Tax Guide

U.S. Business Tax Basics

U.S. business taxes consist of federal and state taxes. Taxation varies by entity type. Compare LLC and Corporation in our LLC vs Corporation guide.

The U.S. tax system is based on self-reporting. Taxpayers calculate their own income, complete the appropriate forms, and file with the IRS. Unlike systems where the tax authority issues assessments first, the responsibility falls on the taxpayer. Understanding deadlines and requirements is essential.

Tax Structure by Entity Type

LLC Pass-Through Taxation

By default, LLCs don't pay corporate tax. Instead, income 'passes through' to members and is reported on their personal tax returns. This avoids double taxation, a key advantage of LLCs. For more details, see our U.S. LLC Guide for Koreans.

For a single-member LLC, the IRS treats it as a 'disregarded entity.' This means the LLC's income and expenses are reported directly on the owner's personal tax return. Non-resident alien owners file Form 1040-NR to report U.S.-source income.

Tax Filing Deadlines

U.S. tax filing has strict deadlines. Missing them can result in penalties and interest. Below are the key due dates by entity type.

Non-resident aliens generally have an April 15 deadline, but those living outside the U.S. receive an automatic extension to June 15. For additional time, file Form 7004 (business) or Form 4868 (individual) before the original due date.

Form 5472: Required for Foreign-Owned LLCs

Foreign-owned single-member LLCs must file Form 5472 along with a pro-forma Form 1120 with the IRS every year. This is an informational return that must be filed even if the LLC has no income.

Who Must File?

• U.S. corporations owned 25% or more by a foreign person
• Single-member LLCs (disregarded entities) 100% owned by a foreign person
• Entities with 'reportable transactions' between the company and related parties

What Are Reportable Transactions?

Reportable transactions include all monetary exchanges with related parties: capital contributions, loans, rent, service fees, royalties, and more. Even depositing capital into your own LLC counts as a reportable transaction.

Penalties for Non-Filing

Failure to file Form 5472, or filing an incomplete or inaccurate form, results in a $25,000 penalty per form. Additional penalties may accrue if you fail to file after IRS notice. Even LLCs with zero income must file.

Estimated Tax Payments

In the U.S., you may need to pay taxes quarterly as income is earned. These are called 'Estimated Tax Payments.'

If you expect to owe $1,000 or more in taxes for the year, you should make estimated payments. Failure to do so may result in an underpayment penalty. C-Corporations must also make quarterly estimated payments if their annual tax is expected to exceed $500.

State-by-State Tax Differences

In addition to federal taxes, each state has its own tax requirements. When choosing your state of incorporation, consider the state tax structure carefully.

Franchise Tax

Some states charge an annual fee simply for the privilege of existing as a business entity in that state. This is called a franchise tax.

Sales Tax

If you sell physical goods or certain digital products, you may need to collect sales tax based on the buyer's location. Sales tax is imposed at the state level, not federally. Five states have no sales tax: Oregon, Montana, Delaware, New Hampshire, and Alaska.

U.S.-Korea Tax Treaty

South Korea and the U.S. have a tax treaty to prevent double taxation. This treaty can help avoid or reduce paying taxes on the same income in both countries.

• Business income: May not be taxed in the U.S. without a 'Permanent Establishment (PE)'
• Dividend income: Withholding rates may be reduced under the treaty (from 30% to 15%)
• Interest income: Withholding rates may be reduced to 12% under the treaty
• Royalty income: Withholding rates may be reduced under the treaty
• Foreign tax credit: Taxes paid in one country can be credited in the other

Korean Resident Reporting Obligations

• Korean residents must report worldwide income to Korean tax authorities.
• U.S. business income may be subject to Korean income tax reporting.
• If total foreign financial account balances exceed KRW 500 million, you must report them to Korean authorities.
• If you hold 10% or more ownership in a foreign entity (U.S. LLC/Corp), you must file a foreign subsidiary report.
• Taxes paid in the U.S. can be claimed as a foreign tax credit on your Korean return to prevent double taxation.

Do I Need a CPA?

U.S. tax filing can be complex, and cross-border tax matters between Korea and the U.S. often require professional assistance. We strongly recommend consulting a CPA (Certified Public Accountant) or tax professional in the following situations.

• When Form 5472 filing is required (foreign-owned LLC)
• When income is earned in both the U.S. and Korea
• When annual revenue is significant (estimated payment calculations needed)
• When hiring employees or processing payroll
• When sales tax collection obligations exist

Auteur does not provide tax filing services directly, but we can refer you to CPAs experienced in U.S.-Korea cross-border taxation. See our LLC Guide for Koreans for the full journey from formation to tax filing.