Have a Tax Question? Ask a Tax Expert
Hi, my name is Mark. I will be happy to help you with your questions.
What kind of entity are you looking to set up? A Corporation? A LLC?
With a C-Corporation there would be double taxation. The rates for corporations go up fairly quickly. The first $50,000 of income is taxed at 15%. The next $25,000 is taxed at 25%. The next $25,000 would be taxed at 34%.
When the income is distributed to the shareholders is would be taxed as dividends. The dividends from foreign shareholder is subject to a withholding of 30%.
With an LLC there is only one level of tax. An LLC is known as a flow through entity. This means that all of the income, deductions, and credits flow from the LLC to the individual members. The members would receive a k-1at the end of the year with their share of the income, deductions, and credits.
The LLC would be required to withhold 39.6% percent of the income allocated to foreign partners. This withholding would need to be submitted to the IRS on a quarterly basis. The foreign partners would need to file a 1040NR to potentially obtain a refund. If the foreign partner is a resident alien they would be required to file a form 1040.
No it would be a graduated system. So for $100,000 the first $50,000 is taxed at 15% ($7,500) The next $25,000 is taxed at 25% ($6,250) and the next $25,000 is taxed at 34% ($8,500) or $22,250.
Assuming that you submitted $50,000 of dividends to foreign shareholders, you are correct that the withholding would be $15,000. The actual tax could be different. The shareholders would need to file a return. Potentially the shareholder could receive a refund.
In an LLC, assuming that all of the income is allocated to foreign members, then the company would withhold $39,600. The members would need to file individual returns to report their share of the income and to report the amount of withholding allocated to them. It is possible that a member would receive a refund when they filed his or her individual taxes.