Taxation of an LLC for non-residents of the United States | 2023

Taxation of an LLC for non-residents of the United States | 2023

What Taxes Does My Non-Resident LLC Have to Pay?

In this article, we will show you what taxes a non-resident LLC needs to pay, in what cases you must pay taxes, and, if you qualify, which taxes you need to pay.

Let’s start with the initial question.

When Does My Non-Resident LLC Have to Pay Taxes?

A Limited Liability Company must pay taxes when it is considered to be an ETBUS (engaged in trade or business in the US).

And how does the IRS determine when an LLC should be classified as an ETBUS?

The Internal Revenue System (IRS) relies on three criteria when qualifying your LLC:

  1. That you provide services within the United States.
  2. Having certain fixed, annual, periodic, or determinable income.
  3. Having a presence in the United States.

 

Let’s take a closer look:

That you provide services within the United States.

If you perform any service or work within the United States during your physical presence, then you will qualify as an ETBUS.

Only remuneration for services or work performed outside the United States is considered non-U.S. source income, according to Section 862(a)(3) of the Internal Revenue Code.

Having certain fixed, annual, periodic, or determinable income.

All fixed, determinable, annual, or periodic income (FDAP) is subject to U.S. taxes, even if you do not engage in a trade or business activity in the country.

Some examples of FDAP income include:

  • Compensation
  • Salaries
  • Interest
  • Wages
  • Premiums
  • Dividends
  • Rent
  • Annuities
  • Compensation

 

If your non-resident LLC receives any of these types of income, it will qualify as an ETBUS.

Having a presence in the United States.

As the final criterion, a permanent establishment is determined when:

  • You have an agent or representative with the authority to enter into contracts for the company within the United States.
  • Your LLC has a fixed place of business in the United States that is a material factor in the generation of income.
  • You have any employees or agents employed within the United States.

 

If you meet any one of these criteria, you are considered an ETBUS.

When Do I Have to Pay Taxes for a Non-Resident LLC?

To determine if your foreign LLC must pay taxes, you must qualify as an ETBUS (Engaged in Trade or Business in the US), meaning companies that have at least one dependent agent and are involved in continuous, regular, and substantial business activities.

To find out if you qualify as an ETBUS or not, consider the following:

  • You should not have workers or dependent agents residing within the United States.
  • You should not reside within the United States.
  • Lastly, you should not have any physical establishment within the United States (offices, stores, warehouses, or any other property used by your LLC as an operational space).

 

So, LLCs registered in the United States where all their activity is online and outside the country typically do not pay taxes. This activity cannot be taxed as it does not occur physically in the US.

Now that you know whether you qualify as an ETBUS or not, let’s look at what taxes you need to pay if you do qualify.

If My LLC Qualifies as an ETBUS, What Taxes Should I Pay?

State Sales Tax

When a company sells a product or service, it must pay a tax to the state where that sale occurred.

For example, if you have an e-commerce business that sells in multiple states, you may need to pay sales taxes in each state where you have made sales.

Several years ago, this tax was primarily applied to physical products. However, with the evolution of digital product and service sales, this has changed.

Now, sales tax, or “sales taxes,” is also applicable to digital sales.

There are some states that do not impose sales taxes, such as:

  • Delaware
  • Oregon
  • Alaska
  • New Hampshire
  • Montana

 

You should be aware that for the rest of the states, you will be required to pay sales taxes once you surpass the specific threshold for each state.

These thresholds are within a range of over $100,000, or in some cases, thresholds are based on the number of transactions (e.g., more than 200 transactions).

Federal Income Taxes in the US

If you qualify as an ETBUS, you must pay these taxes to the IRS.

Below, you will find the income tax rates for individual taxpayers in 2023:

If the taxable base is: The tax to pay is:
Less than $11,000 10% of taxable income
Between $11,001 and $44,725 $1,100 plus 12% of the excess over $11,000
Between $44,726 and $95,375 $5,147 plus 22% of the excess over $44,725
Between $95,376 and $182,100 $16,290 plus 24% of the excess over $95,375
Between $182,101 and $231,250 $37,104 plus 32% of the excess over $182,100
Between $231,251 and $578,126 $52,832 plus 35% of the excess over $231,250
More than $578,126 $174,238.25 plus 37% of the excess over $578,125

These data are sourced from the Forbes tax table.

State Income Taxes

Now, speaking of the previous tax but at the state level, it’s a tax you must pay personally.

That is, this tax is not imposed on LLCs but on individuals.

