E2 Visa Tax for E2 Visa Entrepreneurs in the United States

If you’re an E2 visa applicant or already an E2 visa holder, you might be wondering about taxes in the United States. The E2 visa is a great chance for entrepreneurs, but it means you have to deal with taxes, too. Let’s explore your E2 visa tax responsibilities in this article.¬†

Understanding the E2 treaty investor visa

An E2 visa, also known as a treaty investor visa, is a remarkable opportunity for individuals who meet specific investment requirements to live and work in the United States. This visa category is available to nationals of certain countries that have established trade treaties with the US, and it comes with a range of benefits for eligible applicants.

Here’s a closer look at the key aspects of the E2 visa:

  • Substantial investment

To qualify for an E2 visa, individuals must make a substantial capital investment in a US business. This investment is considered substantial in relation to the total cost of purchasing an existing enterprise or establishing a new one. The investment must demonstrate a genuine financial commitment to the successful operation of the enterprise.

  • At risk

An essential element of the E2 visa is that the invested capital must be “at risk” in the commercial sense. In other words, the investment capital must be at risk of either partial or complete loss in case the business venture doesn’t thrive. This distinguishes E2 visa investments from passive investments that do not involve such risk.

  • Nationality

E2 visas are available only to nationals of countries with trade treaties with the United States. These treaties vary from country to country, and eligibility depends on your nationality.

  • Work authorization

E2 visa holders can work in the US within the business they have invested in. This provides a unique opportunity to actively engage in their chosen entrepreneurial ventures.

  • Freedom of travel

E2 visa holders can freely travel to and from the United States. This flexibility is valuable for international business operations and personal travel.

  • Length of stay

E2 visas are typically granted for two years, but they can be extended indefinitely, provided that the visa holder maintains compliance with the ongoing E2 visa criteria.

  • Family accompaniment

E2 visa holders can bring their qualifying dependents, including their spouses and children under 21. Spouses are eligible to work in the US. Additionally, children can enroll in schools and academic institutions without needing a separate student visa.

Do E2 visa holders need to pay US taxes?

Yes, E2 visa holders must pay US taxes on their qualifying income. The United States tax system mandates that individuals who earn income within the country, regardless of their visa status, fulfill their tax obligations.

The tax liability for E2 visa holders depends on their tax status, which is determined by factors like the substantial presence test and applicable tax treaties between the US and their home country.

e2 visa tax filling form

The substantial presence test

calculating e2 visa tax

The substantial presence test is a key factor in determining an individual’s US tax residency. It involves calculating the number of days an individual has been physically present in the United States over a specified period. The test uses the following formula:

  • All the days the individual spent in the United States during the current tax year.

  • One-third of the days they were present in the tax year immediately preceding the current year.

  • One-sixth of the days they were present in the tax year two years before the current year.

If the individual has spent a minimum of 30 days in the United States during the current year and a total of at least 183 days over a three-year period (calculated using the formula mentioned above), they are generally classified as a US tax resident and are required to pay US income tax on their worldwide income.

Example A: Nonresident status

If an investor was present in the United States for 100 days in 2020, 60 days in 2021, and 120 days in 2022, the calculation would be as follows:

  • 2020 = 100 days

  • 2021 = 60 days/3 = 20 days

  • 2022 = 120 days/6 = 20 days

The cumulative total is 140 days, which means the investor would not meet the substantial presence test criteria and, therefore, would not be liable for US income tax on their global income. Instead, they would only be obligated to pay tax on the income they earned while working within the United States.

Example B: US tax resident status

If an investor was present in the United States for 195 days in 2020, 210 days in 2021, and 180 days in 2022, the calculation would be as follows:

  • 2020 = 195 days

  • 2021 = 210 days/3 = 70 days

  • 2022 = 180 days/6 = 30 days

With a total of 295 days, the investor would meet the substantial presence test requirements, making them eligible for US tax resident status. Consequently, they would be liable for US income tax on their worldwide income unless they qualify for another exception to mitigate their tax liability.

