The 30-second framework
- Federal income tax: only on ECI (income effectively connected to a US trade or business). Most non-resident digital businesses owe $0.
- State income tax: $0 in Wyoming. No personal income tax, no corporate income tax.
- Annual filings: Form 5472 + pro forma 1120 always, even if no tax is owed. $25,000 penalty for non-filing.
- Sales tax: applies if you have nexus in states where you sell. FBA inventory in Amazon US warehouses creates physical nexus.
- Withholding tax: 30% default on US-source FDAP income, reducible by treaty via Form W-8BEN-E.
- Home country tax: most countries tax your worldwide income. Consult a local CPA.
- Self-employment tax: not applicable to non-residents on non-ECI income (SE tax is for US persons only).
What is ECI (Effectively Connected Income)?
ECI is income effectively connected to a US trade or business. The IRS applies a fact-specific test under Internal Revenue Code Section 864. Indicators of ECI:
- Physical office or fixed place of business in the US
- US-based employees
- Dependent agents acting on your behalf in the US (not independent contractors)
- Substantial US-based equipment or inventory used in operations
- Personal services physically performed within the US
Most non-resident digital business owners (SaaS, dropshipping, freelance, content creation) do not meet ECI factors. Amazon FBA is the most common grey area because of US warehouse inventory. The conventional position is that Amazon acts as an independent contractor handling logistics, you have no US office or employees, so FBA inventory alone does not rise to ECI. Multiple Tax Court cases (e.g., Piedras Negras Broadcasting, Pinchot v. Commissioner) support the view that mere US-based inventory does not by itself create ECI. Consult a US CPA familiar with FBA before relying on this analysis.
The four federal scenarios
| Scenario | US federal tax owed | Forms required |
|---|---|---|
| No ECI, no US-source income (most digital businesses) | $0 | Form 5472 + pro forma 1120 |
| No ECI, some US-source FDAP (dividends, royalties, interest) | 30% withholding (often reduced by treaty) | Form 5472 + 1120 + W-8BEN-E |
| ECI exists (US employees, US office, fixed place of business) | Graduated US tax rates on net ECI | Form 5472 + 1120 + 1040-NR |
| FDAP withheld at source (payer withholds 30% or treaty rate) | Withholding satisfies tax | Form 5472 + 1120 + W-8BEN-E |
Form 5472 plus pro forma 1120: the mandatory annual filing
The single most important compliance item for foreign-owned single-member US LLCs. Required under Internal Revenue Code Section 6038A and Treas. Reg. 1.6038A-2.
- Form 5472: reports related-party transactions (capital contributions, owner draws, loans between you and the LLC). Operating revenue from unrelated customers does NOT go on Form 5472.
- Pro forma 1120: a one-page cover return that identifies the LLC.
- Due date: April 15 by default, extended to October 15 with Form 7004.
- Filing method: mail or fax (no e-filing for foreign-owned single-member LLCs).
- Penalty: $25,000 per failure to file. Additional $25,000 every 30 days after IRS notice.
- Cost through WyomingLLC: $99/year add-on. Or work with a US CPA ($200 to $800/year typical).
State and local tax (Wyoming = $0, other states maybe)
Wyoming itself has zero state income tax. But if your business has nexus in another state, that state may tax you.
- FBA inventory nexus: Amazon US warehouses in CA, TX, NY, FL, OH, IL, AZ, NV, NJ, GA, PA create physical nexus in those states. You may owe sales tax (and rarely state income tax) in those states.
- Economic nexus (post-Wayfair): most states impose sales tax registration once you exceed $100,000 in sales or 200 transactions to customers in that state.
- Property tax: only if you own US real estate.
- State income tax: most states do not tax foreign-owned single-member LLCs on non-ECI income, but exposure depends on your specific activity in the state.
- Local taxes: some cities (NYC, SF) impose local business taxes if you have city nexus. Most non-residents do not.
TaxJar (~$19/month), Avalara (custom pricing), and A2X automate multi-state sales tax compliance. Most early-stage founders only register in 1 to 3 states.
Home country tax
Most countries tax your worldwide income. Your LLC pass-through income flows to you and is taxed at home.
