The source of income is determined under U.S. tax rules based on the type of income. Compensation for personal services, whether employment or self-employment, is generally sourced where the services are performed, not where the income is paid. Therefore:
- Income for services performed outside the U.S. is foreign source income and is not subject to U.S. tax for a nonresident alien, even if paid by a U.S. employer or payer.
- Income for services performed in the U.S. is U.S. source income and is subject to U.S. tax, even if paid by a foreign employer or payer.
If you have no information about where an income payment is sourced, you must presume that the amount is U.S. source income and withhold and report accordingly.
There are also special sourcing rules for types of payments related to personal services.
- A covenant (i.e., a promise) not to compete is sourced where the right is given up.
- A signup bonus is sourced where the employment to which the bonus relates is sourced. See Revenue Ruling 2004-109, I.R.B. 2004-50.
See Section 8 of IRS Publication 519, U.S. Tax Guide for Aliens for more detailed information about source of income.