In the United States, personal service incomes are classified under the incomes generated within the country or sources within the periphery of the United States. In general terms, the places where the personal services are performed are deemed to be the sources of personal services income. The place of contract or payment made are not taken into consideration in this regards. In fact, international payers, if served from the periphery of the United States is considered as personal service provided by the payee.
While the rule regarding personal services is straightforward, there are some areas which need a better clarification. In certain instances, payment received for providing personal services which are performed in the US is not deemed as income from a source within the periphery of United States. This rule implies to independent, no local, outside contractors who are exempted from tax treaty.
Let’s have a look at personal services income and their classifications.
Allocation of Personal Service income: An Insight
The allocation philosophy is implied if the personal service is party performed in the US and partly outside. One has the option to make the allocation of personal service income on time basis. In general equation, U.S. source income is the amount that results from multiplying the total amount of pay by the fraction of days in which services were performed in the U.S. This dividing fraction is again deciphered by dividing the serving days in the US by the total days of service for which payment has been made.
Allocation of Fringe Benefits
This allocation is also based on a time basis - given the service has been performed partly in the US and partly outside. The fringe benefits to be acquired on a geographical basis are as follows:
More information about these can be derived from Treasury Regulations section 1.861-4(b)(2)(ii)(D).
Territorial Limits
Having a clear definition of a territorial limit is needed to understand benefits. Fees or wages received for personal services which have been rendered within the periphery of US is considered the source in United State. In fact, wages earned by an outsider even on a voyage across the coast of the United States are deemed as sources in the United States. In the same way, when someone earns wages for services performed in mines within the continental shelf of United States is deemed as the sources in the United States.
Vessel or Aircraft Services
Service income from vessels or aircraft is deemed as sources in the United States given that the beginning and end happens in the United States. According to Transportation and income in publication 515 tax on alien nonresident incomers are withheld.
Crew Members
Fees or wages by doing services by an outsider in relation to the person’s temporary presence in the periphery of United States as a commissioned member of the crew of a foreign ship or vessel which is engaged in transportation between the US and other countries are not deemed as sources in the United States.
Scholarships, Fellowships, and Grants
This rule is implied on the location of the residence of the payer. When any entity which is domiciled and formed in the US gives a Scholarship or grant it is deemed as income from sources in the United States. In a similar fashion, if the grant or fellowship is given by an entity domiciled outside the US, it is not deemed as income from sources in the United States.
Activities Outside the United States
Be it scholarship, fellowship or even achievement award received by an outsider for activities conducted in foreign lands are deemed foreign source incomes.
Pension Payments
Pension payment is derived by the percentage of the distribution of the compensation (employer contribution) and earning (Investment). When it comes to the compensation element it is sourced as the same as the fees for personal services. As defined earlier, the portion attributed to services performed within the US is considered U.S source incomes while the opposites are deemed as foreign source income.
