Form 673 US Payroll Abroad: Stop Federal Withholding

Form 673 tells a US employer to stop withholding federal income tax on the slice of your wages you expect to exclude under section 911. On a London assignment it can release cash that would otherwise sit with the IRS for a year or more. Signed without the arithmetic behind it, it manufactures an underpayment rather than a saving.

Every season Jungle Tax meets the same person: a US-payrolled managing director, partner or desk head who relocated to London, pays UK tax at the additional rate on every pound of salary, and still sees federal income tax deducted from each semi-monthly pay run out of New York. The Form 673 US payroll abroad question is usually asked as an administrative one — which form do I sign? — when it is really a cash-flow and exposure question. For a $600,000 earner in Mayfair, the correct answer is frequently not Form 673 at all.

What does Form 673 actually do?

Form 673, Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911, is a statement you give to your employer. It is not filed with the IRS. Its legal effect runs through the withholding rules: a US employer is not required to withhold federal income tax from wages it reasonably believes will be excludable from the employee's gross income under section 911. Form 673 is the document that supplies that reasonable belief.

Three points are routinely misunderstood, and each of them matters more on a high-value London assignment than on a modest posting:

• It is a withholding instrument, not a claim. The exclusion itself is claimed later on Form 2555, filed with your Form 1040. Form 673 only changes the timing of when the money leaves your bank account. It cannot create relief that the return does not ultimately support.
• Its ceiling is the section 911 exclusions, and nothing above them. It covers the foreign earned income exclusion and the foreign housing exclusion. It does not cover the foreign housing deduction (relevant to self-employed partners rather than employees), and, critically, it does not cover the foreign tax credit.
• It binds nobody. Your employer may decline to act on it. It must decline if it has reason to believe the statement is false. Many US financial institutions apply an internal policy of refusing Form 673 for assignees on tax-equalised packages, because the withholding is the employer's own funding mechanism.

The IRS overview page for the form is the primary reference point — see About Form 673 on irs.gov — and the underlying withholding treatment for US-payrolled staff working overseas is set out at Persons employed abroad by a U.S. person.

Who can sign Form 673 on a London assignment?

Two gates must both be open. You must be a US citizen (or, for these purposes, a US citizen only — more on that below), and you must reasonably expect to qualify for the section 911 exclusions for the tax year in question.

The tax home requirement

Your tax home must be in a foreign country for the period covered. For a London assignee this is usually straightforward once the posting is indefinite or expected to exceed a year and the family, the home and the principal place of business have moved. It is far less straightforward for someone rotating between London and a New York desk, or for an assignment structured as a series of nine-month secondments. If you retain an abode in the United States and your London presence is intermittent, the tax home test is where the claim fails.

Bona fide residence or physical presence

You then satisfy either the bona fide residence test — an uninterrupted period covering an entire tax year, judged on the nature and intent of the residence rather than a day count — or the physical presence test, which requires presence in foreign countries for a defined number of full days within a rolling twelve-month period. For arrivals mid-year, the physical presence test is usually the only route available in year one, and it is fragile: a heavy US travel schedule for internal meetings, client pitches or a board seat will break it.

Form 673 asks you to state which test you expect to meet and, for the physical presence test, the twelve-month period you are relying on. Assignees frequently complete this from memory in the first fortnight of a posting, before their travel pattern is known. That is the origin of most of the underpayments we later have to fix.

Why green card holders cannot use it

A resident alien may not use Form 673 to exempt wages from federal income tax withholding, even where that person genuinely anticipates qualifying for the exclusion on the eventual return. This surprises a large number of London-based executives who hold a green card rather than citizenship. The exclusion may still be available on Form 2555; the withholding relief route through Form 673 is not. A W-4 adjustment is the only lever, and it must be defensible.

The arithmetic that catches London bankers and partners

Here is where the generalist articles stop and the money starts. The section 911 exclusions are capped. For 2026 the maximum foreign earned income exclusion is $132,900 per qualifying person. The foreign housing exclusion sits on top, but it only counts qualifying housing costs above a base amount of roughly 16% of the exclusion, and it is itself capped — at 30% of the exclusion generally, or at a higher city-specific figure for designated high-cost locations. London carries one of those elevated limits.

So the maximum a London assignee can shelter through section 911, and therefore the maximum Form 673 can lift out of withholding, is somewhere in the region of the exclusion plus a London housing figure. Against a $650,000 total compensation package, that is a minority of the pay.

