U.S. Income Tax Source Rules for Income of Nonresident Aliens

Determining Whether Different Types of Income Are Taxable

For U.S. income tax purposes, persons who are not U.S. citizens are considered to be either residents or nonresidents of the U.S. The importance of this distinction is that persons considered to be residents are subject to U.S. income tax on their worldwide income, while nonresidents are taxed only on their U.S. source income.

The rules for determining whether a person is a resident for tax purposes are not necessarily the same as the rules for immigration purposes. The U.S. Internal Revenue Service (IRS) has two basic tests for determining residency. One of these is the green card test, which is in line with immigration laws, in that it states that a resident is a person who has been admitted as a lawful permanent resident of the United States. The other test is the substantial presence test, which determines resident status based on the number of days of actual physical presence in the U.S. These rules are explained in IRS Publication 519 – U.S. Tax Guide for Aliens, which can be found on the IRS website at www.irs.gov. 

Source Rules and Determining Factors

If you do not meet either the green card test or substantial presence test and are therefore considered a nonresident for U.S. income tax purposes, you are subject to U.S. income tax only on your U.S. source income. This is true whether you are actually residing in the United States or outside the country. Depending on the type of income, there are different factors that determine whether the income is U.S. source, and therefore taxable. These are referred to as the source rules. 

Personal Services

Salaries, wages, and other compensation you receive for work performed in the United States are considered U.S. source income. If you work both inside and outside the U.S., you will need to prorate your compensation to determine how much is U.S. source. Normally you can do this based on the proportion of days you worked in the U.S. You would take the number of days you worked in the U.S. divided by the total number of days you worked, times the total compensation you received for the period.