Avoiding E2 visa tax residency

There are exceptions and alternatives for an E2 visa holder to prevent being categorized as a resident alien and, instead, maintain nonresident status for US tax purposes:

  • Closer connection exception

To qualify for this exception, you should ensure that you don’t spend more than 182 days in the US during the current tax year. Demonstrating a “closer connection” to your home country, typically through ties like family, assets, or business interests, can help you maintain nonresident tax status. Filing IRS Form 8840 is necessary to establish this closer connection.

  • Treaty Tiebreaker

Many US tax treaties, such as the United States-Germany Tax Treaty, offer a “treaty tiebreaker” provision. This provision allows you to be treated as a nonresident alien for tax purposes even if you meet the substantial presence test. To utilize this provision, file IRS Form 1040-NR and attach Form 8833, disclosing your treaty-based return position. Keep in mind that you may still have tax obligations on specific types of income.

E2 Visa Tax for Resident Aliens

As a resident alien in the United States, you have certain tax obligations and will need to report both your foreign and US income using various forms, depending on the types of income you have. Below is a breakdown of these forms and the penalties associated with non-compliance:

  1. FBAR (FinCEN 114)

  • Form¬†purpose: Reporting foreign bank and financial accounts.

  • Threshold: If you have financial interest or signature authority over a foreign account exceeding $10,000 during the financial year.

  • Penalties: Willful violations can result in a penalty greater than $100,000 or 50% of the total account balance per violation. Non-willful violations without reasonable cause incur a $10,000 penalty per violation.

  1. Form 8938

  • Form purpose: Reporting foreign financial assets.

  • Threshold: Required if you have foreign financial assets with an aggregate value exceeding $50,000.

  • Penalties: Starting at $10,000, with an additional $10,000 per month for each month the failure continues after notice of delinquency, up to a maximum of $50,000 per return.

  1. Form 3520

  • Form purpose: Reporting substantial foreign gifts, foreign businesses, or distributions.

  • Threshold: Reporting gifts above $100,000 or certain foreign business transactions.

  • Penalties: Penalties depend on the specifics of the reporting requirements and the nature of the gifts or transactions.

  1. Form 3520-A

  • Form purpose: Reporting foreign trusts as a US person.

  • Penalties: Non-compliance penalties can be substantial and vary depending on the circumstances.

  1. Form 5471

  • Form purpose: Reporting ownership in foreign corporations.

  • Threshold: Generally required if you own at least 10% of a foreign corporation.

  • Penalties: Penalties start at $10,000 and increase with continued non-compliance.

  1. Form 5472

  • Form purpose: Reporting interest, ownership, or control in any foreign corporation.

  • Penalties: Penalties may apply for non-compliance, with amounts depending on the specifics of the reporting requirements.

  1. Form 8621

  • Form purpose: Reporting ownership in a Passive Foreign Investment Company (PFIC).

  • Threshold: Generally required if you have any interest in a PFIC.

  • Penalties: While there are no specific numerical penalties, failing to file Form 8621 can keep your tax return open to IRS audits, potentially affecting the statute of limitations.

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E2 Visa Tax for Nonresidents

When you have nonresident status, you are only required to file a tax return for the income you earn in the United States. There are two main types of income taxed for nonresidents: Effectively Connected Income (ECI) and Fixed or Determinable, Annual, or Periodic Income (FDAP).

  1. Effectively Connected Income (ECI)

ECI pertains to income earned from your work or business activities in the United States. It is taxed using a progressive tax rate, which means the rate increases as your income rises.

  1. Fixed or Determinable, Annual, or Periodic Income (FDAP)

FDAP, which stands for Fixed or Determinable, Annual, or Periodic Income, encompasses passive income sources like dividends, rents, or royalties. This category of income is subject to taxation at a flat rate.

For nonresident tax reporting, Form 1040NR, known as the US Nonresident Alien Income Tax Return, is the essential document. Both ECI and FDAP income should be reported on this form.

While FDAP income is typically taxed at a standard 30% rate, E2 investors eligible for treaty benefits may qualify for a reduced tax rate. Notably, no deductions are permitted against FDAP income.