Element	Assignee A: $185,000 salary	Assignee B: $650,000 salary and bonus
Foreign earned income exclusion (2026)	$132,900	$132,900
Foreign housing exclusion (London, indicative)	Up to the London high-cost limit less the base amount	Up to the London high-cost limit less the base amount
Approximate wages Form 673 can free from withholding	Most of the package	Roughly a quarter to a third of the package
Wages still subject to federal withholding	Modest residual	Several hundred thousand dollars
Relief that actually eliminates the residual US liability	Section 911 exclusions	Foreign tax credit for UK tax paid
Is Form 673 the right instrument?	Usually yes	Usually not, or not on its own

Two further mechanics compound the point for higher earners. First, the exclusion does not reduce the marginal rate on what remains: under the stacking rule, tax on your non-excluded income is computed as though the excluded amount were still in the base, so the residual is taxed in the upper brackets rather than the bottom ones. Second, the exclusion cannot be paired with a foreign tax credit on the same income — you cannot exclude $132,900 and also claim credit for the UK tax attributable to it. For someone paying UK tax at the additional rate on the whole package, the foreign tax credit alone will usually wipe out the US liability entirely, and the exclusion adds nothing except complication and a five-year revocation trap if you later switch.

Form 673 or Form W-4: which one does a London assignee actually need?

This is the distinction that the top-ranking pages on this topic handle poorly, and it is the single most valuable thing to understand.

Form 673 only ever reflects section 911. If your relief is the foreign tax credit — as it is for most US citizens on a London package, because UK effective rates on employment income comfortably exceed US federal rates — Form 673 is the wrong document. There is no equivalent statement for the foreign tax credit. The mechanism is a Form W-4 that reflects your anticipated credit, so that withholding is calibrated to the tax you will actually owe rather than to a domestic-only computation.

• Section 911 case. Salary at or near the exclusion limits, straightforward qualification, few US workdays. Form 673 to payroll, Form 2555 on the return. Cash released immediately.
• Foreign tax credit case. Substantial package, UK tax at the additional rate, credit expected to exceed the pre-credit US liability. No Form 673. A carefully evidenced W-4 adjustment, supported by a projection, and Form 1116 on the return.
• Mixed case. Exclusion on base salary, credit on the excess. Form 673 covers only the excluded layer; withholding continues above it and a W-4 adjustment addresses the rest. This is the most common profile in London and the one most often mishandled.

Employers are markedly more comfortable actioning a Form 673 than a large W-4 adjustment, because the former has a named statutory home and a printed IRS form and the latter looks like a judgement call. That comfort gap is why so many high earners end up signing a Form 673 that does almost nothing for them, and then waiting fifteen months for a seven-figure-salary refund. Our cross-border compliance team models the projection that makes the W-4 position defensible before payroll is asked to change anything.

What does the employer do with Form 673?

Practically, the sequence is short but each step has a failure mode:

• You complete the statement, indicating the test you expect to meet and the estimated housing amount, and sign under penalties of perjury.
• You give it to payroll or the global mobility team. It is not sent to the IRS, and there is no acknowledgement to chase.
• Payroll adjusts federal income tax withholding prospectively. It will not be applied retrospectively to earlier pay runs in the same year — withholding already taken is recovered only through the return.
• The statement covers a calendar year. A fresh form is required for each year the position continues, and the practical deadline is the last pay run of the prior December, not the following April.
• If facts change — the assignment is curtailed, US workdays escalate, you repatriate — you must tell payroll promptly so withholding resumes. There is no formal revocation form; a written notification is the standard route.

The employer retains its own exposure. If it has reason to believe the statement is false, it must continue to withhold. In practice this means a Form 673 filed by someone visibly spending half the year on a US trading floor will be queried, and should be.

What Form 673 does not touch

• Social security and Medicare. FICA is unaffected. Under the US–UK totalisation agreement, a US employee sent by a US employer to work in the UK for an expected period within the agreement's limit generally remains in the US system and is exempt from UK National Insurance, evidenced by a certificate of coverage. That certificate, not Form 673, is the document that governs social security.
• State income tax. Form 673 is federal only. If you have not broken domicile with California or New York, state withholding continues on its own terms and the state may not recognise the federal exclusion at all.
• UK PAYE. HMRC has no interest in your Form 673 whatsoever. UK withholding is governed entirely by UK rules, which run in parallel.
• Income that is not foreign earned income. A bonus or deferred award attributable to a US workday period, or equity vesting over a period that includes US service, is sourced by workday apportionment. Form 673 does not shelter the US-sourced portion, and treating an entire bonus as excludable is a recurring source of underpayment.

