If you are a non-resident who has a business related to the USA or intends to set up one, it is important that you understand the basics of the USA accounting system. There are many non-residents who run businesses in the USA or plan to set up a business in the USA, even though they are not physically present in the country. Although the market in the USA is enormous, the rules governing it are complicated.
This article will provide you with the basics of the USA Accounting system for non-residents so that you may be able to run your business in the US confidently.
Who Is Considered a Non-Resident for USA Accounting?
In the USA, a non-resident is usually defined as an individual who is not a USA citizen or a Green Card holder and does not qualify under the IRS Substantial Presence Test. Such an individual is usually classified as a Non-Resident Alien (NRA) for tax purposes.
Non-residents may also need to comply with US accounting and tax regulations if they:
- Have a USA Company (LLC or Corporation)
- Have sales to customers in the USA
- Have an Amazon, Shopify, or e-commerce business in the USA
- Have income generated in the USA
- Have business partners or employees in the USA
It is important to note that even if you are not living in the USA, your business activities might trigger a reporting requirement.
Choosing the Right Business Structure
One of the first steps in US Accounting for non-residents is to choose the right business structure. There are a few most common business entities that are often used by non-residents:
LLC – Limited Liability Company
LLC is the most popular business structure for non-residents.
Advantages:
- Easy to manage
- Flexible taxation
- Fewer compliance requirements
- Can be fully owned by foreigners
However, the accounting requirements will vary depending on how this business entity is taxed.
For example:
- For a single-member LLC that is foreign-owned, special reporting is required.
- For multi-member LLCs, taxation is similar to a partnership; however, corporate taxation can be elected.
C Corporation
Some non-residents prefer to be a C-Corp if they are:
- Raising investments
- Starting a startup
- Working with US Venture Capital
However, this business entity is subject to:
- Corporate tax
- Dividend tax for foreign owners
- Complex accounting requirements
Understanding US Accounting Requirements
USA accounting entails the recording of financial transactions and the preparation of reports in accordance with established norms.
In the USA, the majority of businesses adopt the “US GAAP” accounting system. Small businesses may only focus on maintaining books of accounts.
Your accounting may include:
- Tracking income and expenses
- Bank and payments reconciliations
- Financial statements
- Tax reporting
- Compliance filings
If accounting is not maintained in an organized manner, it is not possible to file taxes.
Key Financial Statements You Must Maintain
However, even though you are a non-resident owner, maintaining financial statements is necessary.
Profit and Loss Statement (P&L)
This statement displays:
- Revenue
- Expenses
- Profit or loss
This is useful in understanding the profitability of the business.
Balance Sheet
This displays:
- Assets
- Liabilities
- Owner’s equity
This is often used by investors and banks, as well as accountants.
Cash Flow Statement
This is the cash flow in and out of the business.
This is extremely important for e-commerce and startups.
Bookkeeping for Non-Resident Businesses
Bookkeeping is the foundation of US accounting.
Bookkeeping includes:
- Recording transactions
- Categorizing expenses
- Invoicing
- Sales tracking
- Tax tracking
Many non-resident founders use accounting software such as:
- QuickBooks
- Xero
- Wave
Bookkeeping can help you:
- Avoid tax mistakes.
- Make sense of your business performance.
- Make it easy to prepare reports.
For online-selling businesses, integrations with Stripe, PayPal, Amazon, or Shopify can also be helpful.
US Tax Obligations for Non-Residents
Taxes are arguably the most confusing aspect of US accounting for foreign business owners.
Your tax requirements depend on whether your earnings are “effectively connected income” with a US business or trade.
Common Situations:
Foreign-Owned Single-Member LLC
This type of business has to file the following:
- Form 5472
- Pro Forma Form 1120
Even if they have no earnings.
This is a filing requirement that many foreign business owners are unaware of.
Partnership LLC
If you have multiple partners in your LLC, you may have to file the following:
- Form 1065 Partnership Return
C Corporation
Corporations have to file:
- Form 1120 Corporate Tax Return
Individual Tax Filing
If you have earnings in the US, you may have to file the following:
- Form 1040 NR
It’s advisable to consult a tax expert due to the numerous considerations involved in tax filing.
Sales Tax for Online Businesses
Sales tax is another major area that non-resident business owners need to be aware of.