What are the E2 visa tax considerations for LLCs and C-Corporations?

Two common choices for foreign entrepreneurs are Limited Liability Companies (LLCs) and C-Corporations. Each structure has its own set of tax considerations, and it’s important to weigh the pros and cons before making a decision.

LLCs

  • Pass-through taxation

Creating an LLC offers a significant advantage in the form of pass-through taxation. This concept entails that the LLC entity itself is not responsible for paying federal income taxes. Instead, the profits and losses generated by the LLC are passed through to the individual members, who report these figures on their personal tax returns. For E2 visa holders operating under an LLC structure, this means reporting their portion of the business income on their personal tax returns, which could potentially lead to lower individual tax rates being applied.

  • Self-employment tax

E2 visa holders actively involved in the daily operations of the LLC may be subject to self-employment tax on their share of the company’s income. This includes Social Security and Medicare contributions and may amount to a substantial financial obligation.

  • State taxes

State tax laws can vary, and LLCs may be subject to state income taxes, annual report fees, or franchise taxes, depending on the state where they are located.

C-Corporations

  • Double taxation

Unlike LLCs, C-Corporations are subject to double taxation. The corporation itself pays federal income tax on its profits, and then shareholders pay individual income tax on any dividends received. This can result in a higher tax burden for E2 visa holders operating as C-Corporations.

  • Retained earnings

C-Corporations have more flexibility in retaining earnings within the company, which can be advantageous for reinvesting in the business. However, this retained income is subject to corporate income tax.

  • Fringe benefits

C-Corporations can provide certain fringe benefits to employees, including health insurance and retirement plans, which may be tax-deductible for the corporation.

  • State taxes

Similar to LLCs, C-Corporations may also be subject to various state taxes, depending on their location.

calculating e2 visa tax in calculator

Ensuring Compliance with E2 Visa Tax

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Here are the key steps to ensure compliance with E2 visa tax:

  1. Determine your tax status: The first step is knowing your tax status in the United States. Follow the steps above to determine whether you’re a resident or nonresident alien.

  2. Understand your taxable income: Identify all income sources subject to US taxation. This includes income earned within the United States and income generated internationally, depending on your tax status.

  3. Maintain accurate records: Keep meticulous records of your financial transactions, including income, expenses, and investments. Good record-keeping is essential for accurate tax reporting.

  4. File tax returns: E2 visa holders must annually submit their tax returns to the Internal Revenue Service (IRS). The specific forms you need to file depend on your tax status and the nature of your income. Refer to the forms mentioned above.

  5. Report foreign assets: If you have financial interests in foreign bank accounts or assets, you may be required to report them to the US government. Not reporting foreign assets can lead to significant penalties.

  6. Consider state taxes: Aside from federal taxes, be aware that you may also be subject to state taxes depending on the state where you reside or conduct business. State tax laws can vary significantly.

  7. Pay taxes promptly: Ensure you pay your taxes on time to avoid penalties and interest charges. The US tax system operates on a pay-as-you-go basis, so it’s important to meet your tax obligations throughout the year.

  8. Seek professional help: Consult a qualified tax professional specializing in international taxation or with experience with E2 visa holders. They can provide guidance on your tax situation, help you identify deductions and credits, and ensure compliance with tax laws.

  9. Stay informed: US tax laws can change, so stay updated about amendments that may affect your tax situation. The IRS website and tax professionals can be valuable resources for staying up-to-date.

How E2VisaFranchises Can Help

Compliance with E2 visa tax is crucial to maintaining legal status and avoiding potential issues with US authorities. By following these guidelines and seeking professional guidance when necessary, you can fulfill your tax obligations and enjoy the benefits of your E2 visa in the United States.

E2VisaFranchises offers the essential support you need for your E2 visa journey. Beyond tax compliance, we help you explore and invest in compatible franchise opportunities that match your goals and resources. Our expertise ensures you navigate the complexities of franchise ownership while staying in line with your visa requirements. Give us a call today.

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