The UK side: PAYE, section 690 notifications and Overseas Workday Relief

While the Form 673 conversation is happening in the US, a second withholding system is running in London, and the two are not coordinated by anyone unless you coordinate them. A US-payrolled assignee performing duties in the UK generally brings a UK PAYE obligation for the employer, frequently operated through a modified or shadow payroll arrangement.

Two UK mechanisms matter to cash flow. First, an employer can notify HMRC that it will operate PAYE on only a proportion of an employee's earnings where part of the remuneration relates to non-UK duties — the process historically called a section 690 direction. From 6 April 2025 this became a notification rather than an application requiring HMRC approval, and from 6 April 2026 the notification must reflect a reasonable estimate of the non-PAYE proportion, with the relief given in-year to a qualifying new resident limited to a set proportion of earnings. The current guidance is at GOV.UK: tell HMRC you will operate PAYE on a proportion of an employee's income, with HMRC's internal treatment of qualifying new residents at PAYE81517.

Second, Overseas Workday Relief sits inside the four-year regime for new UK residents that replaced the remittance basis from 6 April 2025, and is subject to an annual financial limit expressed as a percentage of qualifying employment income with a monetary cap. An assignee who assumed OWR would shelter a large share of a substantial London package will find the cap binds well before the intuition does.

Question	United States	United Kingdom
Who withholds?	The US employer, on worldwide wages of a citizen, regardless of where duties are performed	The employer, via PAYE or a shadow payroll, on earnings for UK duties
Instrument to reduce withholding	Form 673 (section 911 only) or a calibrated Form W-4	A PAYE notification for the non-UK proportion (formerly a section 690 direction), or an NT code where no UK liability arises
Approval needed?	No IRS approval; the employer decides whether to act	Notification to HMRC by the employer, with an in-year limit on the excluded proportion
Relief for the other country's tax	Foreign tax credit on Form 1116, or exclusion on Form 2555	Double taxation relief in the Self Assessment return; Appendix 5 net-of-credit PAYE where operated
Social security	FICA continues; unaffected by Form 673	NIC exemption where a US certificate of coverage applies
Which tax is paid first?	Withheld through the year, refunded up to 15 months later	PAYE deducted monthly, in real time
Filing that settles it	Form 1040 with Form 2555 and/or Form 1116	Self Assessment return by the following 31 January

The practical consequence is unpleasant and entirely avoidable: HMRC takes its money monthly and in full, while the IRS also takes money monthly on the same wages, and the US position is only unwound the following year. On a $650,000 package that can be a mid six-figure sum sitting with the US Treasury at zero return for over a year. If the assignment is UK-payrolled or dual-payrolled, the interaction is more complex again, and our US–UK specialists normally review both payrolls together rather than in isolation.

Tax equalisation: whose refund is it anyway?

Most banking and law-firm London assignments are tax-equalised. The employee bears a hypothetical tax broadly equal to what they would have paid had they stayed in the United States; the employer bears the actual US and UK tax and receives the benefit of any relief.

Under that structure, signing Form 673 changes the employer's funding, not your net pay. Your take-home is set by the hypothetical tax deduction, and any US refund generated by the exclusion belongs to the employer under the equalisation agreement. The employee who chases a Form 673 believing it will improve monthly cash flow is often disappointed, and the employee who signs one on an equalised assignment and then also claims the refund personally has created a genuine dispute with their employer.

The people for whom Form 673 truly changes cash flow are the ones outside equalisation: partners and senior hires on local-plus or fully local packages, founders on a US payroll running a London operation, and executives whose assignment letters are silent on tax. For those individuals it is worth getting right, and worth getting right in the first quarter of the year rather than the fourth.

Why does a wrong signature create an underpayment rather than a saving?

Form 673 removes withholding on a forward-looking expectation. If the expectation fails, the tax does not disappear — it simply arrives all at once, unfunded, with interest running.

The failure modes we see repeatedly:

• The physical presence test breaks. A promotion brings a New York reporting line and forty US workdays. The full-day count falls short, the exclusion is denied for the year, and twelve months of unwithheld federal tax becomes payable in April.
• The assignment is curtailed. A repatriation in month nine ends the bona fide residence claim, and nobody tells payroll to restart withholding.
• Housing is overstated. The estimated housing amount on the form assumes an employer-funded Kensington rent that is later restructured as a cash allowance treated differently, and the excluded amount shrinks.
• The whole package is treated as excludable. Withholding stops on $650,000 when only a fraction qualifies.
• The credit is double-counted. The assignee excludes income under section 911 and also claims foreign tax credit for the UK tax on that same income. The return is wrong, and correcting it produces a balance due.

