A plain-English FAQ for non-residents running online businesses (affiliate marketing, digital services, ecommerce)
Non-resident owner of a U.S. single-member LLC? Learn when you owe U.S. income tax, self-employment tax (Social Security/Medicare), what “effectively connected income” means, and how Forms 5472/1120, W-8 forms, and 1099s work.
Important: This is general education, not legal or tax advice for your exact facts. Cross-border tax issues can turn on small details.
The big idea (in one minute)
If you’re a nonresident alien and you run an online business from outside the U.S., you often do not owe U.S. federal income tax on that business income unless you’re considered engaged in a U.S. trade or business and earn effectively connected income (ECI). The IRS’s ECI concept is the core “gate” for U.S. tax on business income for non-residents. Separately, many foreign owners of U.S. single-member LLCs still have U.S. reporting obligations (even with $0 tax), especially Form 5472 + a pro-forma Form 1120.
FAQ 1) Do I pay Social Security, Medicare, or self-employment tax as a non-resident?
Usually, no. The IRS states that nonresident aliens are not subject to U.S. self-employment tax (Social Security/Medicare) in the typical case.
- If you become a U.S. resident for tax purposes (e.g., substantial presence test), rules can change.
- If you perform services in the United States as an individual, you may have U.S. wage/withholding issues depending on classification and facts. (This is distinct from “my customers are in the U.S.”)
FAQ 2) If I’m not living in the U.S., can the U.S. still tax my online business?
Yes, but only in certain fact patterns. For business income, the U.S. generally taxes a nonresident alien on effectively connected income (ECI)—income connected to a U.S. trade or business.
- “My LLC is formed in Wyoming / my bank is in the U.S. / I have a U.S. virtual address → I must owe U.S. tax.”
- Those items may matter for compliance and optics, but they’re not the core test for ECI. The core question is whether your activities rise to a U.S. trade or business and produce ECI.
FAQ 3) What is “effectively connected income (ECI)”?
ECI is income the U.S. treats as connected to the conduct of a trade or business in the United States. If you have ECI, you’re generally taxed on it at the same graduated rates that apply to U.S. persons (after allowable deductions).
FAQ 4) What facts increase the risk the IRS could argue I have U.S. trade or business / ECI?
- You (or your staff) perform services while physically in the U.S.
- You have U.S. employees or a dependent agent conducting core revenue-generating activities in the U.S.
- You maintain a U.S. office or fixed place of business used to generate income.
- The U.S. becomes the operational center (not just the customer base).
Lower-risk fact patterns:
- You create marketing content, manage campaigns, and run operations entirely from abroad, and you’re paid commissions for marketing/affiliate activity performed abroad.
- Your U.S. touchpoints are mainly administrative (banking, formation, registered agent).
FAQ 5) If the IRS ever says I do owe U.S. income tax, is tax on my revenue or my profit?
In a normal “file correctly” world: business-type U.S. taxation is generally on net income (profit), not gross revenue.
But here’s the trap for non-residents: to claim deductions, nonresident individuals generally must file a true and accurate return in a timely manner. If you don’t, you risk losing deductions/credits and turning a “profit-based” tax problem into a “gross-based” nightmare. This is exactly why protective filings exist.
FAQ 6) What is a “protective return,” and why do people file one?
A protective return is a practical risk-management tool. In plain English, it’s you telling the IRS: “I don’t believe I owe U.S. tax under the ECI rules, but if you later disagree, I’m preserving my ability to claim deductions and report correctly.”
FAQ 7) I have a foreign-owned single-member U.S. LLC. Do I still need Form 5472 and a pro-forma Form 1120?
Very often, yes—even if you owe $0 U.S. income tax. The IRS treats a foreign-owned domestic disregarded entity as a domestic corporation for the limited purpose of certain reporting requirements under IRC § 6038A (which is where Form 5472 lives).
Penalty alert: Failure to file Form 5472 can trigger a $25,000 penalty.
FAQ 8) Does receiving a 1099 mean I owe U.S. tax?
No. A 1099 is usually an information return—it tells the IRS that payments occurred. It does not automatically prove you have ECI or owe U.S. income tax.
FAQ 9) Should a non-resident submit a W-8 form to platforms (affiliate networks, processors, marketplaces)?
Often, yes—if a platform requests it. Form W-8BEN is generally used by foreign individuals to certify foreign status and claim treaty benefits (if applicable).
FAQ 10) My bank or platform warns me about 1099s (e.g., “you paid contractors over $600”). Do foreign-owned LLCs issue 1099-NEC?
This is where people get tripped up. There are two separate questions:
- Are you required to file a 1099-NEC for contractor payments? The IRS guidance is: you may have to file Form 1099-NEC to report payments to independent contractors when the conditions are met.
- Are your contractor payments U.S.-source or foreign-source? If payments are foreign-source income paid to a nonresident alien, the IRS notes it’s normally not required to be reported on an information return.
Practical takeaway:
- Collect the correct documentation (often W-8 forms for foreign vendors).
- Determine where services are performed (sourcing matters).
- Don’t assume “no U.S. tax for the owner” automatically means “no contractor reporting.” These are related but not identical compliance buckets.
FAQ 11) How do I transfer money from my U.S. LLC to myself abroad?
In most ordinary situations, the mechanics (wire, ACH, card, PayPal transfer) are not the tax issue by themselves. The tax/compliance issues are usually:
- How you label the transfer (owner distribution, reimbursement, contractor payment, loan, etc.),
- Whether there’s proper supporting documentation (receipts/invoices),
- And whether it creates reportable related-party transactions for Form 5472 purposes.
For single-member LLCs, personal cash withdrawals (including ATM withdrawals) are typically treated as owner distributions, not business expenses.
FAQ 12) If I dissolve/close my LLC, can the IRS still come back later?
Yes. Dissolving an entity does not erase potential federal tax issues for prior years. If there were filing obligations (e.g., Form 5472) or if the IRS later disputes your tax position, those issues can still surface later through notices or examinations.
FAQ 13) Do I need bookkeeping if I “only” need Form 5472 / pro-forma 1120?
You don’t need “perfect” bookkeeping software to be compliant, but you do need reliable records.
Why bookkeeping matters even for “information returns”:
- Form 5472 reporting depends on identifying and quantifying reportable transactions with foreign owners/related parties.
- If questions arise later, clean records reduce time, cost, and risk.
Many small foreign-owned businesses start with a spreadsheet, then move to software as transaction volume grows.
Ready for peace of mind and clean compliance? If you’re a foreign owner of a U.S. LLC and you want a professional, fact-specific review of your U.S. filing obligations (Form 5472 + pro-forma 1120, 1099/W-8 considerations, and whether a protective return makes sense), schedule a paid consultation with our CPA & tax attorney team.
