Before starting your international expansion in the U.S., it is crucial to have a basic understanding of your businesses’ U.S. tax obligations. Your tax compliance requirements will depend on the type of entity you form. This is the essential first step when planning operations in the U.S.
If your company already exists in Germany, the decision must be made whether to operate through the German entity directly or to form one of the three basic types of entities allowed in the U.S. Those three entities are:
Corporations are separate taxable entities, and can shield European shareholders from having to file income tax returns in the U.S. These are referred to as “Blocker Corporations.”.
Partnerships and LLCs are flow-through entities that give the partners or members their own tax filing obligations in the U.S.
In many cases, due to German law, a partnership must be formed in the U.S. An LLC with more than one member is always formed as a partnership. It is usually recommended that a partnership or an LLC take advantage of the “Check the Box Election”, and elect to be taxed as a corporation. This makes the corporation a blocker corporation.
In the United States, there are multiple levels of tax compliance. The Federal Government, states, and many cities and towns each have their own tax regulations and laws. The main types of taxes that require compliance are:
Corporations are subject to a federal-level corporate income tax on net taxable income. Most states also have a corporate income tax. Four states, Nevada, Ohio, Texas and Washington State impose a gross receipts tax instead of a corporate income tax. South Dakota and Wyoming are the only two states that do not impose a corporate income or gross receipts tax.
Partnerships and LLCs are flow-through entities that give their partners or members a tax obligation in the U.S. even if they are non-residents. This is why a blocker corporation in the U.S., or taking advantage of the check the box regulations, is a recommendation that is usually made.
Sales tax is like the value-added tax (VAT), but at the same time completely different. It is a destination tax and an end user tax. If you ship to customers outside your state, generally you do not collect sales tax. If the product you sell is sold to a store for resale, then you do not collect sales tax from the store. It is the store’s responsibility to collect the sales tax from its customers. Depending on your volume, sales tax returns will be filed either monthly, quarterly or annually.
Sales tax has become the most complex tax in the U.S. Every state and many towns and cities have their own sales tax regulations. A product subject to sales tax in one state may be exempt from sales tax in another state. Software is an example where many states have different regulations.
Many services such as consulting are exempt from sales tax in most states.
Accountants will analyze your business, what it sells, how it sells the product, for every state you are selling into. They also look into the services you are providing to determine if they are taxable in a particular state.
In states where you create sales tax nexus, such as a state where you are warehousing your product, you will have to register and collect sales tax, even if it is not the state you incorporate in or the state from which you run the business.
Payroll taxes are essentially the same in the U.S. as in Europe. Federal, state and local income tax is withheld from the employee and paid into the various government agencies by the company. Taxes are paid on a pay-as-you-go system.
Social taxes such as Social Security and Medicare tax is also withheld from the employee, but the company must match the amount dollar for dollar. In addition, some states require an employee and the company to contribute to its unemployment insurance fund. Other states such as New York, only require the company to pay into the unemployment insurance fund.
All states require the company to have workers compensation insurance and disability insurance. Some states such as New Jersey also require the employee to contribute to the disability insurance.
It is always recommended to use a payroll service to handle all the payroll and payroll tax requirements.
Some states and localities have a personal property tax, where the company pays a tax on the tangible assets (computers, etc) used in the business.
Tax compliance is complex. However, it’s not a reason to discount the lucrative U.S. market for your services or products. To ensure your company follows all the various tax laws and regulations in the U.S., be advised to consult an experienced tax accountant.