US Expat Payroll Tax 2026

The phrase “US expat” in payroll context covers two situations that the IRS treats very differently. The first is a US citizen or US green-card holder living abroad while still being taxed by the United States on worldwide income. The second is a non-US citizen working physically inside the United States on a visa, paid through a US payroll, while still potentially owing tax in their home country. The first situation is governed primarily by IRS Publication 54 (Tax Guide for US Citizens and Resident Aliens Abroad), Forms 2555 and 1116, and any applicable bilateral tax treaty plus totalization agreement. The second is governed by Publication 519 (US Tax Guide for Aliens) and by source-of-income rules under IRC §861.

The two situations both require the employer to think about FICA, federal income tax withholding, foreign tax credits, and the totalization agreement, but they require thinking in opposite directions. A US employer paying a US citizen abroad usually wants to know whether the foreign earned income exclusion (FEIE) reduces gross wages for federal income tax. A US employer paying a foreign national on US soil usually wants to know whether a tax treaty exemption or a totalization “certificate of coverage” eliminates FICA.

For a US citizen working abroad, the Foreign Earned Income Exclusion under IRC §911 allows excluding a statutory amount of foreign earned income each year. The 2026 ceiling is set by the cost-of-living adjustment formula in §911(b)(2)(D) and is published by the IRS each fall. To qualify, the employee must satisfy either the bona fide residence test (a full tax year as a bona fide resident of a foreign country) or the physical presence test (330 full days in any consecutive 12 months in a foreign country or countries).

The employer payroll consequence is meaningful: Form 673 (Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusion(s)) can be filed by the employee with the employer to reduce federal income tax withholding on wages that the employee reasonably expects to exclude. The withholding reduction is not automatic and requires Form 673; without it, the employer withholds normally and the employee claims FEIE on Form 2555 with the personal return.

The United States has bilateral totalization agreements with about 30 countries that prevent double-coverage under both social-security systems on the same wages. The Social Security Administration maintains the list at ssa.gov/international/agreements_overview.html. For an employer paying a US citizen abroad, a Certificate of Coverage from SSA exempts the wages from foreign social security and keeps them in US FICA. For an employer paying a foreign national inside the US, a Certificate of Coverage from the home country’s social-security authority exempts the wages from US FICA and keeps them in the home country system.

Either way, the certificate has to be on file before the wages are paid — retroactive certificates are limited and rare.

• Treating FEIE as automatic. A US employer that stops federal income tax withholding without a Form 673 on file is exposed if the employee fails the 330-day test for any reason.
• FBAR and FATCA confusion. Those are taxpayer-side reporting obligations (FinCEN Form 114; Form 8938) and not employer-side. Employers do not file FBAR for the employee, but should make sure the employee knows the obligation exists.
• Foreign tax credit vs FEIE election. An employee can claim FEIE on the first slice of foreign wages and FTC (Form 1116) on the rest, but not double-counting the same income. Employer-provided W-2 reporting can be cleaner if the employer understands which slice goes which way.
• Treaty-claim documentation for inbound foreign nationals. A treaty exemption from US tax for short-term inbound work (the “dependent personal services” article of most US treaties) requires Form 8233 on file with the employer.

• US Expat Payroll Tax Guide — the deeper guide page with Publication 54, Form 2555, Form 1116, FATCA, FBAR, and totalization mechanics.
• FEIE 2026 walkthrough — the IRS-cited deep dive on Form 2555 mechanics.
• 2026 Federal payroll tax rates — FICA, Medicare, and FUTA reference for the US side of the calculation.