Non-citizens often form companies and pay federal, state and local taxes

 How do non-citizens who form companies and pay federal, state and local taxes?

Non-citizens form companies and pay federal, state, and local taxes by using specialized tax identification numbers issued by the Internal Revenue Service (IRS), structuring their businesses legally to accommodate foreign ownership, and navigating specific jurisdictional tax rules. [1, 2]

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Step 1: Secure Tax Identification Numbers

Non-citizens cannot use a standard Social Security Number (SSN) to file taxes if they lack work authorization or legal residency. Instead, they rely on two specific tax identifiers: [1]

• Employer Identification Number (EIN): This is the tax ID for the business itself. Non-citizens obtain this by filling out⁠IRS Form SS-4 via fax or mail, as they cannot use the online IRS portal without an SSN. [1, 2]
• Individual Taxpayer Identification Number (ITIN): This is the personal tax ID for the owner. It is issued via⁠IRS Form W-7 and allows the individual to report personal earnings, distributed business profits, or file individual tax returns. [1, 2, 3, 4]

Step 2: Pay Federal Taxes Based on Business Structure

How federal tax is paid depends entirely on how the business is legally structured:

Pass-Through Entities (LLCs and Partnerships) [1]

Most non-citizens form a Limited Liability Company (LLC). If it is a Single-Member LLC, the IRS treats it as a "disregarded entity". [1, 2]

• Effectively Connected Income (ECI): If the business operates physically in the U.S. (e.g., has U.S. employees, offices, or inventory), profits are considered ECI. The non-citizen pays standard progressive income tax rates using⁠IRS Form 1040-NR. [1, 2, 3]
• Foreign-Owned Disregarded Entities: If the owner lives abroad and the LLC has zero physical operations in the U.S. (e.g., a digital service), the income may not be federally taxable. However, the owner must still file⁠IRS Form 5472 and Form 1120 pro forma annually to avoid severe penalties. [1, 2]

C-Corporations

If formed as a C-Corp, the business pays a flat federal corporate tax rate on its net income using⁠IRS Form 1120. If the corporation distributes dividends to the non-citizen owner, a flat 30% withholding tax typically applies under FDAP rules, though this can be reduced if their home country has a tax treaty with the U.S.. [1, 2, 3]

Step 3: Satisfy State and Local Tax Obligations

State and local tax liabilities are determined by where the business is registered or where it has a physical or economic presence ("nexus"). [1]

┌────────────────────────────────────────────────────────┐
│               State & Local Tax Types                  │
└───────────────────────────┬────────────────────────────┘
                            │
         ┌──────────────────┼──────────────────┐
         ▼                  ▼                  ▼
┌─────────────────┐ ┌───────────────┐ ┌──────────────────┐
│  Income Taxes   │ │  Sales Taxes  │ │  Property Taxes  │
└────────┬────────┘ └───────┬───────┘ └────────┬─────────┘
         │                  │                  │
         ▼                  ▼                  ▼
  Paid to states     Collected from     Paid on owned or
  on net corporate    customers via     leased business
   or pass-through     state seller's     real estate and
   business profits     permits     equipment

• State Income Tax: The business files state corporate or individual returns using its EIN or ITIN. States like Delaware and Wyoming are highly favored by non-residents because they impose no state income tax on LLCs that do not actively conduct business within those specific states. [1]
• Sales Tax: If the business sells physical goods or certain digital products to customers in states where it meets economic thresholds, it must register for a seller's permit and collect/remit local sales tax. [1]
• Franchise Taxes / Annual Fees: Most states require businesses to pay an annual franchise tax or filing fee simply to maintain the legal structure active in that jurisdiction, regardless of whether the business made money.

Step 4: Remit Payroll and Employment Taxes

If the non-citizen-owned company hires employees inside the U.S., it must use its EIN to handle payroll obligations. The business automatically withholds federal, state, and local income taxes from employee paychecks. [1, 2]

The company must also contribute its share of Federal Insurance Contributions Act (FICA) taxes for Social Security and Medicare, unless the worker holds a specific visa status (like F-1 or J-1) that qualifies for a temporary exemption under an international Totalization Agreement. [1, 2]