Determining the Source of Compensation for Labor or Personal Services: Foreign Tax Credits (2025 IRS Guide)

This guide covers “Determining the Source of Compensation for Labor or Personal Services” within foreign tax credits. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 514 (2025), Foreign Tax Credit for Individuals, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

Before you can determine the limit on your credit, you must first figure your total taxable income from all sources before the deduction for personal exemptions. For individuals, this is the sum of (i) Form 1040, 1040-SR, or 1040-NR, line 11b, minus Form 1040, 1040-SR, or 1040-NR, line 14; and (ii) Schedule 1-A (Form 1040), line 37. Then, for each category of income, you must figure your taxable income from sources outside the United States.

If your taxable income from sources outside the United States for a category of income is zero or less, your limit for that category of income is zero. If your total taxable income from all sources is zero or less, your limit is zero for all categories of income.

Before you can figure your taxable income in each category from sources outside the United States, you must first determine whether your gross income in each category is from U.S. sources or foreign sources. Some of the general rules for figuring the source of income are outlined in Table 2.

See Determining the foreign tax credit limit if you elect to be taxed at corporate tax rates under section 962, earlier, for more details that apply to you if you make a section 962 election.

See Determining the Source of Compensation for Labor or Personal Services and Determining the Source of Income From the Sales or Exchanges of Certain Personal Property, later, for a more detailed discussion on determining the source of these types of income.

Determining the Source of Compensation for Labor or Personal Services

If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. Compensation (other than certain fringe benefits) is sourced on a time basis. Certain fringe benefits (such as housing and education) are sourced on a geographical basis.

Or you may be permitted to use an alternative basis to determine the source of compensation. See Alternative basis, later.

If you are self-employed, you determine the source of compensation for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next.

Time basis.

Use a time basis to figure your foreign source compensation (other than the fringe benefits discussed later). Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction.

You can use a unit of time less than a day in the above fraction, if appropriate. The time period for which the compensation is made does not have to be a year. Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate.

Table 2. Source of Income

• * Exception: Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation’s gross income is effectively connected with a U.S. trade or business for the 3 tax years before the year in which the dividends are declared.
  
  

Example 1.

Christina, a U.S. citizen, worked 240 days for a U.S. company during the tax year. Christina received $80,000 in compensation. None of it was for fringe benefits. Christina performed services in the United States for 60 days and performed services in the United Kingdom for 180 days. Using the time basis for determining the source of compensation, $60,000 ($80,000 × ¹⁸⁰/₂₄₀) is Christina’s foreign source income.

Example 2.

Robert, a U.S. citizen, is employed by a U.S. corporation. Robert’s principal place of work is in the United States. Robert’s annual salary is $100,000. None of Robert’s annual salary is for fringe benefits. During the first quarter of the year, Robert worked entirely within the United States. On April 1, Robert was transferred to Singapore for the remainder of the year. Robert is able to establish that the first quarter of the year and the last 3 quarters of the year are two separate, distinct, and continuous periods of time. Accordingly, $25,000 of Robert’s annual salary is attributable to the first quarter of the year (0.25 × $100,000). All of it is U.S. source income because Robert worked entirely within the United States during that quarter. The remaining $75,000 is attributable to the last 3 quarters of the year. During those quarters, Robert worked 150 days in Singapore and 30 days in the United States. Robert’s periodic performance of services in the United States did not result in distinct, separate, and continuous periods of time. Of Robert’s $75,000 salary, $62,500 ($75,000 × ¹⁵⁰/₁₈₀) is foreign source income for the year.

Multi-year compensation.

In most cases, the source of multi-year compensation is determined on a time basis over the period to which the compensation is attributable. Multi-year compensation is compensation that is included in your income in 1 tax year but that is attributable to a period that includes 2 or more tax years.

You determine the period to which the compensation is attributable based on the facts and circumstances of your case. For example, an amount of compensation that specifically relates to a period of time that includes several calendar years is attributable to the entire multi-year period.

The amount of compensation treated as from foreign sources is figured by multiplying the total multi-year compensation by a fraction. The numerator of the fraction is the number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in the foreign country in connection with the project. The denominator of the fraction is the total number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in connection with the project.

Geographical basis.

Compensation you receive as an employee in the form of the following fringe benefits is sourced on a geographical basis.

• Housing.

• Education.

• Local transportation.

• Tax reimbursement.

• Hazardous or hardship duty pay.

• Moving expense reimbursement.

The amount of fringe benefits must be reasonable and you must substantiate them by adequate records or by sufficient evidence. Table 3 summarizes the factors used for determining the source of these fringe benefits.

Table 3. Source of Fringe Benefits

• * You can determine the source based on the location of your former principal place of work if you have sufficient evidence that such determination of source is more appropriate under the facts and circumstances of your case.
  
