If you’re not a U.S. citizen, you might be thinking that U.S. taxes don’t apply to you. However, that’s not always the case if you’re earning income from the U.S. And if you are, the IRS wants to know about it.
U.S.-sourced income is generally defined as income that comes from activities or assets located inside the U.S. The IRS taxes U.S.-sourced income for nonresidents, so it’s important to understand what does and doesn’t count.
Why Source Matters
The U.S. tax system doesn’t tax all noncitizens the same. Nonresident aliens (meaning you don’t have a green card or don’t meet the substantial presence test) are only taxed on income that is “effectively connected” to a U.S. business.
In simpler terms, that means the location of the activity or asset that generated your income determines how it’s taxed, not necessarily where the payment comes from or where you live.
✅ Types of U.S.-Sourced Income
1. Wages or Payments for Services Performed in the US
If you do any kind of work that takes place physically in the U.S., the income earned from that service is U.S.-sourced.
Example: You’re a freelancer web developer from Brazil. Say you’re visiting New York for two months and work while you’re there. Even for non-U.S. clients, that income is U.S.-sourced.
2. Business Income From a U.S. Trade or Office
If your business or any you take part in operates in the U.S., any income tied to that operation is going to be U.S.-sourced. This applies whether you sell services, products, or operate online. If your business has a U.S. “nexus,” the income may be considered U.S.-sourced.
3. Rental Income from U.S. Property
The property market is commonly owned for rental properties whether for locals or travelers. If you own properties in the U.S. that generate income, that is going to be U.S.-sourced and taxable, even if you live abroad.
4. Interest Income
Interest you receive from the following are generally U.S.-sourced.
- U.S. Banks
- U.S. Savings and loans
- U.S. Government bonds
However, bank deposit interest is often exempt from U.S. tax for non residents, as long as its not connected to a U.S. business.
5. Dividends from U.S. Companies
If you own shares in a U.S. corporation, any dividends paid out to you are U.S.-sourced, and typically subject to a 30% withholding tax, unless a tax treaty reduces or eliminates it.
6. Royalties for U.S. Use
If someone pays you to use your intellectual property (like patents, trademarks, software, or copyrighted content) within the U.S., any royalty income is considered U.S.-sourced.
7. Capital Gains (Sometimes)
This is where it can get tricky for nonresidents.
- Selling U.S. real estate? That’s U.S.-sourced and taxed under specific rules (FIRPTA)
- Selling U.S. stocks or crypto? Usually not taxed if you’re a nonresident – unless:
- The gains are connected to a U.S. business, or
- You were physically in the U.S. for 183+ days during a 1 year period
8. Scholarships, Pensions, or Annuities
If any funds for school are granted for study in the U.S., it is considered U.S.-sourced. This goes for any pensions or annuities that generate income from a U.S. business as well.
❌ What Doesn’t Count as U.S.-Sourced?
While it may seem like everything business-related is going to be considered U.S.-sourced, there are some instances where it’s not.
- Services performed outside the US, even for a U.S. company.
- Income from foreign rental properties.
- Dividends from foreign corporations.
- Capital gains on foreign investments (usually).
- Foreign Bank interest and royalties for non-U.S. use.
Tax Treaties Can Change the Rules
Many countries have tax treaties with the U.S. lower or eliminate taxation on certain kinds of income (like royalties, dividends, or pensions). These can also protect freelancers and businesses owners from double taxation.
You will need to file Form W-8BEN to claim these treaty benefits.
What This Means for You
If you’re a non-U.S. citizen earning income that comes from the U.S. in some way, make sure you understand how the IRS sees it.
The key is where is the money was made, not who paid for it.
Do you need help figuring out your specific situation? Working with a tax advisor who understands nonresident and international tax rules can save you from the uncertainty, and maybe even save you money.
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