For a nonresident alien, wages and salaries do not become U.S.-source income simply because a U.S. company issued the paycheck or the money was deposited into a U.S. bank account. For employee compensation, the place where the services were physically performed is usually the starting point. Work performed in the United States is generally U.S.-source compensation; work performed outside the United States is generally foreign-source compensation.
The discussion below concerns individuals who are nonresident aliens for U.S. federal income tax purposes. Immigration classification and federal tax residency are separate concepts, so an F-1, J-1, H-1B, or other immigration status does not by itself establish whether someone is a resident or nonresident alien for a particular tax year.
What Counts as Employee Compensation?
The IRS uses the term dependent personal services for services performed in the United States by a nonresident alien as an employee. Compensation can include wages, salaries, fees, bonuses, commissions, and similar amounts paid because of the employment relationship. Overtime pay and taxable employee benefits may also form part of compensation.
Employee compensation should not be treated as interchangeable with independent contractor pay. A worker’s classification can change the withholding and reporting rules, so the wage rules described here apply to compensation arising from an employer-employee relationship.
Where the Work Is Performed Usually Determines the Source
For personal service income, the IRS generally looks to where the labor or services were performed. The place where the employment contract was signed, the currency used for payment, the location of the payroll department, and the residence of the payer do not by themselves determine the source of the compensation.
| Employer | Where the Employee Works | General Source Result |
|---|---|---|
| U.S. employer | United States | Generally U.S.-source compensation |
| Foreign employer | United States | Generally U.S.-source compensation, subject to specific statutory or treaty exceptions |
| U.S. employer | Outside the United States | Generally foreign-source compensation |
| Foreign employer | Outside the United States | Generally foreign-source compensation |
| Either | Partly inside and partly outside the United States | Allocation is generally required |
This sourcing rule matters for remote and cross-border employees. A nonresident alien working from another country for a U.S. employer can have foreign-source employee compensation for the days the services are performed abroad. Conversely, a foreign employer can pay U.S.-source wages when the employee performs the services inside the United States.
Wages for Work Performed in More Than One Country
When an employee performs services partly in the United States and partly outside the United States, compensation other than certain fringe benefits is generally allocated on a time basis. The usual calculation is:
U.S.-source compensation = total allocable compensation × U.S. service days ÷ total service days for which the compensation is paid
Suppose an employee earns $120,000 of salary for 240 service days and physically performs services in the United States on 60 of those days. A time-based allocation would produce $30,000 of U.S.-source compensation: $120,000 × 60 ÷ 240.
The denominator is tied to the service period for which the compensation is paid, not automatically to all calendar days in the year. Travel days, leave, partial workdays, separate assignments, and compensation tied to a different service period can affect the facts used in an allocation.
Certain Fringe Benefits Use Geographic Rules
A simple workday fraction is not the default source rule for every employee benefit. Treasury sourcing rules use geographic factors for several fringe benefits when services are performed inside and outside the United States.
| Fringe Benefit | Source Factor |
|---|---|
| Housing | Employee’s main job location |
| Education | Employee’s main job location |
| Local transportation | Employee’s main job location |
| Tax reimbursement | Jurisdiction imposing the tax |
| Hazardous or hardship duty pay | Location of the hazardous or hardship duty pay zone |
| Moving expense reimbursement | Employee’s new main job location |
The sourcing question is separate from whether a fringe benefit is taxable in the first place. A benefit may first need to be classified under the employee benefit rules and, if it is compensation, then sourced under the applicable rule.
Bonuses and Multi-Year Compensation Can Follow the Service Period
The payment date does not always control the source of a bonus or other compensation connected with work performed over more than one tax year. The IRS generally sources multi-year compensation over the period to which that compensation is attributable, based on the facts and circumstances. If a payment relates to services performed in both the United States and another country during that period, a time allocation may be required even if the payment is received after the employee has moved.
The Narrow 90-Day and $3,000 Exception
There is a statutory exception under which compensation for services physically performed in the United States is treated as income from outside the United States. The exception is narrow. All of the applicable conditions must be met:
- The nonresident alien is temporarily present in the United States for no more than a total of 90 days during the tax year.