  

Housing.

The source of a housing fringe benefit is determined based on the location of your principal place of work. A housing fringe benefit includes payments to you or on your behalf (and your family if your family resides with you) only for the following.

• Rent.

• Utilities (except telephone charges).

• Real and personal property insurance.

• Occupancy taxes not deductible under section 164 or 216(a).

• Nonrefundable fees for securing a leasehold.

• Rental of furniture and accessories.

• Household repairs.

• Residential parking.

• Fair rental value of housing provided in kind by your employer.

A housing fringe benefit does not include:

• Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation);

• The cost of buying property, including principal payments on a mortgage;

• The cost of domestic labor (maids, gardeners, etc.);

• Pay television subscriptions;

• Improvements and other expenses that increase the value or appreciably prolong the life of property;

• Purchased furniture or accessories;

• Depreciation or amortization of property or improvements;

• The value of meals or lodging that you exclude from gross income; or

• The value of meals or lodging that you deduct as moving expenses.

Education.

The source of an education fringe benefit for the education expenses of your dependents is determined based on the location of your principal place of work. An education fringe benefit includes payments only for the following expenses for education at an elementary or secondary school.

• Tuition, fees, academic tutoring, special needs services for a special needs student, books, supplies, and other equipment.

• Room and board and uniforms that are required or provided by the school in connection with enrollment or attendance.

Local transportation.

The source of a local transportation fringe benefit is determined based on the location of your principal place of work. Your local transportation fringe benefit is the amount that you receive as compensation for your local transportation or that of your spouse or dependents at the location of your principal place of work. The amount treated as a local transportation fringe benefit is limited to actual expenses incurred for local transportation and the fair rental value of any employer-provided vehicle used predominantly by you or your spouse or dependents for local transportation. Actual expenses do not include the cost (including interest) of any vehicle purchased by you or on your behalf.

Tax reimbursement.

The source of a foreign tax reimbursement fringe benefit is determined based on the location of the jurisdiction that imposed the tax for which you are reimbursed.

Hazardous or hardship duty pay.

The source of a hazardous or hardship duty pay fringe benefit is determined based on the location of the hazardous or hardship duty zone for which the hazardous or hardship duty pay fringe benefit is paid. A hazardous or hardship duty zone is any place in a foreign country which meets either of the following conditions.

• The zone is designated by the Secretary of State as a place where living conditions are extraordinarily difficult, notably unhealthy, or where excessive physical hardships exist, and for which a post differential of 15% or more would be provided under section 5925(b) of title 5 of the U.S. Code to any officer or employee of the U.S. Government at that place.

• The zone is where civil insurrection, civil war, terrorism, or wartime conditions threaten physical harm or imminent danger to your health and well-being.

Compensation is treated as a hazardous or hardship duty pay fringe benefit only if your employer provides the hazardous or hardship duty pay fringe benefit only to employees performing labor or personal services in a hazardous or hardship duty zone.

The amount of compensation treated as a hazardous or hardship duty pay fringe benefit cannot exceed the maximum amount that the U.S. Government would allow its officers or employees present at that location.

Moving expense reimbursement.

In most cases, the source of a moving expense reimbursement is based on the location of your new principal place of work. However, the source is determined based on the location of your former principal place of work if you have sufficient evidence that such determination of source is more appropriate under the facts and circumstances of your case. Sufficient evidence generally requires an agreement between you and your employer in most cases, or a written statement of company policy, which is reduced to writing before the move and which is entered into or established to induce you or other employees to move to another country. The written statement or agreement must state that your employer will reimburse you for moving expenses that you incur to return to your former principal place of work regardless of whether you continue to work for your employer after returning to that location. It may contain certain conditions upon which the right to reimbursement is determined as long as those conditions set forth standards that are definitely ascertainable and can only be fulfilled prior to, or through completion of, your return move to your former principal place of work.

Alternative basis.

If you are an employee, you can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your compensation than the time or geographical basis. If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your compensation. Also, if your total compensation from all sources was $250,000 or more, you must check the box on Form 1116, line 1b, and attach a written statement to your tax return that sets forth all of the following.

1. Your name and social security number (written across the top of the statement).

2. The specific compensation income, or the specific fringe benefit, for which you are using the alternative basis.

3. For each item in (2), the alternative basis of allocation of source used.

4. For each item in (2), a computation showing how the alternative allocation was computed.

5. A comparison of the dollar amount of the U.S. compensation and foreign compensation sourced under both the alternative basis and the time or geographical basis discussed earlier.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 514 (2025), Foreign Tax Credit for Individuals: How To Figure the Credit — Figuring the Limit — Determining the Source of Compensation for Labor or Personal Services — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.