The main goal of our acceleration program ubi i/o is to enable French startups to establish themselves in the U.S. Through this program and all the missions we execute here in the Silicon Valley, we gather a lot of advices, new insights and experiences we’re thrilled to share with you on this blog.
You’ve already gained new insights on how to prepare your US development and market entrance and on how to hire in the US. It’s time to get an overview on a less sexy but nonetheless crucial topic for your establishment: U.S. Taxes
This article is a humble snapshot of the taxation policies in the U.S, but this will hopefully give you some clues as of to where to look for further details.
In which cases will you pay taxes in the US?
Good news! You don’t have to be a US-citizen or resident to incorporate a business in the US. However, starting your business operations here is not the Far West! There are rules, and those rules include taxes. Here are two main cases in which you will have to pay taxes:
- If you engage in a trade or business in the United States: You will be subject to a net-basis income tax on any of your income that is “effectively connected” with that business.
- Whether you are engaged in a trade or business in the United States: You will be subject to a gross-basis tax on certain types of U.S. income sources—primarily investment income, such as interest and dividends—that are not “effectively connected” with a U.S. business.
Of course, you can be taxed for both effectively and non-effectively connected incomes.
Different types of taxes
In most cases, a foreign person (including corporations) is subject to U.S. taxes on its U.S. income source. Most types of U.S. income sources you receive are subject to 30% tax. A reduced rate, including exemption may apply if there is a tax treaty between your country of residence and the United States. The tax is generally withheld directly from the payment you receive.
The United States – France Income Tax Treaty reduced this tax at a rate of 0% to 15% for French corporation established in the U.S, depending on who owns the capital of the company.
Regarding this withholdings legislation during the conduct of a Trade or Business in the U.S, you will have to provide a W-8ECI Form or a W-8BEN-E Form to your payer in order to receive funds from him, depending on whether your income is effectively connected (W-8ECI) or not (W-8BEN-E).
Corporate income tax
There are three levels of income taxation in the US:
The Federal level
The Federal State taxes gross income including all income effectively connected with the conduct of a U.S trade or business.
The tax rates are as follow:
|Taxable Income ($)||
|0 to 50,000||15%|
|50,000 to 75,000||$7,500 + 25% Of the amount over 50,000|
|75,000 to 100,000||$13,750 + 34% Of the amount over 75,000|
|100,000 to 335,000||$22,250 + 39% Of the amount over 100,000|
|335,000 to 10,000,000||$113,900 + 34% Of the amount over 335,000|
|10,000,000 to 15,000,000||$3,400,000 + 35% Of the amount over 10,000,000|
|15,000,000 to 18,333,333||$5,150,000 + 38% Of the amount over 15,000,000|
|18,333,333 and up||35%|
The State level
Most individual U.S states collect a state income tax. In most states, the taxable income is the same as the federal taxable income. The rates go from 0% to 9% of the income.
In the State of California, the tax rate for corporations other than banks and financial institutions, which might be your case, is 8.84%.
Now, how to figure out which state you have to pay your income taxes in? It depends on your Nexus. A Nexus is a link or connection with a state. It can be a physical presence in a state (employees, offices), or just the presence of your servers in that state! You also have to consider the economic Nexus, which is the level of sales you make in the State. For example in California, an economic Nexus is established if you make more than 25% of your sales or more than $5000 a year in the state. Whenever a Nexus is recognized in a state, you will have to pay state income taxes there.
The City level
In addition to the Federal and State income taxes, some localities are likely to tax your income. The rates vary from 0% to 9%. Those taxes are forbidden by the Californian constitution, but in New York, the rate is 8.85% of your “net income allocated to New York City”
The Tax Calendar
At this point, you should see the income tax structure a bit more clearly. There is one last point to broach: the Tax Calendar! This is how it works: Two months and a half after the end of your fiscal year, you have to file a calendar year income tax return (form 1120) and pay any tax due. Then, during the months of April, June, September and December, you have to pay the taxes you estimate to owe to the administration for the past period. If you paid more or less than you actually owe, you will be asked to pay any tax due, or you will get a refund.
Sales and Use Tax 
Sales Tax is collected by any retailer selling to his final consumers inside his Nexus States. If you sell goods or services subject to Sales Tax outside your Nexus State, you do not have to collect Sales tax. The rates go from 0% to 9.45%, depending on the State.
Unfortunately, that does not mean that the transaction is tax free if you sell outside of your Nexus State. Indeed, your customers will have to pay a Use tax to his state! The Use tax rates are most of the time the same as Sales Tax rates within a State.
Once again, there are different levels of Payroll Taxes
Federal Payroll Taxes
As an employer in the U.S, you will have to pay the following taxes for the Federal State:
- Social security: 6.2% of a worker’s wages, up to $188,500 per worker per year.
- Medicare: 1.45% of a worker’s wages
- Federal unemployment: 6.0% on the first $7000 of a worker’s wages, up to $42 per worker per year.
State Payroll Taxes
In addition to the Federal Payroll Taxes, each State has to apply its own State Unemployment taxes and Workers compensation and Disability Insurances.
It is mandatory to provide Medical Coverage if you hire more than 50 full time equivalent (FTE) employees. Contracting health care for your employees if you hire less than 25 FTE and if your average employee salary is less than $50,000 per year allows you to qualify for the small Business Health Care Tax Credit.
For foreign entrepreneurs, the Unites States are seen as the land of complete entrepreneurial freedom. It is, as anyone can establish a business on the American soil. But freedom does not mean paradise, and even in the USA, rules and taxes apply. Even more, the United States has the highest Corporate Income Tax Rates among the OECD Nations. But this should not prevent you from settling a branch in one of the most dynamic Tech market in the world.