There are exceptions where LLCs must pay this tax, but it’s for companies that generate a significant amount of income.

However, at a personal level, you must pay this tax in your annual returns.

Payroll Tax

When your LLC has one or more employees residing in the United States, or one or more members residing in the US, you must pay payroll tax.

You must pay two types of taxes:

  • Social Security (6.2%)
  • Medicare (1.45%)

 

The combination of these two taxes forms FICA (7.65%).

At the same time, you must add this FICA rate for both the employee and the employer, resulting in a total of 15.3% that must be paid to the IRS.

Franchise Taxes or Annual Report

Rates for this tax can range from $0 to $820, depending on the state.

This tax is paid, like income tax, to the state of incorporation.

You must pay the annual tax or franchise tax even when your LLC is not generating income to maintain your company.

In some states, this tax is not imposed, while in others, such as California, it’s the highest of all ($800 + $20).

Corporate Tax

LLCs that have chosen to be taxed as corporations must pay corporate tax.

So, if you’re taxed as a corporation, you’ll need to:

  1. Pay corporate income taxes at a rate of 21% on the total taxable income.
  2. Afterward, from the money distributed to the members of the LLC, each one must pay the corporate tax at a personal level.

Sales Tax

You probably won’t have to worry about these taxes if you’re a non-resident.

However, there are occasions when you will have to.

For example, if your business involves:

  • Sale of fuel
  • Airline tickets
  • Heavy trucks
  • Tobacco sales

What to Do If Your Foreign-Owned LLC Has to Pay Taxes?

Get an ITIN

It’s the Individual Taxpayer Identification Number used for tax purposes by foreign residents and non-residents who don’t have the possibility of obtaining an SSN.

To obtain an ITIN, you should:

  • Apply for it for free.
  • Fill out the form with your information.
  • Submit and verify the form.

 

If you want more details on this, read our article on how to apply for an ITIN.

Tax Planning

If you engage in clever and intelligent tax planning, you can significantly reduce the tax rate you need to pay.

That’s why you should make use of tax deductions.

Tax deductions are specific expenses that you can subtract from your income to minimize the tax rate you need to pay.

These expenses can include:

  • Utility costs, mortgage interest or real estate, and rent.
  • Employee education costs.
  • Business expenses (transportation, legal fees, office supplies, etc).
  • Costs for business-related miles driven.
  • Charitable donations.

Frequently Asked Questions

What is Pass Through?

LLCs that pay income taxes are considered pass-through entities. As is well known, an LLC operates as a separate entity from the owner or owners. But concerning taxes, they are paid similarly to sole proprietorships. This means that taxes are only charged on your personal tax return and not on a business return. This is why they are called pass-through entities because the taxes pass through the owner of the business.

What is a Foreign-Owned?

It is a term used to define LLCs for non-residents. These are businesses that operate within the United States with one or more non-resident owners. When one of the owners is a U.S. citizen, your LLC is no longer considered foreign-owned and is subject to the tax regime of a common Limited Liability Company.

When and where to file the tax return?

If you are a person who receives a salary or payments for independent work subject to U.S. income tax withholding, or if you have an office in the U.S., you must file this document by April 15 at the latest.

Can I request an extension for the tax return?

Yes.

If you are unable to file your tax return by the deadline, you must file Form 4868 (SP). With this document, you can request an automatic extension of time. The deadline to request an extension is the same as the tax return deadline.

LLCs that pay income taxes are considered pass-through entities.

As is well known, an LLC operates as a separate entity from the owner or owners.

But concerning taxes, they are paid similarly to sole proprietorships.

This means that taxes are only charged on your personal tax return and not on a business return.

This is why they are called pass-through entities because the taxes pass through the owner of the business.

What is a Foreign-Owned?

It is a term used to define LLCs for non-residents. These are businesses that operate within the United States with one or more non-resident owners.

When one of the owners is a U.S. citizen, your LLC is no longer considered foreign-owned and is subject to the tax regime of a common Limited Liability Company.

When and where to file the tax return?

If you are a person who receives a salary or payments for independent work subject to U.S. income tax withholding, or if you have an office in the U.S., you must file this document by April 15 at the latest.

Can I request an extension for the tax return?

Yes.

If you are unable to file your tax return by the deadline, you must file Form 4868 (SP).

With this document, you can request an automatic extension of time. The deadline to request an extension is the same as the tax return deadline.

Need help with your Limited Liability Company?

For proper planning, it’s important to have good professionals who can advise and guide you through a plan to help you save on taxes.

If you need assistance, you can simply contact us here.

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