Tax Withholding and Estimated Tax: US Expat Taxation
Normally if you are a US citizen working in a foreign country then you need to pay US tax on the foreign earned income. When in the US, your employer withholds the income tax from your salary. However, in your current country of your residence if the employer does not withhold the income tax or if the tax withheld is less than the required amount then you are required to pay the estimated tax.
Tax Withholding: when living in a foreign country you can get your employer to stop withholding tax from all or some part of your income. This can be helpful if you want to qualify for the foreign earned income exclusion by passing the physical presence test or bona fide resident test. When you do so, you need to pay the remaining tax as estimated tax.
Estimated Tax: Employers in foreign countries do not normally withhold any income tax from the salary of the employee. Therefore, if you are based in a foreign country and are paying the US income tax, you will have to pay the additional estimated tax. So, how to figure this out?
The calculation of the estimated tax that you need to pay is the sum of your self-employment tax and your estimated income tax for the taxation year minus your expected withholding tax for the year.
When trying to estimate your gross salary, do not add the income that you are expecting to exclude. If the actual deduction or exclusion comes out to be less than the value you estimated then you can be subjected to penalty. Once the gross income is calculated then you can minus the estimated housing deduction while figuring out the tax liability. In case the income tax deducted happens to be more than the required then the extra income tax deducted will be refunded to you.
The process and requirements for filing the estimated tax are same as those that you have followed in the US. Refer to the Form 1040-ES Estimated Tax for Individuals, for calculating and filing your estimated tax.