This FAQ is written for non-U.S. founders, global ecommerce operators, and U.S. citizens living abroad who want a practical, beginner-friendly overview of the most common U.S. tax and compliance gotchas that come up with foreign ownership, online sales, contractors, partnerships, and international investments.
Important: This is general education, not legal advice. Cross-border facts change outcomes fast. Treat this as a map, not a verdict.
Quick definitions (so the rest makes sense)
- Foreign-owned U.S. LLC (disregarded entity): A U.S. single-member LLC owned by a non-U.S. person or foreign company that is ignored for U.S. income tax purposes.
- USTB / ECI: U.S. trade or business and effectively connected income. If you have USTB, the U.S. can tax your business income.
- FDAP: Passive U.S.-source income such as interest, dividends, or royalties, often subject to 30 percent withholding unless reduced by treaty.
- Sales tax nexus (economic nexus): A state concept. You may owe sales tax compliance even if you owe no federal income tax.
1) We are foreign-owned. Do we owe U.S. income tax?
Sometimes yes, sometimes no. The result depends on whether your business is treated as having a U.S. trade or business and earning effectively connected income.
- Employees or dependent agents in the U.S. who can bind you
- A U.S. office or home office employee setup
- Control over inventory and fulfillment that looks like U.S. operations
- Whether U.S. activity is handled by an independent third party serving many clients
Key point: No U.S. income tax due does not mean no U.S. forms.
2) If we owe no U.S. income tax, what forms still apply?
For many foreign-owned single-member LLCs, informational filings still apply.
- Pro-forma Form 1120
- Form 5472 for reportable transactions with foreign owners or related parties
Failure to file can trigger penalties starting at twenty five thousand dollars. Clean bookkeeping is essential.
What counts as a reportable transaction?
- Owner capital contributions
- Owner distributions
- Intercompany reimbursements
- Management fees
- Loans to or from owners or related parties
- Paying owner expenses from the business or vice versa
3) What happens if I transfer money from the company to my personal account?
This is usually treated as an owner distribution. For foreign-owned disregarded entities, it is typically a reportable transaction for Form 5472.
4) We sell online across the U.S. Do we need sales tax permits in every state?
Sales tax is state by state. Most states have economic nexus thresholds based on revenue or transaction count.
- Track sales by ship-to state
- Monitor when thresholds are crossed
- Register for permits
- Collect correct tax rates
- File required returns
Best practice is to use automation tools such as Avalara or TaxJar once volume grows.
5) We pay foreign contractors. Do we issue 1099s?
Often no, but do not assume. The outcome depends on who was paid, what they were paid for, and where the work was performed.
Services performed in the U.S. by nonresident aliens can trigger withholding and reporting under the nonresident regime.
- Collect W-8BEN or W-8BEN-E forms
- Document where services were performed
- Separate general ledger categories for U.S. and foreign contractors
6) Expat S-Corp basics: salary vs distributions
W-2 wages may qualify for the foreign earned income exclusion if tests are met. S-Corp profits generally do not.
The 2025 foreign earned income exclusion limit is one hundred thirty thousand dollars.
There is no magic salary ratio. Reasonable compensation depends on facts and circumstances.
7) Do expats still owe Social Security or Medicare taxes?
U.S. citizens working abroad for U.S. employers generally still owe payroll taxes. Self-employed individuals usually still owe self-employment tax.
Totalization agreements may change the outcome depending on the country.
8) Partnerships with foreign owners and withholding
Partnerships with foreign partners and effectively connected income may be required to withhold under IRC Section 1446 using Forms 8804 and 8805.
Even without ECI, partnerships often receive IRS notices and must respond with documentation.
9) Royalties paid to foreign owners
U.S.-source royalties are generally subject to thirty percent withholding unless reduced by treaty.
Routing royalties through a U.S. corporation may reduce withholding but introduces corporate tax and dividend withholding considerations.
10) PFICs and U.S. tax residency
Foreign mutual funds and ETFs often trigger PFIC rules, which are punitive and paperwork heavy.
- Identify PFIC exposure early
- Gather data before residency
- Plan exits before becoming a U.S. tax resident if possible
11) Foreign pensions and retirement accounts
The U.S. taxes residents on worldwide income. Treatment depends on classification, basis, and treaty coverage.
This area often overlaps with foreign trust reporting and PFIC exposure.
Year-round compliance checklist
- Entity documents and EIN letter
- Monthly bookkeeping
- Owner and related-party ledgers
- Contractor documentation
- Sales tax nexus tracking
- Investment and retirement statements
Need hands-on help?
For professional review of foreign-owned LLC filings, expat S-Corp strategy, withholding exposure, sales tax setup, or PFIC and pension risk, book a consult through the scheduling link on our site.
