I am a single owner of a U.S. LLC, non-U.S. person living abroad. My company provides remote services. Do I need to file tax return and pay income tax?
A single member LLC that elected to be a disregarded entity (a default election) would only pay tax based on the tax status of the owner. Since the owner is not physically present in the US and is providing services remotely there would be no income effectively connected to the US. That means the LLC would owe no US tax, except for the annual registration fee in the state of LLC registration, and there would be no US federal tax obligation (in other words there is no requirement to file income tax either).
Keep in mind though - you might not technically be producing income in the U.S., but you still could be (and chances are) liable to income tax on this income in your country.
What if I import and sell goods in the U.S. - does it change the previous answer?
If your business is selling tangible goods in the US, you are required to report the income from this business to the IRS. Non-US residents report their US sourced income on form 1040NR.
Don’t try to figure this form out - it is our recommendation to hire a CPA to handle all your U.S. tax issues. You will also need to obtain ITIN, something Jumpstart can assist you with.
What if the LLC has more than one owner? What happens then?
LLC that has more than one owner (partnership), or if it is elected to be taxed as S or C Corporation (any number of owners), must file federal tax return, even if it has zero income.
Ok, I got the point about LLC. But what if it’s corporation instead?
A corporation is a separate tax entity from its owners. That means the corporation files its own tax return and pays its own tax liability. That also means that one cannot freely transfer money between the owners (shareholders) and the corporation. The corporation can reimburse the owners for expenses they pay on behalf of the business, and the corporation can pay owners for services they provide to the corporation, both of which are tax deductions for the business.
The only other option for the shareholders to take funds from the business is if the corporation pays them dividends. Dividends are not a tax deduction and are generally taxable income to shareholders as the individuals. As a shareholder, your personal income is subject to the income tax rules in your country of residence.
What is the best way to reduce the taxable income of my LLC or Corporation?
Most businesses have both revenues and expenses. The IRS keeps a list of eligible business expenses, and it is safe to say that expenses that can are obviously related to maintaining and running the business (e.g. hosting, advertising, salaries of employees, etc.) are considered deductible expenses. Other expenses might be partially deductible, and it is best to have your CPA handle the question which of your expenses are deductible and to what degree.
To minimize your tax obligation you would want to report as many eligible expenses as possible, however you should be able to prove these expenses were real, so keeping receipts and/or bank and credit card statements is a must.
Ok, let’s talk about wages. Can I pay myself a salary as a corporate officer, this way avoiding double taxation?
If you are non-resident alien you probably don’t have work permit, which means you cannot receive a salary as a resident alien or U.S. citizen would. Sorry.
You could however provide services, such as management services, to the U.S. company, and receive payment in form of consulting fees. You will then be required to report this income in accordance with your country tax rules.
What if we spend all or most of the income of the U.S. company on services provided by our other company, registered in our country?
You could do that, provided you can prove services were indeed provided and properly documented. You also want to make sure these services are provided outside of the U.S., in order not to be considered U.S. sourced, and as such subject to 30% withholding requirement (more about it below).
What if we retain all the corporate profits in the U.S., pay the corporate income tax, and not distribute it to shareholders? Can we just reinvest this money into the business?
Yes, you can.
So given all the owners are non-U.S. persons, from income tax point of view is it more beneficial to register LLC or Corporation?
Tricky question that depends on lots of factors. Both entities have their pros and cons, so before reaching a conclusion you should analyze your specific situation, make some forecasts on how your business will evolve, and also - consult a CPA, it will help you a lot.
Keep in mind, there is not always a “right” and “wrong” answer - often times either entity that you would form for your business would work just fine.
How and when do I file tax return?
By hiring a knowledgeable U.S. CPA (accountant). The deadline in most cases is or around April 15 (each year can be a bit different). You can file extension by that date, and the new due date is September 15 for companies and October 15 for individuals.
Keep in mind, corporations have to file quarterly reports, while LLCs taxed as partnerships file once a year. This could result in slightly higher cost of accounting services for corporations.
Do I need an ITIN to file taxes? If yes, how can I get it?
Whether you need to obtain an ITIN will depend on if you have US tax reporting obligations due to your US business interests. It is possible that you will need an ITIN if you have membership interest (ownership) in an LLC, but most probably you won’t need one as a shareholder of a corporation.
KEEP IN MIND: Individuals must have a filing requirement and file a valid federal income tax return to receive an ITIN, unless they meet an exception.
What about state income tax?
This tax is only applicable to C Corporations, not LLCs. It applies to income earned by the corporation in the state, unlike federal income that applies to all U.S. sourced income.
Even though LLCs don’t pay income tax, it is a good idea to check with your CPA if there are any filing requirements for the LLC in the state of registration.
Should I register my company in the state that has no income tax?
Again, it doesn’t matter if you choose LLC. For corporations it matters, but only to the extent that you believe you will have lot’s of income in the state of registration. For example, if you have a Delaware Corporation and your business has no income coming from sources in Delaware then you will have no corporate tax to pay to the state of Delaware, only the federal corporate tax.
I heard as non-resident alien I need to pay 30% income tax on my U.S. income. Is it true?
It is true in certain cases. It is called NRA (non-resident alien) withholding, meaning your payee keeps 30% of the sum they are paying you, and remits this sum to the IRS.
According to IRS rules “in order for a payment to be subject to NRA withholding, it must be a payment of FDAP income. FDAP is an acronym for Fixed or Determinable, Annual or Periodic. Some of the more common expenses paid by US withholding agents which would result in FDAP income to their vendors and other service providers are interest, royalties, compensation for personal services, rents, pensions or annuities and gains from the sale or exchange of the patents, copyrights and similar intangibles...”
Here is a key - for FDAP income paid to a foreign person to be subject to NRA reporting and withholding, the payment must be U.S. sourced. So how do you know if your FDAP income is in fact U.S. sourced? Here are some examples:
- Interest: If the debtor is a U.S. resident, the interest is generally U.S. sourced.
- Royalties: If the subject property is used in the U.S., the royalty payment is U.S. sourced. Payments made in connection with the sale of certain intangible assets, including copyrights and patents, are generally sourced similar to royalties when the payments are contingent on the productivity, use or disposition of the intangible.
- Rents: If the rental property is located in the U.S., the rental payment is U.S. sourced.
- Personal Services: If the services are performed in the U.S., the payment for those services is generally U.S. sourced.
What is form W-8BEN, and when do I need to file it?
Form W-8BEN is a Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. You need to fill this form out and give to the withholding agent or payer if you are a foreign person and you are the beneficial owner of an amount subject to withholding. In other words, if you have U.S. sourced FDAP income your payer will be responsible to withhold the 30% tax based on the information listed on the W-8BEN.
Keep in mind, you need to submit Form W-8BEN when requested by the withholding agent or payer whether or not you are claiming a reduced rate of, or exemption from, withholding.
What about tax treaty between U.S. and my country? How does it influence my income tax obligations?
If you as foreign vendor are a resident in a country that has a tax treaty with the United States, the 30% rate may be reduced. Each treaty has specific provisions which determine the reduced withholding rate. These provisions reduce the withholding rate based on the type of income and the status of the recipient.
To know if your country has tax treaty with the U.S. please visit this page. You can study the text of the treaty to understand how it influences your withholding situation, although I would recommend using the help of a CPA for that as well.