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Income Subject to Withholding This section explains how to determine if income is subject to withholding of U.S. tax. Generally, fixed or determinable annual or periodic income from U.S. sources is subject to withholding. This includes interest, dividends, rents, salaries, wages, premiums, annuities, or other gains, profits or income unless specifically exempted under the Internal Revenue Code or a tax treaty. Source of Income Generally, income is from U.S. sources if it is paid by domestic corporations or noncorporate residents of the United States, or if the property that produces the income is located in the United States. Other source rules are summarized in Chart A and explained in detail in the separate discussions under Withholding on Specific Income, later. Personal service income. If the income is for personal services performed in the United States, it is from U.S. sources. The place where the services are performed determines the source of the income, regardless of where the contract was made, the place of payment, or the residence of the payer. However, under certain circumstances, pay for personal services performed in the United States is not considered income from sources within the United States. For more information on this exception, see the discussion, Pay for dependent personal services, under Pay for Personal Services Performed later. If the income is for personal services performed partly in the United States and partly outside the United States, you must make an accurate allocation of income for services performed in the United States. In most cases, you make this allocation on a time basis. That is, U.S. source income is the amount that results from multiplying the total amount of pay by the following fraction: Graphic Example. Jean Blanc, a citizen and resident of Canada, is employed as a professional hockey player by a U.S. hockey club. Under Jean's contract, he received $98,500 for 242 days of play during the year. This includes days spent at pre-season training camp, days during the regular season, and playoff game days. Of the 242 days, 194 days were spent performing services in the United States and 48 days performing services in Canada. The amount of U.S. source income is $78,963 ((194 ÷ 242) × $98,500). Territorial limits. Wages received for services rendered inside the territorial limits of the United States and wages of an alien seaman earned on a voyage along the coast of the United States are regarded as from sources in the United States. Also treated as from sources in the United States are wages or salaries for personal services performed in a mine or on an oil or gas well located or being developed on the continental shelf of the United States. Income from the performance of services directly related to the use of a vessel or aircraft is treated as derived entirely from sources in the United States if the use begins and ends in the United States. This income is subject to 30% withholding if it is not effectively connected with a U.S. trade or business. If the use either begins or ends in the United States, see Transportation income, later. Crew members. Income from the performance of services by a nonresident alien in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a U.S. possession is not income from U.S. sources. When withholding is not required. Even though income arises from sources in the United States, withholding under the rules in this publication is not required in the following general situations. The income is effectively connected with the conduct of a trade or business in the United States (or, under a treaty, is attributable to a permanent establishment in the United States) by a foreign payee entitled to the income, who has filed a Form 4224 (or similar statement), giving the payee's U.S. taxpayer identification number. (This exception does not apply, however, to income from personal services performed by an individual or services performed by a foreign corporation that has personal holding company income under personal service contracts.) The income is paid to a foreign payee who is entitled under a tax treaty to exemption from withholding on the specified type of income, and the payee has filed a Form 1001 or a Form 8233. The income is not included in gross income under the Internal Revenue Code. The income is U.S. source gross transportation income. Note. The forms in items (1) and (2) cannot be used for payments made after 2000. See New Forms, earlier. Transportation income. Transportation income is income from the use of a vessel or aircraft, whether owned, hired, or leased, or from the performance of services directly related to the use of a vessel or aircraft. U.S. source gross transportation income includes 50% of all transportation income from transportation that either begins or ends in the United States. For personal service income other than income derived from, or in connection with, a vessel, the use must be between the United States and a U.S. possession. The recipient of U.S. source gross transportation income must pay tax at the rate of 4% unless the income is effectively connected with the conduct of a U.S. trade or business. However, the income is not subject to withholding. If the income is effectively connected with a U.S. trade or business, it is taxed on a net basis at a graduated rate of tax. Fixed or Determinable Annual or Periodic Income In general, every kind of fixed or determinable annual or periodic income from U.S. sources is subject to withholding unless specifically exempt under the Code or a tax treaty, or unless that income is effectively