How Taxes Are Filed for Online Sellers or Service Providers
Scenario 1: Your company does not have any connections to any of the U.S. suppliers. You are simply soliciting, accepting, and fulfilling orders out of a foreign country. You do not have any offices and any employees on U.S. soil. You do not use any vendors and do not deal with any suppliers.
Scenario 2: Your company is using U.S. suppliers and logistics (i.e., Fulfilled by Amazon or other 3rd Party logistics) to produce revenue, but does not have employees, office, or warehouses in the U.S. In that case, your company is deemed to be “engaged in a trade or business in the United States (ETBUS)” and have generated “Effectively Connected Income (ECI)”.
Scenario 3: Your company has an office or employees in the U.S. (i.e., fixed place of business). You regularly conduct business with U.S. companies. You have continuous projects (over12 months) or you provide services for 183 days or more in the U.S. In those cases, you will be deemed to have an effectively Connected Income (ECI) and a Permanent Establishment (PE) in the U.S.
How U.S. Taxes Work for Online Sellers and Service Providers
Scenario 1: In the case you do not have any Effectively Connected Income (ECI) in the U.S., you are not obligated to file income tax returns with the Internal Revenue Services (IRS). Your net income from worldwide sources may be fully taxed in a foreign country.
Scenario 2: In the case if you have Effectively Connected Income (ECI), but no Permanent Establishment (PE), your business needs to file:
*For individuals/sole proprietorships/partnerships: file Form 1040NR U.S. Non-resident Alien Income Tax Return and Form 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) to claim tax relief under the U.S.-Foreign Country Tax Treaty*.
*For corporations: file Form 1120-F U.S. Income Tax Return of a Foreign Corporation together with Form 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) to claim relief under the treaty.
These are informational forms; your business will not be liable for income taxes in the U.S. However, the IRS will want to know about your business activity in the U.S. as a foreign corporation.
Scenario 3: If you have Effectively Connected Income (ECI) AND a Permanent Establishment (PE) in the U.S., then you need to file the 1040NR (for individuals/ sole-proprietors)/ 1120-F (for corporations). Form 8833 is not necessary since your income will no longer be protected by the U.S.-foreign country tax treaty.
In addition, your company will be subject to the state filing requirements in the state where you are deemed to have a Permanent Establishment (PE). If you have ECI & PE in the U.S., your U.S-sourced income will be effectively first taxed in the U.S. and then in foreign country. However, you may be able to claim a foreign tax credit in the foreign country, to avoid double taxation on the Effectively Connected Income in the U.S.
Finally, note that if you have opened an EIN for your business (for importing or bank account purposes, for example), the IRS will be expecting a tax return from your business regardless of the scenario.
What to Do if There Is No Tax Treaty
If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for Form 1040NR, U.S. Nonresident Alien Income Tax Return.
Here is a link to a website that is reliable that may provide you sufficient information on structuring, but you should really consult with an attorney. There are both “tax” and “non-tax” issues that must be considered.
Contact International and U.S. Tax Accountant Ted Kleinman Today
If you have additional questions, please contact international tax accountant Ted Kleinman. A minimum consulting fee of $975 would apply. Provide the following before contact:
- What are your historical annual average sales and margin (both US and world-wide)?
- What do you project US sales and margin for 2020?
- Do you have a website to share?
- How much have you invested (plan to invest) in this business?
- Do you have a business plan, executive summary, or backgrounder you can provide me?
- This would include a personal profile, company information, financial statements, ownership structure.
- Will you have a permanent establishment in the US?
- Where will you acquire/store inventory?
- Do you need assistance with product selection?