Federal Tax Purposes
The Internal Revenue Service classifies income into two sources: U.S. source or foreign source.
- The source of income depends on the type of payment made, location of the payer and location of service provided.
- Resident aliens are taxed on their worldwide income. Nonresident aliens are taxed on their U.S. source only.
- Foreign source income paid to a nonresident alien is not subject to income tax withholding or tax reporting.
The following table illustrates the Federal Income Sourcing Rules.
| Type of Payment | Source Determined by |
Location of Service In the United States |
Location of Service Outside of the United States |
| Compensation: Employment or Independent Services | Where the services are performed |
U.S. Source Income | Foreign Source Income |
| Fellowship/Scholarship (Non-service) | U.S. Payer | U.S. Source Income | Foreign Source Income |
| Fellowship/Scholarship (Non-service) | Foreign Payer | Foreign Source Income | Foreign Source Income |
| Royalty | Where property is used |
U.S. Source Income | U.S. Source Income |
| Death Payment | Where the services were performed to accrue benefit |
U.S. Source Income | Foreign Source Income |
| Pension | Where the services were performed to accrue benefit |
U.S. Source Income | Foreign Source Income |
State Tax Purposes
For California tax purposes, income is sourced by residency of the individual receiving payment and location of services.
- California residents are taxed on all income earned regardless of where it is earned.
- Nonresidents (of California) are only taxed on the income earned while working and living in California.
Provided is a table containing the Franchise Tax Board (FTB) rules as they pertain to California nonresidents.
| Type of Payment | Source Determined by |
Location of Service Inside California |
Location of Service Outside California |
| Employment | Where the services are performed |
California Source | Non-California Source |
| Independent Personal Services | Where the services are performed |
California Source | Non-California Source |
| Fellowship/Scholarship | U.S. Payer | California Source* | Non-California Source |
| Fellowship/Scholarship | Foreign Payer | Foreign Source Income | Foreign Source Income |
| Death Payment | Where the services were performed to accrue benefit |
California Source | Non-California Source |
| Pension | Where the services were performed to accrue benefit |
California Source | Non-California Source |
*Per an agreement with the FTB, no California withholding or reporting on California source fellowship/scholarship payments is required by UC Universities. However, recipient of such awards may have a requirement to file estimated quarterly payments with the FTB.