connected with a U.S. trade or business or, under a treaty, is attributable to a permanent establishment in the United States. Income is fixed when it is paid in amounts known ahead of time. Income is determinable whenever there is a basis for figuring the amount to be paid. The income need not be paid annually if it is paid periodically, that is to say, from time to time, whether or not at regular intervals. The fact that a payment is not made annually or periodically does not, however, necessarily prevent its being fixed or determinable annual or periodic income. The following items are examples of fixed or determinable annual or periodic income and are subject to withholding. Annuities. Dividends. Gains. Interest. Patronage distributions. Pay. Premiums. Profits. Rents. Royalties. Salaries. Wages. A sales commission paid or credited monthly. A commission paid for a single transaction. The distributable net income of an estate or trust from U.S. sources that is fixed or determinable annual or periodic income and that must be distributed currently, or has been paid or credited during the tax year, to a nonresident alien beneficiary. Taxes, mortgage interest, or insurance premiums paid to, or for the account of, a nonresident alien landlord by a tenant under the terms of a lease. Prizes awarded to nonresident alien artists for pictures exhibited in the United States. Purses paid to nonresident alien boxers for prize fights in the United States. Prizes awarded to nonresident alien professional golfers in golfing tournaments in the United States. Installment payments. It does not matter whether income is paid in a series of repeated payments or in a single lump sum. For example, $5,000 in royalty income would come within the meaning of the term "fixed or determinable annual or periodic income" whether paid in 10 payments of $500 each or in one payment of $5,000. Insurance proceeds. Income derived by an insured nonresident alien from U.S. sources upon the surrender of, or at the maturity of, a life insurance policy, is fixed or determinable annual or periodic income and is subject to withholding. The proceeds are income to the extent they exceed the cost of the policy. However, certain payments received under a life insurance contract on the life of a terminally or chronically ill individual before death (accelerated death benefits) may not be subject to tax. This also applies to certain payments received for the sale or assignment of any portion of the death benefit under the contract to a viatical settlement provider. See Publication 525, Taxable and Nontaxable Income, for more information. Racing purses. Racetrack operators must withhold 30% on any purse paid to a nonresident alien racehorse owner in the absence of definite information filed on Form 1001 that the owner has not raced, or does not intend to enter, a horse in another race in the United States during the tax year. If available information indicates that the racehorse owner has raced a horse in another race in the United States during the tax year, then any Forms 1001 filed for that year are ineffective. The owner may be exempt from withholding of tax at 30% on the purses, if the owner files a statement or Form 4224 with you, which provides that the income is effectively connected with the conduct of a U.S. trade or business and that the income is includible in the taxpayer's gross income. Note. These forms cannot be used for payments made after 2000. See New Forms, earlier. Covenant not to compete. Pay received for a promise not to compete is fixed or determinable annual or periodic income. Its source is the place where the promisor forfeited his or her right to act. Amounts paid to a nonresident alien for his or her promise not to compete in the United States are subject to withholding. Signing on. A fee paid to a professional soccer player for "signing on" with the effect of preventing any other team from negotiating with the player and preventing the player from negotiating with any other team is pay for a covenant not to compete. The pay is fixed or determinable annual or periodic income and the source is the place where the right to play is given up. If a league is made up of both foreign and U.S. teams, the fee is from sources partly in and partly outside the United States. The part of the fee that is from U.S. sources is subject to withholding. If there is no reasonable basis for an allocation of the fee, the entire sign-on fee is income from the United States and is subject to withholding. Partnership distributions. A domestic partnership that earns fixed or determinable annual or periodic income during the tax year that is not effectively connected with a U.S. trade or business must withhold 30% (or lower treaty rate) on the distributive share of a foreign partner. This is true whether or not the foreign partner's distributive share has actually been distributed to the partner. The partnership should withhold by the date on which partnership forms (Schedule K-1 (Form 1065)) are sent to individual partners, but no later than the 15th day of the 3rd month after the close of the partnership's tax year. Effectively connected income of foreign partners is subject to the rules discussed under Partnership Withholding on Effectively Connected Income, later. Sale of property. Income from the sale of real or personal property in the United States is not fixed or determinable annual or periodic income and generally not subject to this withholding tax. However, see U.S. Real Property Interest, later, for a discussion of a separate withholding tax on certain sales.

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