The consequence is not only the tax. Estimated tax penalties are computed by reference to safe harbours based on the current year's liability or the prior year's tax, and withholding is treated as paid evenly through the year in a way that quarterly estimates are not. Turning off withholding without substituting estimated payments removes precisely the protection that would have prevented the penalty. Where a large UK tax payment is also in flight, the resulting cash squeeze can be severe.

The catch-up sting: withholding trapped in years that have closed

Now the part almost nobody writes about, and the reason this topic sits inside our compliance catch-up work rather than our payroll commentary.

The mirror image of over-withholding is a refund. The mirror image of a delinquent filer is a refund that expires. A refund claim must generally be made within three years of filing the return or two years of paying the tax, whichever is later. Tax withheld from wages is treated as paid on the due date of the return for that year. So the three-year clock on withheld tax runs from the April following the tax year — not from the date you eventually file.

For the London assignee who never filed, the arithmetic is brutal. Sitting in a New York payroll system are years of federal income tax withheld on wages that the United Kingdom taxed in full and that the foreign tax credit would have eliminated. Every one of those years is an overpayment. But on the years that have aged past the window, the overpayment is simply forfeited. It cannot be refunded, and it cannot be carried forward to offset a later year.

Three consequences follow that matter to anyone approaching a catch-up:

• Sequence is money. Where a filer has, say, seven delinquent years, the oldest still-open year is the one with a deadline attached. Filing in slug order and leaving the oldest until the process is comfortable is how refunds are lost.
• The Streamlined Foreign Offshore Procedure does not reopen closed years. The procedure resolves penalty exposure on the three most recent returns and six years of FBARs; it is not a mechanism for recovering withholding from a year whose refund window has expired. Filers are frequently surprised that a programme designed to bring them current does not also return their money. Our streamlined filing team quantifies the recoverable and the forfeited amounts before a submission is made, so the decision is taken with the figures visible.
• An overpayment year is still a filing obligation. The fact that no tax is owed does not remove the requirement to file, nor does it protect the FBAR and Form 8938 positions attaching to the UK bank, brokerage and pension accounts opened during the assignment. Those carry their own penalty regimes entirely independently of whether the income tax position was a refund.

A practical sequence for London assignees

For the current year:

• Model the full-year position first: total compensation, US and UK workday split, projected UK tax, and the resulting US liability after credit or exclusion. The form follows the model, never the reverse.
• Decide the relief posture explicitly — exclusion, credit, or a defined combination — and record the reasoning, because the section 911 election has consequences if revoked.
• If Form 673 is right, complete it with a defensible test and a supportable housing estimate, and lodge it before the year's first pay run.
• If the credit is the real answer, prepare the W-4 projection and present it to payroll with the workings.
• Confirm the certificate of coverage is in place so UK National Insurance is not deducted in parallel with FICA.
• Check whether a UK PAYE notification is appropriate for non-UK duties, and diarise the Self Assessment deadline.
• Re-test the position at the half-year, when the travel pattern is actually known.

For back years, the order is different. Establish the earliest open refund year and work forward from there, quantify the withholding at risk, confirm the FBAR and Form 8938 position on every UK account and pension, and choose the disclosure route on the strength of the numbers. Additional background on the wider catch-up process is collected in our cross-border guides library.

The mistakes we correct most often

• Signing Form 673 as a green card holder, where it has no effect and the employer should not have actioned it.
• Filing one Form 673 in year one and assuming it rolls forward. It does not; it is an annual document.
• Excluding a UK-period bonus that relates to a prior US workday period.
• Stopping US withholding while UK PAYE is also being under-operated, so both authorities are short at once.
• Assuming that because the exclusion covers the salary, the assignment produces no US tax — ignoring investment income, UK pension contributions that are not always deductible for US purposes, and reportable UK funds.
• Waiting until the assignment ends to address several years at once, by which point the earliest refunds have expired.

Form 673 is a small document with an outsized ability to help or harm. On a modest overseas salary it is close to free money. On a London package for a high-earning executive or partner, it is a partial answer at best and a liability at worst — and the real work is the projection that sits behind it, the coordination with UK PAYE, and the discipline of filing the oldest open year before the refund window closes on it.

Speak to a specialist before payroll changes anything

If federal tax is still being withheld on wages the United Kingdom is taxing in full, or if there are US returns outstanding with withholding sitting in them, the position is worth quantifying now rather than at the next filing deadline. We prepare US and UK returns for London-based executives, partners and founders, we handle streamlined and delinquent filings, and we tell clients plainly which years still carry a recoverable refund and which do not. To review your withholding position and any outstanding years in confidence, contact our cross-border team for a discreet, no-obligation consultation.