What is U.S. Source Income?
The source of income refers to the origin or location where the income is earned or generated. It plays a key role in determining tax treatment, especially for nonresident aliens and foreign businesses in the U.S. The IRS categorizes income as either U.S. or foreign source based on where the payment activity happens.
An income will be classified as a U.S source income if the payment took place within U.S. This includes all the 50 States, Washington D.C., and U.S. territorial waters and airspace as defined by U.S. law. US territories such as Puerto Rico, Virgin Islands, American Samoa, Northern Mariana Islands, Guam, and the Minor Outlying Islands are not included and are usually treated as foreign countries unless an exception applies.
Nonresident aliens and foreign businesses are taxed on U.S. source income, while U.S. residents are taxed on worldwide income. Self-employed individuals and independent contractors getting payment within the U.S will also be subjected to U.S. source income taxation rules.
Types of U.S Source Income
To classify a payment correctly as source income, it must be clearly stated where the activity took place, including the country.
An income will only be considered source income’ if it falls under the following determining factors:
| Type of Income | Factor Determining Source |
|---|---|
| Salaries, Wages & Other Compensation | Where the services are performed |
| Business Income (Personal Services) | Where the services are performed |
| Business Income (Inventory Sales – Purchased) | Where the item is sold |
| Business Income (Inventory Sales – Produced) | Where the item is produced (may require allocation) |
| Interest | Residence of the payer |
| Dividends | Whether the paying corporation is U.S. or foreign |
| Rents | Location of the rented property |
| Royalties (Natural Resources) | Location of the property |
| Royalties (Patents, Copyrights, etc.) | Where the intellectual property is used |
| Sale of Real Estate | Location of the property |
| Sale of Personal Property | Seller’s tax home (exceptions apply) |
| Pensions | Where the original work was performed |
| Scholarships & Fellowships | Residence of the payer |
| Sale of Natural Resources | Fair market value at the export terminal |
If the source of income cannot be determined at the time of payment because the location of the activity is not clearly indicated, the payment will be considered as U.S. sourced under IRS Regulations.