If you open an LLC in the United States, your company will not be taxed at a corporate level. However, you will have to distribute the profits or losses among the members (partners), through form 1065, or Schedule C. Ultimately, it is the members who will report the numbers on their personal income tax returns (form 1040 or 1040NR).
For non-resident LLC members, the federal individual income tax rates go between 10% and 37%. Since the United States has bilateral agreements with several countries, foreign entrepreneurs may use the amount paid as a “credit” when preparing the return to their country of residence. This means that there is no double taxation.
Can you avoid paying individual income with a single-member LLC?
The IRS states that people should only pay income taxes in the US if they are “engaged in trade or business” (ETBUS) in the country. In the case of a single-member LLC, the taxes are personal and not corporative, so there is a possibility that entrepreneurs residing abroad won’t have to pay income taxes.
Unfortunately, neither the IRS nor the courts specify which activities or sources of income apply under this exception. However, companies that do not have employees or a physical presence in the country and carry out all their activities remotely fall under the ETBUS exception.
A sole proprietor or owner of a one-member LLC who resides outside of the US and does not sell products but provides services in the US will not have to pay individual federal income taxes. This is how IT or marketing entrepreneurs and freelancers can enjoy this tax relief. Industries such as e-commerce, which, on the contrary, sell products in the US, must pay both these taxes plus sales taxes in each state.
How are earnings reported to the IRS?
If you believe that your company is not “engaged in trade or business” in the United States, you will still need to file a Form 5472 with the IRS annually, in addition to completing the appropriate state renewals. (annual report or franchise tax) when applicable.
How can I guarantee that my company falls within the tax exception?
In most cases, it’s not possible to guarantee whether the IRS will consider your company to be “ engaged in trade or business” in the United States.
So when choosing to use this IRS exemption, it is very important that you keep all contracts and vouchers that can prove and explain your operations. In addition, you should be aware that the person responsible for providing proof to the IRS is you, as the owner of the company.
Another important point for decision-making is that services such as Stripe and PayPal are only available to tax residents of the United States. If your company does not pay taxes in the country, it will not be able to submit the W9 form necessary to enjoy these services.
