 LLC
taxation for non-U.S. residents
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 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
 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.
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