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LLC taxation for non-U.S. residents

Dear Tax Talk,
I have an LLC with members who are non-U.S. residents. Do they also have to pay all the three taxes (federal, state and Social Security/Medicare) on their share of profits?
-- Sanjay

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Dear Sanjay,
A limited liability company is, by default, treated as a partnership for federal income tax purposes unless it elects to be treated as a corporation, by filing Form 8832. It sounds like you haven't made this election and therefore the partners (members) of the LLC are liable to report their percentage of the company's income on their tax returns.

Non-U.S. resident individual partners would need to file Form 1040NR to report their respective income of the LLC. They may also be required to file state income tax returns, depending on the laws of the state in which the LLC operates (you'll need to research this separately). The foreign partners would have to compute their tax liability in accordance with the rules applicable to Form 1040NR.

A partnership is required to pay income tax and remit it to the IRS quarterly, based on the profits allocated to foreign partners. The payment is due whether or not the profits are actually distributed in the form of cash or other property to the foreign partners. The payment is equal to 35 percent of the foreign partner's allocated profits and is due with Form 8813 by the 15th day of the fourth, sixth, ninth and 12th month of the partnership's tax year. So for 2005, you should calculate the amount of tax to be paid to the IRS on the 15th of April, June, September and December of 2005, based on the quarterly profits allocated to the foreign partners. Instructions for figuring the quarterly payments are found in an IRS publication.

Social Security and Medicare taxes are not paid by an LLC on partner's income or compensation. Instead a partner pays self-employment tax on his share of the LLC's profits if the partner or member is actively involved in the operations of the LLC and the services are performed in the United States.

Since the foreign members, presumably, would not have authorization to work in the United States, they would not pay self-employment taxes. Alternatively, if the foreign partners did have work authorization, then perhaps they should not be considered foreign for income tax purposes. For example, if the foreign partners have H1 or L1 visas, and they reside in the United States, they would not be considered foreign for income tax purposes and therefore not subject to quarterly income tax withholding.

Since all these rules are quite complex, I recommend you find a competent CPA to help you sort this out.

Bankrate.com's corrections policy
-- Posted: Sept. 7, 2005
Read more Tax Adviser columnsAsk a question
Taxes on profit of LLC shares
Determining LLC income
Foreign income exclusion

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