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All wages and any other compensation for services performed in the United States (U.S.) are generally considered to be from sources in the U.S.. The place, where the personal services are performed, generally determines the source of the personal service income, regardless of where the contract was made, or the place of payment, or the residence of the payer.
However, under certain circumstances, payment for personal services performed in the U.S.is not considered income from sources within the U.S. For example, personal services performed by an independent nonresident alien (NRA) contractor specifically exempted by a tax treaty. For more examples, see the Pay for Personal Service section in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
Allocation of personal service income
If the income is for personal services performed partly in the U.S. and partly outside the U.S., you must make an accurate allocation of income for services performed in the (U.S. In most cases, other than certain fringe benefits, you make this allocation on a time basis. That is, U.S. source income is the amount that results from multiplying the total amount of pay by the fraction of days in which services were performed in the U.S. This fraction is determined by dividing the number of days services are performed in the United States by the total number of days of service for which the compensation is paid.
Example: John Doe, a citizen and resident of Canada, is employed as a professional hockey player by a U.S. hockey club. Under John's contract, he received $150,000 for 242 days of play during the year. This includes days spent at pre-season training camp, days during the regular season, and playoff game days. Of the 242 days, 194 days were spent performing services in the U.S. and 48 days performing services in Canada. The amount of U.S. source income is $120,248 ((194 ÷ 242) × $150,000).
Allocation of fringe benefits
If the personal services are performed partly in the U.S. and partly outside the U.S. by an employee, certain fringe benefits are sourced by a different method from the allocation method for pay, which is determined on a time basis. The following fringe benefits are sourced on a geographical basis, as shown in the following list:
- Housing - employee's main job location.
- Education - employee's main job location.
- Local transportation - employee's main job location
- Tax reimbursement - jurisdiction imposing tax.
- Hazardous or hardship duty pay - location of pay zone.
- Moving expense reimbursement - employee's new main job location.
For information on what is included in these benefits, see Treasury Regulations section 1.861-4(b)(2)(ii)(D). *
An employee's main job location (principal place of work) is usually the place where the employee spends most of his or her working time. If there is no one place where most of the work time is spent, the main job location is the place where the work is centered, such as where the employee reports for work or is otherwise required to base his or her work.
An employee can use an alternative basis based on facts and circumstances, rather than the time or geographical basis. The employee, not the employer, must demonstrate that the alternative basis more properly determines the source of the pay or fringe benefits.
Territorial limits
Wages received for services rendered inside the territorial limits of the U.S., as well as wages of an alien seaman earned on a voyage along the coast of the U.S. are regarded as from sources in the U.S.. Wages or salaries for personal services performed in a mine or on an oil or gas well located or being developed on the continental shelf of the U.S. are treated as from sources in the U.S..
Vessel or aircraft services
Income from the performance of services directly related to the use of a vessel or aircraft is treated as derived entirely from sources in the U.S. if the use begins and ends in the U.S.. This income is subject to NRA withholding if it is not effectively connected with a U.S. trade or business. If the use of a vessel or aircraft either begins or ends in the U.S. refer to Transportation Income in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
Crew members
Income from the performance of services by a NRA in connection with the individual's temporary presence in the U.S. a regular member of the crew of a foreign vessel engaged in transportation between the U.S. and a foreign country or a U.S. possession is not income from U.S. sources.
Scholarships, fellowships and grants
Scholarships, fellowships, and grants are sourced according to the residence of the payer. Those made by entities created or domiciled in the U.S. are generally treated as income from sources within the U.S.. However, refer to Activities Outside the U.S. below. Those made by entities created or domiciled in a foreign country are treated as income from foreign sources.
Activities outside the United States
A scholarship, fellowship, grant, targeted grant, or an achievement award received by a nonresident alien for activities conducted outside the U.S. is treated as foreign source income, even though the payer of the grant is a resident of the U.S..
Pension payments
The source of pension payments is determined by the portion of the distribution that constitutes the compensation element (employer contributions) and the portion that constitutes the earnings element (the investment income). The compensation element is sourced the same as compensation from the performance of personal services. The portion attributable to services performed in the U.S. is U.S. source income, and the portion attributable to services performed outside the U.S. is foreign source income.
The earnings portion of a pension payment is U.S. source income if the trust is a U.S. trust. For details on how to apply these rules refer to Revenue Ruling 79-388, Revenue Ruling 79-389, and Revenue Procedure 2004-37 in Internal Revenue Bulletin: 2004-26. *
Related
*Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, Revenue Rulings, Revenue Procedures court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax code, regulations, and official guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.