Do Non-Residents Pay U.S. Tax on an LLC?

Short answer: often no. If you live outside the U.S. and your single-member LLC has no U.S. operations, its income is usually not subject to U.S. federal income tax. But you still have to file every year, and a few situations do create U.S. tax. Here’s how it works.

How the IRS looks at your LLC

A single-member LLC owned by a non-resident is, by default, a “disregarded entity”: the IRS looks through the company to you, the owner. What matters is the type of income and where it comes from.

The three types of income

• Foreign-source income: 0% U.S. tax. Income with no U.S. connection. For services, income is generally sourced where the work is done. A designer in La Paz billing clients through a U.S. LLC is usually earning foreign-source income, even when the clients are American.
• Effectively Connected Income (ECI): 10% to 37%. Income from a U.S. trade or business, for example working while physically in the U.S., having U.S. employees or an office, or storing inventory in U.S. warehouses (common with Amazon FBA).
• Passive U.S. income (FDAP): 30% withholding. U.S. dividends, interest, royalties or rent. A tax treaty can lower this rate. In Latin America, only Mexico and Chile have income tax treaties with the U.S.

What you must file anyway

Even at 0% tax, a foreign-owned single-member LLC must file Form 5472 with a pro forma Form 1120 by April 15 every year. The penalty for missing it starts at $25,000, whatever your income. If you have ECI, you’ll also need a personal return (Form 1040-NR), and possibly an ITIN.

Other costs to keep in mind

• State fees: annual reports and fees vary by state (Wyoming starts at $60 a year, Delaware is $300).
• Sales tax: if you sell physical products to U.S. customers or hold inventory in the U.S.
• Your home country: depending on where you live, you may owe tax at home on what your LLC earns. Rules differ a lot between Bolivia, Chile, Peru and Paraguay.

Common mistakes

• Paying U.S. tax on income that was never taxable, which happens when returns are filed without checking where the income comes from.
• Not filing Form 5472 because “the LLC didn’t make money”.
• Spending long periods working from inside the U.S. without realizing it can create ECI.

This guide covers single-member LLCs. LLCs with two or more owners are taxed as partnerships, with different filings (Form 1065) and possible withholding.

Need help?

Every case depends on your country, your business and where you work from. Through our partners, James Baker, CPA in the U.S. and partner firms in Bolivia, Chile, Peru and Paraguay, we can make sure you pay what you owe and nothing more. If your budget is tight, ask us about working in exchange for equity, services or referrals.

Book a free consultation with Mauricio →

Sources: based on guidance from James Baker, CPA, VCG’s U.S. tax partner. This guide is general information, not legal or tax advice.