A EU remote worker operating via a LLC in the USA

Question

I'm currently based in Germany (but originally from another EU country) and will be working remotely as a software developer for a US company on and off for a few months in a year. They suggested that it might be easier (for various purposes) to open an LLC in Delaware or Nevada. Its convenient for them and it lets me retain the freedom to move around as much as I like + it might even to some extent be cheaper tax-wise paying taxes over there (if I pay taxes in the US - double taxation agreement means that I would not have to pay them again in Germany right?).

The problem is I'm not really sure what the overhead is in having it go through an LLC. Not worried about smaller expenses here (like opening the LLC, franchise/tax/agent fees) - but am not really sure how to tax my personal earnings and at what rate? The confusing thing is that when I'm reading about Nevada LLCs online - it says no personal income tax? Does that mean that I'd pay 0 in taxes (to the IRS) when getting the money out from the LLC to me? That can't be right.

Let say the LLC makes 75k USD - how much out of that could I really get after tax? (bare in mind that I'm sitting in EU so there will probably be 0 deductibles)

Answer 1

LLC will not make things easier for you in any way whatsoever. LLC can be treated as one of those in the US:

1. Disregarded entity - I.e.: from the IRS perspective the LLC doesn't even exist. You're liable for all the taxes regardless of the legal entity you're operating through. You have the benefit of the limited liability (but not very limited, since you're the sole member and do all the work), but no tax benefits at all.

2. Corporation. In your case it is C-Corporation (in the US there's also S-Corporations, foreigners cannot hold shares in those). C-Corporations are taxed on their income at the corporate level, and moneys distributed to owners are called "dividends" and are taxed again on the individual level for the owners. This means double taxation, so unless you're planning on selling shares in your business - C-Corp is not for you. If you are planning on selling shares - LLC is not for you, since it doesn't have shares. Bottom line - in your situation this option is not suitable at all.

That aside, consider your local (German?) laws. LLC in the US can very well be considered a Corporation (for tax purposes) according to the German law. I know that disregarded entities in Europe can be considered as corporations according to the US law. You may end up having double taxation issues in your home country even if in the US you chose option #1 just for the limited liability. Talk to a tax adviser.

If you do decide to create an LLC in the US - the State of the incorporation matters not only for the State income taxes, but also for the State fees (for example, California charges minimum $800 a year for a LLC), and of course the limitations on the liability. Talk to a US-licensed tax adviser and attorney about these things. You will have to register the LLC in the state where you'll be working (if you ever set foot in the US), so registering in Delaware won't save you from the CA LLC fee (the $800) if you stay at least a day in CA.

If you're not working in the US, and don't set foot in the US at all - I'm not sure whether you should even be worried about the US taxes. Talk to a tax adviser licensed in the US and familiar with the tax treaty (if any) that your country has with the US.

By the way, I'm not sure who did you speak to at the US company, but to the best of my knowledge, unless you chose to treat your LLC as a C-Corp, you having LLC or working directly has no difference whatsoever to them.

Answer 2

I would suggest finding an accountant (CPA) that is familiar with cross border tax issues as there are double taxation treaties between Germany and US in play as well.

Nevada's no personal income tax only means that you as an individual (and in case of Nevada same applies to corporations) don't pay any tax on income (profits) earned in the state of Nevada to the state of Nevada. IRS which is a federal agency is completely different. There may be other taxes or fees that may be applicable to your situation, which an accountant should be able to tell you.

There was a question here that may be also relevant in some respect to your situation.

What is the purpose of a W9 form and how do you get one as a non-resident/non-citizen of the US?

Answer 3

A US LLC isn't really that useful in your situation. It's (usually) a "flow-through" entity, which means it's not (normally) taxed itself, the income flows through to the owner(s) (partners) and is taxed where they are resident. In your case, that means your income is still taxed in Germany, not the US.

In other words, an LLC (in the most common form) is not a company or corporation, it's a partnership (sometimes with just one partner), that adds a limited liability layer but doesn't pay tax itself because the profits (if any) are taxed as income for the owners, in their own country.

It is possible to choose to have the LLC taxed as a "C" corporation (instead of a partnership). Lots more tax paperwork and the only real saving is if you can leave money in the LLC to be taxed at federal corporate tax rates (but, what will you do with that money, owned by the LLC?). If you're paying out almost all the income to yourself an LLC taxed as a corporation ends up being just a much more complex (and expensive to run) version of the same thing: a limited liability layer in front of income which is taxed only in your home country.

You still need to do US tax returns for the LLC (even if nothing owing), annual returns, EIN numbers, go there to open a bank account, etc but you don't get to save any tax (unless you have significant expenses you could charge to the LLC before being paid, although you could equally deduct that from a German self-employment tax return).

Note if you're going to get an LLC, Wyoming is mostly cheaper and less paperwork than Nevada or Delaware. Consider what effect owning a US LLC would have on your visa status when you visit the US (are you "working" for it while there - not a good idea on a tourist visa).

Especially for a short-term gig, forming something like this and getting involved in the US tax system (for years) seems overkill, for very little benefit.