When it comes to personal service income, all wages and any other compensation for services performed in the United States are generally considered to be from sources in the United States. The place, where the personal services 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 United States. It is not consider income from sources within the United States. For instance, personal services performed by an independent nonresident alien contractor specifically exempted by a tax treaty. For more instances, see the Pay for Personal Service section in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
Foreign Source Income – Form 1042-S Reporting Not Required
Foreign source income (non-U.S. source income) paid to a nonresident alien is normally not subject to U.S. tax. Income from sources outside of the United States is exempt from NRA withholding under Internal Revenue Code Section 1441(a). It is normally not require to report on an information return. If you choose to report the income item on a Form 1042-S, use Exemption Code 03, Income is not from U.S. sources. When entering an amount for information reporting purposes. For more information about the income sourcing rules which apply to the income of nonresident aliens. Please refer to the discussion about “Source of Income” in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and IRC sections 861 through 865. Also, refer to Nonresident Aliens – Source of Income.
Allocation of Personal Service Income
If the income is for personal services performed partly in the United States and partly outside the United States. You must make an accurate allocation of personal service income in the United States. 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 performed in the U.S. This fraction determined by dividing the number of days services performed in the United States by the total number of days of service for which the compensation paid.
Example. Jean Blanc, a citizen and resident of Canada, employed as a professional hockey player by a U.S. hockey club. Under Jean’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 spent performing services in the United States 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 perform partly in the United States and partly outside the United States by an employee, certain fringe benefits sourced by a different method from the allocation method for pay, which determine on a time basis. The following fringe benefits source 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 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 center. For instance, where the employee reports for work or is otherwise require 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 United States, as well as wages of an alien seaman earned on a voyage along the coast of the United States, regarded as from sources in the United States. 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 United States are treated as from sources in the United States.
Vessel or Aircraft Services
Income from the performance of services directly related to the use of a vessel. Or aircraft treated as derived entirely from sources in the United States if the use begins and ends in the United States. This income subject to nonresident alien withholding if it is not effectively connect with a U.S. trade or business. If the use of a vessel or aircraft either begins or ends in the United States, 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 nonresident alien in connection with the individual’s temporary presence in the United States. As a regular member of the crew of a foreign vessel engaged in transportation between the United States. 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 United States are generally treated as income from sources within the United States. However, refer to Activities Outside the United States, 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 United States. It treated as foreign source income, even though the payer of the grant is a resident of the United States.
Pension Payments
The source of pension payments 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 sourced the same as compensation from the performance of personal services. The portion attributable to services performed in the United States is U.S. source income. And the portion attributable to services performed outside the United States 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.
References/Related Topics
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases. Or other official tax guidance. References to these legal authorities 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. Visiting 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.
