When expanding your business to the US, one of the key decisions is which category fits your needs the best: LLC or C Corporation. This decision will affect how your business will be run and the types of taxes you’ll pay. Keep reading and learn everything about sales, franchise, and income tax rates in the US for international entrepreneurs.
Understanding the taxes levied for an LLC in the different US states will make a significant difference for your company. Not for nothing, LLCs are one of the most sought-after options for those looking to avoid double taxation and seeking flexibility.
Tax differences between LLC and Corporation
Limited Liability Companies (LLC) and C Corporations are two of the most popular business setups for foreign entrepreneurs in the US.
For foreigners, LLCs are one of the most sought-after options. Partners in this type of business do not need to live in the US or the state where the business is registered. LLC partners are called members. According to state regulations, this model can exist even with only one member.
Structure differences between LLC and Corporation
- Flexibility: The LLC, contrary to the C Corp structure, does not require a staff of directors responsible for most decisions. Also, due to the possibility of having only one member, the category facilitates small businesses and individual entrepreneurs.
- Avoid double taxation: Although you’d still be subject to other taxes, as an LLC member, you are only required to pay individual income taxes. The company passes through all the profit distributions directly to the members.
Despite these benefits, opening an LLC in the US from abroad does not mean you will be 100% tax-free. Learn about the main taxes levied on companies and how it works for LLCs with foreign owners.
Federal income tax
Federal income taxes must be paid to the IRS (Internal Revenue Service) according to the company’s Net Income.
In the case of LLCs, the profits must be divided among its members at the end of the fiscal year. That is to say: there is no taxation at the company level, only for business partners. Each partner declares the income tax individually –as a natural person– after dividing the profits. The partners will be taxed between 10% and 37% depending on the profit each one receives.
Engaged in trade or business
For single-member international limited liability companies, there is still an exception to this rule. According to the IRS, only people who are “Engaged in trade or business in the United States” or ETBUS, that is, involved in commerce or business in the country, must pay income taxes.
In this way, companies that do not have their own operating structures or employees in the US can be considered not involved in trade or business in the country, even if they have income from clients present in the country.
The different types of taxes in the US for e-commerce entrepreneurs can be tricky as US taxes apply to products sold in the country. Therefore, the IRS does not apply the exemption rule.
To find out if your business is eligible for the exemption, it is essential to have specialized accountants. Globalfy’s bookkeeping services can help you better understand every detail of the process and ensure that you make use of every benefit in the American tax system.
State income tax
Income taxes vary depending on the state where your LLC is registered. As in the case of federal tax, the tax filing must be made as a natural person.
Some regions of the United States do not levy income tax for LLCs at all. This is the case for states like Florida, Texas, Wyoming, and Nevada. Although in Delaware, the tax is collected only from residents of the region. This means that if you open an offshore LLC in Delaware from abroad, you wouldn’t have to pay any state income tax.
California, for example, has one of the country’s highest state income tax rates, as individuals pay between 1% and 12.3% on their earnings. This is one of the reasons many California-based tech companies are actually registered in Delaware, which is a key factor when considering income tax in the US for entrepreneurs.
Sales taxes are paid by consumers when they purchase consumer goods. Each of the 50 states has different rules for this type of US tax. In some regions, the tax does not apply to items such as medicines or clothing.
It is the seller’s responsibility to collect and file the sales taxes, for both LLCs and Corps.
Check out some factors that will influence your business’ sales taxes:
- State of Registration. In most cases, sales tax must be collected from all customers with an address in the state where your business is registered.
- Physical Presence in State. If you use a warehouse outside of the state in which the company is registered, you must collect sales tax on sales from customers located in the other state.
- Economic activity. After July 2018, the states instituted the Economic Nexus. From a certain volume of transactions carried out in a state in a period of 12 months, it becomes necessary to collect the Sales Tax also in that place.
Sales tax for tech companies
In addition to the factors above, tech companies need to consider this tax when selling their services in the US: Sales tax can also apply to digital and SaaS products. Currently, each state has different regulations on the subject in the United States.
Sales tax rules for technology companies in the US are still very new and are constantly evolving. Therefore, it is important that the analysis be done on a case-by-case basis to determine if your product should be taxed. Count on the help of Globalfy’s bookkeeping services to better understand this process!
Tax withholding and estimated tax payment
Tax collection is carried out quarterly in the US. The amount collected in tax withholdings works as a guarantee that at the end of the taxable year, the income tax rate will be made and paid or returned, as the case may be.
In the case of single-member LLCs, the process must be carried out by the members individually, while for muti-member LLCs, and C Corps, the process is executed by the company.
Annual report or franchise tax
Every year, every business in the United States needs to renew its registration. This process is called annual report or franchise tax. The fee for LLCs varies by state.
In most US states, annual reports or franchise taxes are charged during the tax season, a period that generally occurs between the first fortnight of January and the second fortnight of April. However, in states like Wyoming, the charge is made on the anniversary of the business registration, regardless of what time of year it was opened.
The different dates can be confusing when paying your taxes in the US. For this reason, Globalfy offers tools such as the Compliance Calendar and tech and e-commerce-specialized bookkeeping services that will help you with every tax-related transaction and requirement.
Income tax in the US for foreign freelancers
In case you’re an international freelancer who works for businesses based in the United States, here’s what you need to know:
To improve your position in the American professional market, your best option is to open an offshore LLC or Corp in the US. This way you’d be able to garner a better reputation, find more and more clients, and have access to a US bank account to collect your earnings.
You can start your own LLC in Delaware from abroad and pay no state income tax. To widen your business horizons and opportunities with Globalfy’s special freelance plan, you get your LLC, a US bank account, a virtual address service, annual reports, and federal and state tax declarations.
More on sales, franchise, and income tax in the United States
Check out the tax rates for the most foreign-friendly US states.
|LLC Formation fee||US$125||US$90||US$300||US$50||US$100|
|Individual state income tax||None||None for out-of-state residents||None||Between 1.7% and 5.9%. Higher rates apply starting at US$210,000 in income||None|
|Annual report or franchise tax for LLC||Between $138.75 and $150||Minimum of $225||None, however, No Tax Due and Public reports must be filed annually||None||Minimum of US$62. Additional fees from US$250,000 in assets|
|Sales tax||From 3% to 6%||None||6.25%||5.125%||4%|
Before expanding your business from your home country to the US, it is essential to understand how the American tax system would work for you. Knowing the taxes of an LLC is an important part of the process for your business to grow and reach new markets safely.
To take this step in the best way, you have the support of Globalfy! Open your LLC from anywhere in the world, 100% online and in less than 5 minutes.