Foreign earned income is income you receive for services you perform in a foreign country. For purposes of the Foreign Earned Income Exclusion (FEIE), this applies only during periods when your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence test.

What Counts as Earned Income

Earned income is pay you receive for personal services you perform. This includes:

• Wages and salaries
• Commissions and bonuses
• Professional fees
• Tips
• Self-employment income for services performed
• Income from selling artwork you created
• Scholarship or fellowship amounts paid to you for teaching, research, or other required services
• Non-cash compensation such as lodging, meals, or use of a car (valued at fair market value)

You may also receive allowances or reimbursements for cost of living, overseas differential, family or education expenses, home leave, quarters, or moving expenses. These amounts are generally considered earned income.

Business profits, royalties, and rents may be earned income, unearned income, or a mix of both depending on whether personal services or capital investment are the primary factor in producing the income.

Earned and Unearned Income

Some types of income are not clearly earned or unearned. The rules below apply to income from sole proprietorships, partnerships, corporations, stock options, royalties, rents, and fringe benefits.

Income From a Sole Proprietorship or Partnership

Earned income: If your personal services are an important part of producing the income, the portion representing the value of your services is earned income.

Unearned income: If capital investment is the primary factor, the income may be unearned.

Capital is a factor: If capital is important in producing the income, no more than 30% of your share of net profits can be treated as earned income. If there is no net profit, a reasonable allowance for personal services is treated as earned income.

Example 1: You invest in a foreign partnership but perform no services. Your $80,000 share of profits is entirely unearned income.

Example 2: Same facts, but you perform services worth $15,000. Your share of profits is $80,000; 30% is $24,000. Your earned income is limited to the value of your services: $15,000.

Income From a Corporation

Salary from a corporation is earned income only to the extent it represents reasonable compensation for services you perform.

Example 1: You receive a $10,000 “salary” but perform no services. All $10,000 is unearned income.

Example 2: You work full time and receive $100,000. If $80,000 is reasonable compensation, then $80,000 is earned income.

Stock Options

Stock option income may be earned or unearned depending on when the stock was granted, exercised, and sold. Capital gain treatment results in unearned income. If the stock is sold within 2 years of grant or 1 year of exercise, part of the gain may be earned income. Any portion related to foreign services is foreign earned income.

Royalties

Royalties received by a writer for transferring rights to their own work or under a contract to produce written material are earned income. Royalties from oil, mineral rights, or patents are generally unearned income.

Rental Income

Rental income is generally unearned. If you perform substantial personal services in connection with the rental activity, up to 30% of net rental income may be treated as earned income.

Example: A U.S. citizen operating a rooming house abroad may treat up to 30% of net rental income as earned income if both capital and personal services are required. If only minimal services are performed, all income is unearned.

Use of Employer-Provided Property or Facilities

If your employer provides lodging, meals, or other facilities, the fair market value of those benefits is earned income unless they qualify for exclusion.

Example: You earn $6,000 per month and live rent-free in employer-provided housing worth $3,000 per month. Total earned income = $108,000 ($72,000 salary + $36,000 housing value).

Do Not Include in Foreign Earned Income

• Employer reimbursements (unless they exceed the expense)
• Pension or annuity payments, including Social Security
• Pay received as a U.S. Government employee
• Employer contributions to nonqualified plans
• Recaptured moving expenses
• Payments received after the year following the year services were performed
• Meals and lodging provided on the employer’s premises for the employer’s convenience and as a condition of employment

Source of Earned Income

The source of earned income is where the services are performed, not where you are paid or where your employer is located. Work performed abroad is foreign-source income even if paid in the United States.

If you work partly in the United States and partly abroad and cannot separate the amounts, you generally allocate income based on workdays.

Example: Total income: $88,800; total workdays: 240; U.S. workdays: 30. U.S. source income = 30 ÷ 240 × $88,800 = $11,100.