What is foreign earned income? Is it income paid by a foreign person for working abroad, or is it income paid by a U.S. company for working abroad?

Foreign earned income is income you receive for services you perform in a foreign country or countries. It does not matter whether the income is paid by a U.S. employer or a foreign employer. To qualify for the foreign earned income exclusion, two main requirements must be met:

1. Tax Home in a Foreign Country: Your tax home must be in a foreign country. According to Subsection 911(d)(3) of the Internal Revenue Code, the term "tax home" means your home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which their abode is within the United States.
2. Bona Fide Residence Test or Physical Presence Test:
   • Bona Fide Residence Test: You must be a U.S. citizen or a resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year (Subsection 911(d)(1)(A)).
   • Physical Presence Test: You must be a U.S. citizen or a resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months (Subsection 911(d)(1)(B)).

Foreign earned income includes wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered (Subsection 911(d)(2)(A)). However, it does not include amounts received as a pension or annuity, paid by the United States or an agency thereof to an employee of the United States or an agency thereof, included in gross income by reason of section 402(b) or section 403(c), or received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed (Subsection 911(b)(1)(B)).

In summary, foreign earned income is defined by the location where the services are performed, not by the source of the payment.

Sources:
Publication 54 (2023)
§ 911. Citizens or residents of the United States living abroad
Publication 519 (2023)
Rev. Rul. 75-432
IRM Part 21. Customer Account Services. Chapter 8. International. Section 1. IMF International Adjustments
CCA 201810007