QUESTION: I am a non-US resident who owns a Wyoming LLC that provides online marketing services to health professionals. I formed my LLC in December 2023 and obtained an EIN. I want to know how to estimate the tax liability of my LLC depending on whether I target clients in the US or outside of the US. Specifically, I want to know:
What are the tax filing requirements for a foreign-owned US disregarded entity Wyoming LLC?
How to determine if my income is effectively connected with a US trade or business or subject to withholding tax?
How to calculate the tax liability of my LLC for US and non-US income?
Tax Liability Assessment for Your Foreign-Owned US Disregarded Entity Wyoming LLC
EXPERT’S RESPONSE: Determining the tax liability for a foreign-owned U.S. disregarded entity, such as your Wyoming LLC that provides online marketing services, involves understanding several key tax principles and regulations. Let’s address each of your concerns
Tax Filing Requirements for a Foreign-Owned US Disregarded Entity Wyoming LLC
As the owner of a Wyoming LLC, your tax obligations in the U.S. are influenced by the nature of your business activities and the source of your income. Generally, a foreign-owned single-member LLC is treated as a disregarded entity for tax purposes, meaning it doesn’t file its own tax return. Instead, its income and expenses are reported on the owner’s tax return.
Determining Income Source and Connection with U.S. Trade or Business
Service Location: For service-based businesses like yours, the source of income is typically where the services are performed. If you are residing and working in your home country, the income generated, whether from U.S. or non-U.S. clients, is generally considered foreign-sourced and not subject to U.S. federal tax. However, if your activities are considered to be USTB and result in Effectively Connected Income (ECI), different rules apply.
US Trade or Business Involvement: Your tax liability also hinges on whether your activities are considered as being engaged in a US trade or business (USTB). Without a physical presence, employees, or significant business operations in the US, your LLC would typically not be considered as engaged in USTB, exempting you from certain US federal taxes.
Effectively Connected Income (ECI): If your LLC is engaged in a US trade or business, you need to assess whether your income is effectively connected with such activities. The absence of physical presence, employees, or significant operations in the US typically means your income isn’t ECI.
FDAP Income: For income classified as FDAP (Fixed, Determinable, Annual, or Periodic) where proper withholding wasn’t done, you might need to file a personal tax return in the US (Form 1040NR).
Withholding Tax Consideration: If you receive payments from U.S. sources for services performed outside the U.S., these payments are generally not subject to U.S. withholding tax.
Calculating Tax Liability for US and Non-US Income
- For U.S.-Sourced Income: If any portion of your income is considered U.S.-sourced and effectively connected to a U.S. trade or business, it would be subject to U.S. taxation at the graduated rates applicable to individuals. You would need to file Form 1040NR and possibly claim treaty benefits if available.
- For Non-U.S. Income: As per your situation, if your services are rendered from outside the US to clients regardless of their location, your income would typically be classified as foreign-sourced and not subject to US federal taxation. However, you should remain vigilant about any changes in your business operations that might alter this status.
Reporting Related Party Transactions
Even in cases where your LLC doesn’t have US-sourced income or isn’t engaged in USTB, it’s important to review and report any related party transactions. Such transactions might include owner’s contributions or fees paid personally by you on behalf of the LLC. These require filing separate Proforma 1120 and Form 5472.
State Taxes and Compliance
While this response primarily addresses federal tax implications, you should also be aware of any state-specific obligations, such as sales tax registration, collection, and remittance, along with state franchise and income tax requirements, if applicable.
New Compliance Alert: Under the Corporate Transparency Act (CTA), effective January 1, 2024, you must report beneficial ownership information to FinCEN. This applies to all U.S. registered companies, including foreign-owned LLCs, to enhance transparency and combat financial crimes.
At O&G Accounting, we specialize in providing tailored tax advice and services for international clients like you. We encourage you to book a consultation with us for a detailed and personalized analysis of your tax obligations and opportunities. Book a Consultation