An LLC and C-Corporation in the United States can offer many tax advantages to non-US persons. Correctly setting up your entity and filing taxes in the US can be complicated. If not done correctly, non-US owners could accidentally incur unnecessary taxes and penalties.
In this article, we answer the 13 most common questions we get from non-residents about EINs, engaging in a US trade or business (ETOB), and taxes for US entities.
- Employer Identification Number (EIN)
- Engaging in a US Trade Or Business (ETOB)
- Taxation of US entities – LLC or C-Corp
Please keep in mind that these answers can only provide general information to high-level questions. They are not meant to be tax advice for a specific situation. US tax law is nuanced, and many factors influence if and how foreign-owned businesses in the US are taxed.
Employer Identification Number (EIN)
1. What is an EIN?
An employer identification number or EIN is a unique number that the IRS assigns to a business. The IRS uses this number to identify the entity. Businesses need an EIN for a variety of purposes including filing taxes, opening a bank or investment account, and for third-party services such as Amazon, Stripe, or Shopify.
2. Do I need different EINs for each business, or can my businesses use the same EIN?
You will need a different EIN for each business. EINs are unique to each entity so you cannot reuse them. In short, if you have two different businesses, they need two different EINs.
3. I registered for an EIN but I lost or forgot it. How do I retrieve my EIN?
You can retrieve an EIN by calling the IRS to request a new copy. Please call their business support line at +1-800-829-4933.
4. How long does it take to receive an EIN?
Due to the current coronavirus pandemic, the processing time for an EIN has been longer than usual. The IRS has provided a current turnaround time of 45 days. Under normal circumstances, turnaround time is generally 4 business days.
Engaging in a US Trade or Business (ETOB)
1. What is an ETOB and when would I be an ETOB?
ETOB stands for engaged in a US business or trade. You are likely considered ETOB if:
- You have at least one “dependent agent” in the US (dependent agents are employees or companies that work for you almost exclusively), and
- This dependent agent does something substantial to further your business in the US, or
- You are engaged in “considerable, continuous, and regular” business in the US.
If you meet these qualifications, you will likely be subject to US taxation. However, keep in mind that the tax code and court rulings are vague about what constitutes ETOB. Read more about it in this article about LLC taxation.
For this reason, it is especially important to evaluate your business with the help of a tax expert.
For example, if your US LLC has an e-commerce store that primarily sells to the US via a dropshipping supplier in the US, you might not be ETOB as long as you do not meet any of the requirements explained above. However, this is a nuanced part of tax law and it is important to consult with a tax expert.
Living in a country that has a tax treaty with the United States can also affect your tax liability.
2. My entity has an address at a virtual office. Does the IRS consider this an office, and does it make us taxable?
No. Virtual offices, such as Regus, are third-party services and are not considered a business location of your company. A virtual office alone does not generate a US presence that makes your company taxable.
However, if you are engaging in a US trade or business (ETOB) then you may be taxable. For more about ETOB and dependent agents, visit our article here.
Taxation of US business entities – LLCs and C-Corps
1. How much would I pay in tax for my US LLC as a non-US person?
An LLC is a pass-through tax entity. This means that the LLC’s profits and losses are passed to the owner who reports them on their personal tax returns.
The profits are then taxed at the owner’s individual tax rate. The LLC does not directly pay federal income or corporate taxes.
Moreover, it depends on your structure and how you do business. For example, these variables and more can all have potential tax implications:
- What type of business do you have?
- Are you engaged in trade or business in the US?
- What country are you based in? Does this country have a tax treaty with the United States?
- Does your company sell products or services?
- Is it a physical or digital product?
- If it is a physical product, where does it ship from?
- Do you have US employees or companies that work for you exclusively and further your business?
For personalized help understanding your tax obligations in the United States, please reach out to our team of expert accountants.
2. I work for a US entity operating in a foreign country using my LLC registered in the U.S. Will I be subject to tax?
If you manage your LLC from abroad, with no US-dependent agents and no US office locations, warehouses, etc., then you would potentially not be subject to tax in the US. For more information about taxes for a US LLC, refer to the section above about engaging in a US business or trade and visit our article here.
3. Will I have to pay sales tax because of my virtual office in the US?
Whether you will owe sales tax depends on which state(s) you are selling in. The office address does not affect sales tax.
4. We want to use our US LLC to sell products to our customers in the US and other countries. The products will be shipped directly from our supplier in China to our customers. What taxes will we owe?
Based on this business model, you might not be subject to federal income tax, but you still need to file an annual tax return with the IRS.
In addition, you could be subject to state sales tax depending on the volume of sales in a specific state and depending on each state’s specific rules regarding sales tax.
If you have a single-member LLC, you would report any transactions between the LLC and yourself on Form 5472. If you have a Partnership LLC, you would have to file Form 1065, U.S. Return of Partnership Income.
In addition, it’s important to remember that you may also owe taxes to any other countries you are shipping from or to.
5. I want to use my US company to invest in the US stock market. What would be my tax liabilities? Would I have to pay inheritance, capital gains, or income taxes?
As long as you are not a US citizen or green card holder, then you do not need to pay capital gains taxes. You still need to pay tax on dividend and interest income.
If you have over $60,000 invested in US situs assets, then you could be subject to US inheritance tax.
US situs assets are assets that are located in or are connected to the US. This includes assets such as real estate, shares of publicly traded companies (such as Google or Apple), and more. When those assets are passed on to another non-US person after death, they are subject to inheritance tax.
However, if your US assets are owned by a foreign company or a foreign trust, then the inheritance tax can be eliminated. Index funds, mutual funds, and bonds are not subject to inheritance tax.
If you need help setting up a foreign company or trust for your investment, please reach out to our team.
6. Do we have to file a W-9 and W-8BEN if we do business in the US and outside of the US?
If you are a foreign owner of a single-member LLC that is not engaged in a US trade or business, you need to provide form W-8BEN to US clients to confirm your non-resident status. If you are engaged in a US trade or business, or if you have a C-Corporation or Partnership LLC, you should use form W-9.
7. If a C-Corp has US customers, will it pay a 21% tax on profit made from income that comes from the US only, or on all profit made from global income?
Any income that runs through a C-Corp is subject to a 21% corporate tax. The US taxes a C-Corp only on its profits.
So, to optimize the taxation of the corporation, you need to carefully record its expenses. Claiming expenses will lower the profit of the corporation, which will lower its taxes. You can even claim your salary as an expense of the C-Corp to further lower profits. Salaries to non-US citizens or residents are not taxed in the US.
To ensure that all your expenses are tracked and claimed, consider hiring a bookkeeping service. With a bookkeeper, you can focus on growing your business while still claiming all the expenses you deserve without time-consuming expense tracking.
Understand the tax implication for your US business
Owning a US entity can offer many benefits, but taxation is not always straightforward. As you can see, a variety of factors affect US taxes for a business entity. For more information about how to optimize your tax situation, contact our expert accountants.