The Ten Rules Of U.S. Taxation

by Paula N. Singer, Esq.

The general rule of income taxation is that income is taxable where the economic activity occurs.

Rule #1:
All compensation for services performed in the United States is subject to U.S. taxes unless an exception applies.

Rule #2:
How an individual performing services in the United States is taxed depends on his or her U.S. tax status - resident or nonresident. These are tax terms not immigration terms.

Rule #3:
How an individual performing services in the United States is taxed depends on his or her U.S. tax status - resident or nonresident. These are tax terms not immigration terms.

Rule #4:
An immigrant, like a U.S. citizen, is subject to U.S. tax on worldwide income, even if the individual resides and works abroad, unless an exception applies.

Rule #5:
A resident is subject to U.S. tax on worldwide income regardless of the currency or location of payment. A nonresident is subject to U.S. tax on U.S. source income and income effectively connected to a U.S. trade or business regardless of the source. Compensation for services performed in the United States is U.S. source income regardless of the currency or location of payment unless an exception applies.

Rule #6:
The United States, like foreign governments, collects taxes on the income of nonresidents through withholding taxes. The U.S. withholding tax is 30 percent unless an exception applies. One exception is wages subject to wage withholding.

Rule #7:
An employer is required to withhold federal and state income taxes, and social security and Medicare taxes, on compensation paid for employment services performed in the United States unless an exception applies. This rule applies to both U.S. and foreign employers.

Rule #8:
All payments made by an employer to or on behalf of an employee, including cash and the fair market value of benefits-in-kind, are wages subject to withholding taxes unless an exception applies.

Rule #9:
In addition to meeting the conditions for an exception, an individual must document the exception usually by submitting a completed form, signed under the penalties of perjury, to the payer or to the IRS; otherwise the exception does not apply.

Rule #10:
The IRS enforces withholding by collecting the tax, plus penalties and interest, from the payer who fails to withhold or to collect the necessary form for the exemption from withholding. Additional penalties are imposed for the failure to report the income.