How the personal income tax is culculated if I live in Canada and work
from home for a U.S. based company or organization.

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Clarification of Question by shane77-ga on 05 Aug 2004 20:08 PDT

I am not citizen or green card holder of the U.S. but a premanent
resident of Canada and work as independent consultant.

Hi shane77,

Payments made to nonresident aliens for services performed outside the
U.S. are not taxable or reportable (Sec.1441(a) of the Internal
Revenue Code), However, your employer will need to file forms 1042 &
1042-S (and use Code 03).

Form 1042: Annual Withholding Tax Return for Source Income of Foreign Persons:
http://www.irs.gov/pub/irs-pdf/f1042.pdf

Form 1042-S: Foreign Person?s U.S. Source Income Subject to Withholding:
Box 6, Exemption Code 03: Income is not from U.S. sources:
* "Non-U.S. source income received by a nonresident alien is not
subject to U.S. tax. Use Exemption Code 03 when entering an amount for
information reporting purposes only."
http://www.irs.gov/pub/irs-pdf/f1042s03.pdf

US TAX FOR ALIENS: Publication 519: US Tax Guide for Aliens:
Chapter 2, page 11:
"A nonresident alien usually is subject to U.S. income tax only on
U.S. source income."
Table 2?1, page 11: 
Summary of Source Rules for Income of Nonresident:
 A. Factor Determining Source:
  1. Salaries, wages, other compensation: Where services performed
  2. Business income: Personal services:  Where services performed
Chapter 2, page 12: 
"All wages and any other compensation for services performed in the
United States are considered to be from sources in the United States."
"If your compensation is for personal services performed both inside
and outside the United States, you must figure the amount of income
that is for services performed in the United States."
http://www.irs.gov/pub/irs-pdf/p519.pdf

So briefly, you should receive full payment (no tax withheld) on your
pay cheques, and at tax time, you should receive a copy of Form
1042-S, which you will attach to your Canadian income tax form.

I hope that is clear. If you have any questions or if I've
misunderstood your question, please post a clarification request
before closing/rating my answer and I'll be happy to reply.

Thank you,
hummer

Search Strategy:
I used my extensive research that I've already done on similar IRS questions.

very resouceful, great work.

I assume you want to know about the personal income tax issues
involved.  There may be other issues that relate to the company.

The answer depends on your citizenship and residency status.

Basically US citizens and premanent residents (green card holders) are
taxed on their worldwide income regardless of where it is earned. 
Therefore, if you're a US citizen or green card holder, you'll owe tax
on 100% of the income.  Non-residents are generally only taxed on
income earned within the US.

Revenue Canada will probably want to tax you as well.  Depending on
your citizenship and residency, the US-Canada income tax treaty will
ensure that you don't pay taxes twice or the US foreign tax credit
mechanism will apply.

You need to describe your situation better so that someone can offer a
more specific answer.

Thank you, shane77, for your nice note, rating, and tip - I appreciate
them all. Good luck with your telecommuting. Sincerely, hummer