Pursuant to I.R.C. § 861(a)(3), "[c]ompensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States."
Consequently, nonresident crew members working onboard a foreign flagged yacht may not be subject to the withholding requirements found in I.R.C. §§ 3402 or 1441, so long as that yacht is engaged in transportation between the U.S. and a foreign country or U.S. possession. In this regard, it should be noted that U.S. territories (e.g., Puerto Rico, U.S. Virgin Islands) and their territorial waters are not considered to be part of the U.S. for purposes of I.R.C. § 861.