- Total compensation for those services does not exceed $3,000.
- The services are performed as an employee of, or under a contract with, a qualifying foreign person or entity not engaged in a U.S. trade or business, or for a qualifying foreign office or place of business maintained by a U.S. person or domestic entity.
A stay of 90 days or less does not by itself make U.S. work tax-free. The compensation limit and employer or contracting-party condition also matter.
For this statutory exception, the $3,000 limit is not a monthly allowance. IRS Publication 515 states that if total pay for the services exceeds $3,000, the entire amount falls outside this exception and is U.S.-source income. A tax treaty may contain a separate employment provision with different conditions, so the statutory 90-day rule and a treaty’s day-count rule should not be treated as the same test.
How U.S.-Source Employee Wages Are Taxed
Ordinary employee wages of a nonresident alien for services performed in the United States are generally subject to graduated federal income tax withholding rather than the flat 30% withholding commonly associated with some U.S.-source income paid to foreign persons. The IRS generally taxes effectively connected income after allowable deductions at the graduated rates that apply to U.S. citizens and resident aliens.
The 30% NRA withholding rule is not the default tax rate for ordinary employee wages. Employee wages, nonemployee compensation, scholarships, investment income, and other payments can fall under different withholding rules.
Payroll withholding is also not the same as final federal income tax. Withholding is an amount collected during the year. The final federal result can depend on taxable income, treaty treatment, deductions or credits allowed to a nonresident alien, amounts already withheld, and the individual’s tax-year facts. Where a federal income tax return is required, wage income and withholding are generally reconciled on Form 1040-NR.
Nonresident Alien Payroll Withholding in 2026
Nonresident alien employees use Form W-4 for wages that are not covered by a treaty withholding exemption. IRS instructions require special completion rules for a nonresident alien employee, including writing “Nonresident Alien” or “NRA” below Step 4(c). A nonresident alien generally cannot write “EXEMPT” in that space merely to stop federal wage withholding.
Payroll also applies a special nonresident alien withholding adjustment to wages subject to federal income tax withholding. For an employee who submitted a Form W-4 for 2020 or later, or who was first paid wages in 2020 or later, the 2026 amounts in Publication 15-T are:
| Payroll Period | 2026 Additional Amount |
|---|---|
| Weekly | $309.60 |
| Biweekly | $619.20 |
| Semimonthly | $670.80 |
| Monthly | $1,341.70 |
| Quarterly | $4,025.00 |
| Semiannually | $8,050.00 |
| Annually | $16,100.00 |
| Daily or miscellaneous | $61.90 for each day of the payroll period |
These amounts are not additional taxable wages. Publication 15-T says they are added solely to calculate federal income tax withholding. They are not included in any box on Form W-2, do not increase the employee’s federal income tax liability, and do not increase Social Security, Medicare, or FUTA tax. Nonresident alien students from India and business apprentices from India are excluded from this special adjustment procedure.
An older Form W-4 can lead to a different adjustment table, so the employee’s Form W-4 history can matter to the payroll calculation. The amount withheld on a paycheck therefore may not be reproducible by simply applying an income tax bracket to the cash wage shown for that pay period.
When a Tax Treaty Changes Wage Withholding
A U.S. income tax treaty can exempt some or all compensation from federal income tax when the treaty’s conditions are met. The result depends on the treaty country, the specific treaty article, residence requirements, the nature of the employment, the period of U.S. presence, compensation limits where applicable, and other conditions written into that treaty.
Employment or dependent-personal-services articles are not interchangeable with student, trainee, teacher, or researcher articles. The current Form 8233 instructions also distinguish their residence tests: a claim under an employment article generally requires residence in the treaty country, while a student, trainee, teacher, or researcher article may look to residence immediately before, or at the time of, entry into the United States.
