I formed an LLC this year as a sole proprietor selling clothes online. Not being a U.S. citizen, what tax liability do I have toward the IRS? I have searched and found that Form 5472 is mandatory to file. Please help me to understand.
The answer depends on your particular facts and circumstance. To provide a general answer, I will need to make some assumptions based on your question:
- I assume the LLC was formed in Pennsylvania or another U.S. state.
- I further assume the LLC is a single member LLC, which as you suggest, would be disregarded and taxed as if the LLC were a sole proprietorship.
- I also assume you either have a green card or meet the substantial presence in the U.S. test.
If you have substantial U.S. presence, you will need to comply with all federal, state, and local laws related to operating a business in Pennsylvania (or another state). If not done already, a CPA can provide information about how to register your business in the various U.S., Pennsylvania, and local tax systems. Here are some general guidelines, but clearly, this can be a complex issue and may require the assistance of a professional.
In general, the profits of the LLC, taxed as a sole proprietorship, will be taxed in the income and Social Security/Medicare tax (SECA) systems. You will need to make quarterly estimated payments of income and SECA tax in April, June, September, and January each year. If the LLC engages service providers/employees, the LLC will need to obtain an employer ID number by submitting Form SS-4, and the LLC will need to make periodic payments of employment taxes online via the EFTPS and file quarterly and annual payroll tax and information returns. You will, of course, file a Form 1040, generally due on April 15 each year, to compute and reconcile the tax due with the estimated payments and credits available. All necessary federal forms are available on www.irs.gov
If the LLC has not already done so, it must register with the tax systems in Pennsylvania using the online PA Form 100 utility. Be sure to check out the instructions
Although an online retailer, you will have physical and economic nexus in a state (possibly Pennsylvania) and perhaps a local jurisdiction that charge sales tax. You may also be retailing both taxable and nontaxable merchandise. The LLC would have to file monthly sales and use tax returns online, and make payments of sales tax withheld via the online Pennsylvania payment system e-Tides. Other tax systems may apply, depending upon the nature of the business activities. If the LLC has employees, withholding of employment and unemployment taxes will be required. Payments of those withheld and employer taxes are made in e-Tides for income tax and within the Department of Labor and Industry system for unemployment taxes. If the LLC has employees, appropriate insurance will be required, including worker’s compensation insurance, which is available from a state provider or the LLC’s general insurance provider. You, the LLC member, would be required to make estimated payments of personal income tax each quarter and file a PA Form 40 each year to compute the LLC member’s personal state income tax and apply the estimated tax payments against that tax liability.
The LLC’s physical location may require a business license to occupy the physical location of the LLC. If the LLC has employees, the LLC would need to register with the local tax jurisdiction as an employer, and then withhold local tax from employees’ compensation. Those withheld payments would generally be due along with a local quarterly employment tax report each quarter. In addition to the local earned income tax that must be withheld, many jurisdictions impose a Local Services Tax (LST) that must be withheld from employees’ paychecks and remitted quarterly to the local government jurisdiction.
No Substantial Presence
Let’s relax the substantial presence assumption. If you are not already subject to filing requirements in the United States, the LLC will cause you to pay tax as a nonresident alien (NRA) on all U.S. source income, which would include the U.S. income derived from the conduct of a trade or business that is effectively connected to the United States. Form 5472 is mandatory for reporting information on certain U.S. trade or business activities of foreign corporations, either via the foreign corporation’s ownership of more than 25 percent of the stock of a U.S. corporation, or the corporation’s permanent establishment in the United States. That form is not likely applicable to a nonresident alien who owns a disregarded entity. Income from U.S. sources of effectively connected business income is certified on Form W-8ECI and reported for a nonresident alien on the annual Form 1040NR. That form and instructions are available on the IRS website
If there are employees in the LLC, then all of the above comments on employment and unemployment taxes also applies to the LLC when the managing member is a NRA. Taxation of multinational business operations is complex. and the above comments are necessarily abbreviated for educational purposes only. A CPA can help you establish the compliance routines for the LLC, registration in tax systems, and annual compliance.
Answered by: Edward R. Jenkins Jr., CPA, is a senior tax consultant with Boyer & Ritter in State College, Pa.