- India: LLC income reported as foreign company income on your ITR. India taxes worldwide income for resident Indians under Income Tax Act 1961. Disclosure of foreign assets under Schedule FA.
- Pakistan: Worldwide income for residents under Income Tax Ordinance 2001. Foreign assets reported on Wealth Statement.
- Bangladesh: Worldwide income for resident Bangladeshis. NBR foreign asset disclosure may apply.
- UAE: UAE has no personal income tax. UAE residents owning US LLCs typically owe no UAE tax on LLC income.
- UK: UK resident-domiciled taxpayers pay UK tax on LLC pass-through income. Non-dom rules may apply (remittance basis).
- Brazil: Worldwide income for Brazilian residents. RFB foreign asset disclosure required.
- Singapore: Foreign-sourced income generally not taxed unless received in Singapore.
- Australia / Canada: Worldwide income. CFC rules may apply (Controlled Foreign Corporation rules), though LLCs are treated as look-through entities in most cases.
Double tax treaties may help. The US has treaties with about 70 countries. Treaties typically address: reduced US withholding on FDAP, credit for US tax paid against home-country liability, and avoidance of double taxation on the same income. Consult a CPA in your home country for treaty filings and disclosure requirements.
Common confusions
LLC vs C-Corp: LLC default is pass-through (disregarded entity for single-member). C-Corp default is double-tax (corporate level + dividend tax). Most non-residents stay LLC for this reason. You can elect C-Corp tax treatment via Form 8832 but rarely should.
ITIN vs EIN: EIN is for the LLC. ITIN is for you personally. You need EIN. You probably do not need ITIN. ITIN is only required for personal US tax filing or PayPal personal verification.
Form 1040-NR: only required if you have ECI or other US-source income subject to actual tax. Most non-residents do not file it.
State tax: Wyoming has zero. Other states may apply if you have nexus from FBA inventory or employees. Wyoming domicile does not protect you from other states' nexus rules.
Self-employment tax: 15.3% applies only to US persons on ECI. Non-residents are not subject to SE tax on non-ECI income.
Common tax mistakes by non-residents
- Not filing Form 5472. $25,000 penalty per failure. The most expensive mistake. Calendar reminders annually.
- Confusing 1040-NR with 1040. 1040-NR is for non-residents with ECI or US source income. 1040 is for US persons. Filing 1040 incorrectly can trigger residency arguments by the IRS.
- Filing a state return where you have no nexus. Wyoming-formed LLC selling to customers in California does not automatically create CA filing requirements. Nexus matters.
- Missing sales tax registration where FBA inventory creates nexus. Use TaxJar or Avalara.
- Forgetting Form W-8BEN-E with US payers (Stripe, Amazon, Upwork). Without it, US payers withhold 30% on FDAP by default. Treaty rates are often 0% to 15%.
- Treating ITIN as required. ITIN is for personal US tax filing or PayPal personal verification. Most non-resident LLC owners do not need it.
- Reporting LLC revenue as your personal income on Form 5472. Form 5472 reports related-party transactions, not operating revenue. Customer revenue does not go on 5472.
- Treating disregarded LLC as a corporation. By default, foreign-owned single-member LLCs are disregarded entities for US tax. You report on Form 5472 + 1120, not as a C-Corp.
- Skipping home-country foreign asset disclosure. India, Brazil, Pakistan, and others require disclosure of foreign companies. Missing this can trigger home-country audits.
- Mixing personal and LLC bank accounts. Commingling weakens liability protection and complicates Form 5472 reporting. Keep accounts separate.
When to consult a US CPA
- You have ECI or think you might
- You have multiple US entities or a holding structure
- You have not filed Form 5472 in prior years
- You receive US-source FDAP income above $10,000/year
- You are considering electing C-Corp tax treatment
- You are relocating to the US or considering US residency
- You have substantial US clients and want a defensive ECI analysis
- You sell on Amazon FBA and want a formal ECI position
- You are converting your LLC to a C-Corp for a VC round
- You are operating in a regulated industry (fintech, insurtech) with complex US tax exposure