For employee compensation covered by a treaty withholding exemption, Form 8233 is generally the withholding certificate used to claim the exemption. A separate Form 8233 is required for each tax year, each withholding agent, and each type of income. The withholding agent reviews the form and, if it accepts the claim, forwards a copy to the IRS within five days. The current instructions also provide a waiting period of at least 10 days after the form is properly mailed to the IRS to allow for an IRS objection.
Form 8233 changes withholding when a valid treaty claim is accepted; it does not create a treaty benefit that is absent from the treaty itself. A treaty exemption can also be limited to part of the employee’s wages, leaving additional wages subject to normal payroll withholding.
Why an Employee May Receive Form W-2, Form 1042-S, or Both
Year-end reporting can look different for a nonresident alien because taxable payroll wages and treaty-exempt wages are not always reported on the same form.
| Wage Treatment | Typical Federal Reporting |
|---|---|
| Wages subject to normal federal wage withholding | Generally Form W-2 |
| Wages exempt from federal income tax under an accepted treaty position | Generally Form 1042-S for the treaty-exempt amount |
| Part of wages treaty-exempt and part taxable | Form 1042-S for the exempt amount and Form W-2 for additional taxable wages |
Receiving both forms does not necessarily mean the same wages were reported twice. The forms can represent different portions of the same employment compensation under different federal tax treatments. Even when all federal wages are treaty-exempt and reported on Form 1042-S, an employer may still need to issue Form W-2 to report state or local wages and state or local income tax withholding.
A mismatch between payroll records and year-end forms can be more informative than the presence or absence of a particular form by itself. For example, an employee who worked both inside and outside the United States may need the payroll records that show service locations and workdays to understand how the U.S.-source portion was determined.
Social Security and Medicare Use a Separate Test
Federal income tax withholding and FICA taxes are separate payroll questions. Wages can be subject to federal income tax while being exempt from Social Security and Medicare under a specific FICA rule, or they can be subject to both.
A nonresident alien temporarily present in the United States in F-1, J-1, M-1, or Q-1 status is generally exempt from Social Security and Medicare taxes on pay for services performed to carry out the purpose for which the individual was admitted. IRS Publication 515 states that this treatment can extend to authorized Curricular Practical Training (CPT) and Optional Practical Training (OPT) while the individual remains a nonresident alien and the employment satisfies the applicable conditions.
The immigration label alone is not enough. If the individual becomes a resident alien for federal tax purposes, or the work does not fall within the purpose of the qualifying nonimmigrant status, the FICA result can change. Totalization agreements can also affect Social Security coverage in some cross-border employment situations.
How the Wage Records Fit Together
For cross-border employee compensation, several records can describe different parts of the same tax story. Payroll records show where and when services were performed and how withholding was calculated. Form W-2 reports wages handled through the regular wage-reporting system. Form 1042-S can report treaty-exempt compensation. Form 8233 documents a treaty withholding claim. Form 1040-NR, when applicable, is where the federal income tax result is reconciled rather than simply copied from a paycheck withholding percentage.
These records become especially relevant when an employee changes work locations during the year, receives a bonus tied to an earlier service period, has treaty-exempt wages, or sees Social Security and Medicare treatment that differs from federal income tax withholding.
Federal nonresident alien status does not determine state residency or state wage sourcing. States can apply their own residency, work-location, reciprocity, and withholding rules, so a federal wage result does not automatically produce the same state result.
Resources Used
- IRS Publication 515 (2026), Withholding of Tax on Nonresident Aliens and Foreign Entities — source rules for personal services, wage withholding, treaty-exempt compensation, Form W-2 and Form 1042-S reporting, and FICA treatment.
- IRS Publication 15-T (2026), Federal Income Tax Withholding Methods — 2026 nonresident alien wage adjustments used in payroll withholding calculations.
- IRS: Federal Income Tax Reporting and Withholding on Wages Paid to Aliens — special Form W-4 treatment and reporting of treaty-exempt and taxable wages.
- IRS Instructions for Form 8233 — treaty withholding claims for employee compensation and withholding-agent procedures.
- IRS: Taxation of Nonresident Aliens — general treatment of effectively connected income and Form 1040-NR.