Posted by The TaxAdvocate Group, LLC

Source of Income: Personal Service Income

Source of Income: Personal Service Income

In general, all salaries and other compensation for services rendered in the United States are believed to be from sources located in the United States. The place where the personal services are provided usually determines the source of the income for the personal services, regardless of where the contract is entered into, the place of payment, or the residence of the payer.

However, in certain circumstances, payment for personal services provided in the United States is not considered as income from sources within the United States. For example, personal services provided by a non-resident independent foreign contractor, which are specifically exempt from a tax treaty.

 

Allocation of Personal Services Income

If the income is for personal services provided partly in the United States and partly outside the United States, you must accurately allocate the income for services provided in the United States. In most cases, in addition to certain fringe benefits, this reward is paid out on a timed basis. That is, the income of American origin is the amount that results from the multiplication of the total amount of the payment by the fraction of days during which the services were provided in the United States. This fraction is determined by dividing the number of days of service in the United States by the total number of days of service for which compensation is paid. 

For example, Jane John, an Australian citizen, and resident work as a professional football player for a football club in the United States. Under John's contract, he received $180,000 for 245 days of play throughout the year. This includes days spent at the pre-season training camp, regular season days, and playoff days. Of the 245 days, 200 were spent providing services in the United States, and 45 days were spent providing services in Australia. The amount of income in the United States is $146,938 ((200 ÷ 245) × $180,000).


Allocation of Fringe Benefits

If personal services are provided partly in the United States and partly outside the United States by an employee, certain fringe benefits are obtained by using a method other than the payment attribution method, which is determined on a time basis. The following additional benefits are achieved geographically, as shown in the list below.

  • Education: the employee's main job location.

  • Hardship or Hazardous duty pay: location of the payment zone.

  • Housing: the employee's main job location.

  • Local transport: the employee’s main job location

  • Reimbursement of moving expenses: the employee's new main job location.

  • Tax refund: Jurisdiction which imposes the tax.

For more information on what is included in these benefits, consult a tax expert.

An employee's principal place of work (main job location) is usually where the employee spends most of their working time. If there is no place to spend most of your working time, the main workplace is the place where the work is concentrated, for example, where the employee goes to work or is required to base his or her work.

An employee can choose to use an alternative basis based on facts and circumstances rather than on a temporary or geographic basis. The employee, not the employer, must indicate that the alternative basis more appropriately determines the source of the payor fringe benefits.


Territorial Limits

Salaries earned for services rendered within the territorial limits of the United States, as well as the salaries of an alien seaman earned while traveling along the coast of the United States, are considered to be from sources in the United States. Salaries or wages for personal services rendered in an oil or gas mine or in a good location or under development on the continental shelf of the United States are treated as sources in the United States.


Naval or Air Services

Income from the provision of services directly related to the use of a ship or aircraft is considered to be derived entirely from sources located in the U.S. if the use begins and ends in the U.S. This income is subject to non-resident alien withholding if you are not genuinely connected with a business or trade in the United States. If the use of a ship or aircraft begins or ends in the United States, refer to Transportation Income or consult an expert for clarification.


Crew Members

Income from the provision of services by a non-resident alien in connection with the person's temporary presence in the United States as a regular crew member of a foreign vessel engaged in transportation between the United States and a foreign country or possession of the United States has no income from American sources.


Scholarships, Grants, and Fellowships

Scholarships, grants, and fellowships are obtained according to the taxpayer's place of residence. Those made by entities established or domiciled in the United States are generally treated as income from sources in the United States. However, see activities outside the United States below. Those made by entities established or domiciled in a foreign country are assimilated to foreign source income.


Activities outside the United States

A fellowship, scholarship, grant, targeted grant, or award of excellence received by a non-resident alien for a business outside the United States is considered foreign source income, even if the grant recipient is a resident of the United States.


Pension Payments

The origin of pension payments is determined by the part of the distribution that constitutes the salary element (employer contributions) and the part that constitutes the income element (capital income). The element of remuneration is obtained in the same way as remuneration for the provision of personal services. The part attributed to services provided in the United States is US source income, and the part attributable to services provided outside the United States is foreign source income.

The income portion of a pension payment is US income if the trust is a US trust. For details on the application of these rules, consult an expert.


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