In the US, the sales tax is in the hands of the state, not the federal government.
There are a number of cases where you may be expected to pay sales tax, such as:
- Inventory in a warehouse in the US
- Using FBA with Amazon
- Physical presence in the US
- High sales in a state
This affects a number of e-commerce businesses.
Shopify and Amazon may be able to help you calculate the sales tax, but it also has to be accounted for.
Banking and Payment Systems
Most US businesses will need a business bank account and payment processors.
Payment platforms that can be used include:
- Stripe
- PayPal
- Wise
- Mercury (for startups)
From an Accounting perspective, it is important to note the following:
- Separate personal and business finances are important.
- Reconciling bank accounts is important.
- Tracking fees is important.
Annual Compliance Requirements
Non-resident business owners need to be mindful of their compliance requirements.
These requirements can be:
Annual Requirements:
- Federal tax return
- State return
- Informational return
Possible Additional Requirements:
- Registered Agent Requirements
- Franchise tax (depending on state)
- Business license requirements
These requirements can lead to penalties even if your business has not made any revenue.
Common Accounting Mistakes Non-Residents Make
Foreign entrepreneurs, too, experience similar challenges in dealing with US accounting.
The common mistakes that business owners make are:
Not keeping books regularly
Many business owners update their books only when it is tax season.
Confusion over personal and business expenses
This is a common mistake that may lead to non-compliance.
Not filing necessary forms with the IRS
Some forms are informational, but they are necessary.
Not understanding the tax status of the LLC
This may lead to incorrect filings.
Not keeping records
Not keeping records may lead to issues in audits.
Best Practices for Managing US Accounting Remotely
Running a business in the US from another country is possible by having the necessary systems in place.
Recommended best practices:
Use cloud accounting software.
This allows real-time access to information.
Hire a US accounting professional.
They are knowledgeable about IRS regulations and reporting.
Maintain monthly bookkeeping.
This eliminates last-minute stress before tax season.
Track financial metrics
Revenue, expenses, and profit margins.
Prepare for tax season early.
Organize your information throughout the year.
For many global entrepreneurs, the most efficient option would be to outsource the Accounting Services.
Conclusion
The US is a great place for global entrepreneurs to explore their business opportunities. However, accounting and compliance should not be neglected at any cost. As a non-resident business owner, it is very important to understand bookkeeping and tax requirements.
With proper business structure and Accounting systems in place, it is easy to manage your US business from any corner of the world.
If you are planning to start or are already running a US-based business, investing in proper accounting can help you avoid costly mistakes and grow your business successfully.
FAQs
1. Do non-residents have to pay US taxes?
Yes, non-residents have to pay US taxes if they earn income that is sourced in the US or if they are running a business that is considered to be running in the US. This depends on various factors such as the nature of their business and whether they earn income that is classified as Effectively Connected Income (ECI).
2. Can non-residents open a US LLC?
Yes, non-residents can legally open a US LLC. This is because an LLC is an easy structure to manage, and it is also flexible in terms of taxation. In addition to this, an LLC can be 100 percent owned by foreigners.
3. Do foreign-owned LLCs have to file tax returns in the US?
Yes, most foreign-owned LLCs have to file various forms with the IRS. This includes a single-member foreign-owned LLC that has to file Form 5472 and a pro forma Form 1120 even if they do not have any income.
4. What accounting records do non-resident business owners have to keep?
Non-resident business owners have to keep records of
- Income and Expenses
- Bank Transactions
- Invoices and Receipts
- Financial Statements (Profit & Loss, Balance Sheet, Cash Flow)
5. Do non-residents have the responsibility of collecting sales tax in the US?
This is dependent on various factors. Non-residents are required to collect sales taxes if they have a sales tax nexus in the US. This is usually the case if they store their products in the US or if they use fulfillment Services such as Amazon FBA.
6. Is it possible for a non-resident entrepreneur to run the accounting of their business in the US remotely?
This is possible. A non-resident entrepreneur can run the Accounting of their business in the US remotely using accounting software such as QuickBooks or Xero.
7. Is hiring an accountant necessary for non-resident US businesses?
While hiring an Accountant is not mandatory for non-resident entrepreneurs in the US, it is highly recommended. This is because the laws governing taxes in the US are complex.
