The bank account, currency, contracting location and paying entity usually do not determine where compensation is sourced. Begin with where the services were performed, then address residence, treaty, withholding and state tax separately.

1. Separate four questions before calculating tax

A cross-border compensation review asks whether the person is a U.S. resident or nonresident, whether income is U.S. or foreign source, how the payer must withhold and report, and where state obligations arise. Residents generally report worldwide income; nonresidents focus on U.S.-source and effectively connected income, subject to detailed exceptions.

Residence may depend on the green-card test, substantial presence or a treaty. Compensation source generally follows the service location, while withholding depends on status, income, documentation and Payroll. Compressing those questions into “China paid the executive” can miss federal, state and employer obligations at once.

  • Federal tax residence
  • U.S. and foreign compensation source
  • Employer withholding and reporting
  • State residence and workdays
  • Treaty position and disclosure

2. Compensation generally follows the place of service

The IRS generally sources personal-service income where the services are performed. Payment location, contract location, currency and payer residence usually do not change that result. U.S. management meetings, negotiations, customer work or other executive duties can create U.S.-source compensation even when the agreement and bank account remain in China.

For a pay period spanning both countries, workday allocation is a common starting point, supported by the calendar, duties and calculation method. The denominator should not automatically be calendar days. Bonuses, equity and deferred pay require identification of the relevant earning period, with a method that reasonably reflects how the compensation was earned.

  • Daily service location
  • Salary and bonus earning periods
  • U.S. workdays and total workdays
  • Equity grant, vesting and service periods
  • Support and consistent allocation method

3. A treaty can provide relief, but not automatically

The U.S.-China treaty's dependent-personal-services article may limit U.S. tax only when all applicable conditions are met. Days present, employer status, who bears the compensation and a connection to a U.S. permanent establishment can matter. Nationality or satisfaction of one condition is not enough.

A nonresident employee claiming certain treaty withholding relief may need to give Form 8233 and an attachment to the withholding agent on time. Other treaty-based return positions may require Form 8833. The forms implement disclosure and withholding; they do not replace analysis of the treaty and actual cost-bearing facts.

  • Treaty residence
  • U.S. presence and service days
  • Common-law and economic employer facts
  • Whether a U.S. entity bears the pay
  • Forms 8233, 8833 and the individual return

4. Payer, cost bearer and Payroll must reconcile

When the China parent pays all compensation, the U.S. subsidiary may still need shadow Payroll or another mechanism for U.S. wage withholding, employment tax and state reporting. Conversely, U.S. payment does not automatically make all pay U.S.-source; services performed in China still require separate sourcing and residence analysis.

An intercompany recharge affects transfer pricing, deductions and the treaty cost-bearer facts. Map salary, bonus, benefits, equity and tax equalization to the ledger and invoice. Forms W-2 and 1042-S serve different rules; convenience should never produce duplicate or missing reporting.

  • Legal employer, payer and beneficiary
  • Home and host Payroll
  • Wage withholding and employment tax
  • Forms W-2, 1042-S and the individual return
  • Intercompany recharge and general ledger

5. Let the executive calendar drive quarterly review

Update travel, I-94, service days, pay elements and cost bearing in one monthly workpaper. Compare projected and actual U.S. days quarterly so withholding or estimates can change before year-end. Assign data ownership for bonuses and equity when the award is approved, not during return preparation.

At year-end, obtain confirmation from the executive, HR, Payroll and tax, then reconcile China payroll, U.S. Payroll, the ledger and intercompany settlements. If history must be reconstructed, use verifiable records and label assumptions rather than presenting a broad estimate as a precise fact.