Got Your Dream Job Abroad? What to Know About Your Paycheck Before You Make the Move
If you're going to work remotely for a U.S. company from another country, plan on aligning your employment structure and tax withholdings with payroll before you move to avoid unexpected tax bills and cash-flow headaches.
Many U.S. workers who receive the green light to "work from anywhere" (WFA) choose to move abroad while continuing to work for their U.S. company.
While the importance of clarifying whether your company truly means "anywhere", or just anywhere within the continental U.S. is important, we'll focus on a different question, which assumes your place of work has approved an international WFA policy: How will your taxes be collected once you begin working abroad?
In a traditional U.S. employment relationship, payroll handles much of this process. Your employer calculates federal and state withholding, deducts Social Security and Medicare taxes and sends the money to the appropriate agencies.
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However, without intervention, this system won't update to reflect your new tax reality, even though where you live, where you perform your work and where you owe and pay taxes might change.
Neglecting to make the appropriate updates can cause an ongoing cash-flow problem: You might have too much money withheld in the United States while needing separate funds to pay taxes in your new country. In my experience, I've seen this happen when Americans move to Spain on the Beckham regime.
That said, this problem is manageable when you address it before the first foreign payroll cycle.
Confirm how you will be paid
A good place to start is with your company's HR department. What will your employment structure be after you move?
There are several options, and each has different implications for your withholding, tax optimization and cash flow:
- Remain a W-2 employee of the U.S. company. If you remain on U.S. payroll, your employer might continue withholding U.S. federal income tax, state income tax, Social Security and Medicare from your salary.
- Your employer can transfer you to a foreign subsidiary or employ you through an employer of record. If you move onto local payroll, the foreign employer or employer of record might handle local withholding and social contributions instead.
- You can change your status from employee to independent contractor. If you become a contractor, you'll generally need to calculate and make your own tax payments. You might also be entitled to ask for higher compensation.
Before accepting any arrangement, the onus of responsibility falls squarely on the worker to understand who will be responsible for:
- Running payroll
- Withholding income tax
- Paying Social Security contributions
- Completing local registrations
- Managing tax payments that are not collected through payroll
A statement such as, "We'll keep paying you as usual," doesn't answer these questions. The worker should advocate in their financial interest.
Compare your withholding with your expected tax bill
U.S. income-tax withholding is a prepayment toward your expected federal tax liability. It's not a final calculation of what you owe. Moving abroad introduces considerations around tax credits, the Foreign Earned Income Exclusion (FEIE) and other expat tax provisions and forms with which most U.S. workers are unfamiliar.
Imagine that your U.S. employer continues withholding federal income tax throughout the year. You then receive a foreign tax bill before filing your U.S. return. You might eventually recover excess U.S. withholding through a refund, but you still need enough cash to pay the foreign bill when it's due.
In light of these complexities, we recommend obtaining a tax projection before moving. The projection should estimate:
- Your likely U.S. federal tax liability
- Your likely foreign tax liability
- Any continuing U.S. state liability
- How much your employer is currently withholding
- When foreign payments will be due
While it's conceptually simple to understand the above, obtaining a tax projection might be difficult to organize. It will require a consultation with both a CPA familiar with the unique tax challenges faced by remote workers abroad and a local accountant. In some cases, however, a joint consultation might be obtainable.
Bring specific questions to payroll
Some companies have global-mobility teams that regularly manage international transfers. Others might be handling an overseas remote worker for the first time, particularly if you work for a small company.
Questions to clarify with HR or payroll:
- Will I remain on a U.S. payroll?
- Will federal income tax withholding continue?
- Which state and address will payroll use?
- Will Social Security and Medicare continue to be withheld?
- Can payroll process a revised Form W-4?
- Does the company have a foreign subsidiary?
- Would the company consider using an employer of record?
- Has the company reviewed its obligations in the country where I will work?
A revised Form W-4 might help reduce federal withholding when a tax projection shows that the current amount is too high.
However, payroll might ask for an explanation or supporting documents before making a significant change.
In some cases, the employee might need to provide proof of foreign residence, immigration documents or a letter from a tax professional explaining the expected U.S. treatment. The adjustment is therefore both a tax exercise and a communication exercise.
Understand what a W-4 doesn't change
Federal income tax withholding is separate from Social Security and Medicare taxes.
Changing your Form W-4 can affect the amount withheld for federal income tax purposes. It does not affect Social Security or Medicare deductions.
Is there a way to avoid paying Social Security and Medicare taxes if you move abroad? Yes, sometimes. Totalization agreements can prevent a worker from paying into two Social Security systems on the same earnings, but these agreements exist on a country-by-country basis.
State withholding also requires a separate review. If payroll continues using your former state address, state tax might continue coming out of your paycheck. Moving abroad does not necessarily end state residency, particularly when you retain significant ties to the state.
Moreover, many states do not recognize the FEIE.
To summarize: The payroll question is what state your employer understands you live in. The tax question is whether that state still has a valid claim to tax you. Those answers might not be the same.
Build the payroll plan before the move
A workable international employment arrangement has four connected parts:
- An immigration status that permits the work
- An employment structure that reflects how you'll be paid
- A tax plan based on where you'll live and work
- A payroll system that sends money to the appropriate places
While it can feel like you're becoming a payroll expert throughout this process, the information is important to understand so you know who is responsible for each part of the system (and can troubleshoot accordingly, should an issue arise).
Once those pieces are aligned, the move becomes much easier to manage and more financially sustainable.
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