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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My husband and I operate an internet/technology services LLC

Resolved Question:

My husband and I operate an internet/technology services LLC and we work with a company in India who handles the programming work. Everything they do is 100% based in India. Does the money I pay them count as "U.S. Source Income" under our tax laws, and do I have to charge them anywhere from 15-30% of the income I've already paid them as "tax withholding" ?
Submitted: 4 years ago.
Category: Tax
Expert:  Merlo replied 4 years ago.

Hello JA Customer,

 

 

If the services performed by the company in India are all performed in that country, and no services are physically provided here in the United States, then you are not required to withhold any taxes from these payments.

 

Publication 519 discusses the taxes owed by nonresident aliens. Chapter 2 of that publication discusses the sources of income, and states that a nonresident alien is subject to U.S. income tax only on U.S. source income. The publication also provides a table which identifies US source income. That table specifically provides that the source of income for wages, personal services and other confirmation is determined by where the services are performed. So if the services are performed in India, then this is not considered US source income and is not subject to US withholding.

 

If this was helpful please press the Accept button. It is the only way we receive any credit for helping with these questions.

 

Thank you JA Customer

 

 

Customer: replied 4 years ago.

Thank you for your help!

 

So as long as everything he has done is in India, we don't withhold any taxes from him at all? Do we send him any kind of forms like 1099s? One reason I'm a bit confused with this is because of the stipulations on this site (as an example)

 

https://www.createspace.com/international

 

In that case, what would make royalty payments different from paying someone for services rendered?

 

I guess I misunderstood U.S. source income as income coming from our company (U.S. based) rather that money earned as a result of doing business in this country.

 

 

Expert:  Merlo replied 4 years ago.

Hello again JA Customer,

 

If all of the work is performed in India, then no withholding is required and there are no tax forms to be sent.

 

Royalty payments do not follow the same rules as wages or other compensation paid for personal services. Publication 519 states that the source of income for royalty payments is considered to be the location of where the property is used.

 

If this was helpful please press the Accept button. It is the only way we receive credit for helping with these questions.

 

Thank you JA Customer

 

 

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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