US-source income
Income sourced to the US under IRS source-of-income rules, potentially subject to US withholding.
Definition
US-source income is income sourced to the US under IRS rules. Sourcing depends on income type: service income sourced to location of performance; royalty income sourced to location of use; interest sourced to debtor's residence. US-source FDAP income to non-residents is subject to 30% default withholding (or treaty rate).
Context
Source rules drive both withholding (US-source FDAP) and ECI analysis (US-source ECI is taxed at graduated rates).
Example
AdSense payments from Google (US payer) to a non-resident-owned LLC are typically US-source royalty income, subject to 30% default withholding or treaty rate via W-8BEN-E.
Common pitfalls
- Misunderstanding source rules can lead to over- or under-withholding.
- Some income types have specific source rules (transportation, communications, software).