Myths and Facts: Everything You Should Know About U.S. Taxation

Many myths have been woven around taxation in the United States. Some are true, others are speculations and misinterpretations. That is why we decided to write this post. Draw your own conclusions.

There has been a lot of speculation about taxation in the United States: that it is cheaper than taxing in their countries of origin; that the dates are strict and the taxation period cannot be extended; that the percentages vary according to the percentage of participation. As a result of the lack of knowledge, many questions, how are sales taxes calculated, is the same tax percentage for LLC and Corp? 

That is why we wanted to write this blog. We will explain everything about taxation in the American country. Is it cheaper to be taxed in the United States? Make your comparisons.

The first thing you should know is that in the United States there are two types of taxes, the Income Tax Return (Federal Income Tax) and the Sales Tax (State Sales Tax). 

To explain each of these tax values, we must first understand that the United States is a federated country, that is, it is governed, let's put it this way, under two maxims, at the macro level, with federal laws, and at the local level, with state laws. And a good way to explain this political model is through taxes: the Income Tax is a federal tax, and the Sales Tax is a state tax.

Let's start by explaining the Income Tax, a tax regulated by the IRS (Internal Revenue Service). The settlement is done through the Electronic Federal Tax Payment System (EFTPS), a payment method that offers several benefits, among them, security by safeguarding the use of your taxpayer identification number or employer identification number (EIN) or Social Security number (SSN); facilities that allow scheduling payments; immediate payment confirmation via email; and additional options such as paying through the EFTPS voice response system. 

In the USA, the most popular business models are the Limited Liability Company (LLC) and Corporations (INC or CORP). Each model responds to different rules of the game. According to the type of company, the dates and forms of taxation vary, for example, tax declaration and payment. 

Let's see, LLCs are divided in two, the LLC DISREGARDED, a business model where there is only one owner and the LLC PARTNERSHIP, where there are several partners. 

The DISREGARDED LLC return must be filed before June 15 with a maximum extension of 6 months (December 15). We must clarify that the extension is on the filing of the federal taxes, but not on the value or tax to be paid, which, in effect, will generate interest for non-compliance from the initial filing date. 

The company will have the duty to file its first return when it starts operating activities; if during the first year it does not invoice, it will not be obliged to file the Income Tax return. However, from PRODEZK, we recommend filing even if the company is not operating, this will facilitate the accounting, administrative, financial and future processes for both the company and the members of the company. After the first declaration, the company will be obliged to declare every year without conditions. The amount to declare is staggered, it will be from 10% to 37% of the profit. The form to be filed is the 1040 or 1040NR.

With the LLC PARTNERSHIP, something similar happens, the declaration of the global utility will go until March 15 with an extension of 6 months (September 15). The same observation applies as for the DISREGARDED. The only thing that changes is the tax form to be filed (1065), and in the case of foreigners, the withholding is 37% in the case of individuals and 21% in the case of foreign companies (legal entities).

Likewise, let us clarify that LLC PARTNERSHIP, in the case of having foreign partners, as an advance payment, a previous disbursement of money must be made, which, later on, will be returned at the time of filing the personal federal taxes. The withholding rate is 37%; the IRS debits the tax and returns the excess. 

For foreigners there are two filing times. The first one, on March 15, when they file the global profit and pay the withholding, and a second one, on June 15, when they will file their personal taxes derived from their percentage of participation in the global profit and where they will be able to recover the percentage that corresponds to them of the withholding or advance already paid in the first moment.

The C-Corp are taxed a fixed charge of 21% of the profit. It is important to understand that this return must be filed no later than April 15 of each year and can be extended for 6 months (October 15). In the United States this tax must be filed every year, whether or not there has been any movement during the fiscal year. The form to be filed with the IRS is form 1120. 

On the other hand, there are the S-Corp, these are taxed very similarly to the LLC, that is to say, they do it in their personal capacity. Each one of the partners is taxed according to the share participation they have; the value to be taxed will vary between 10% and 37%, depending on the profit generated. The big difference with the C-Corp is that this business model can only be created by U.S. residents and citizens, it manages shares and can participate in the stock exchange. 

Sales Tax

This tax applies to companies that sell physical objects and, increasingly, to services (we wrote a blog about this). There are several important items to understand about this tax. The first is that it is a tax that is levied at the state level, i.e., it is the states who set the rules of the game and the percentage to be taxed. Some examples: Florida 6 %; California 7.25 %; Delaware 0 %; Texas 6.25 % and Washington 6.5 %. This percentage varies according to the policy of each state. Here is the complete list. 

The Sale Tax is charged to the final consumer, therefore, the final supplier is the one who declares and pays to the tax authorities. Its declaration can be monthly, quarterly, semi-annual or annual, this is assigned by the Treasury Department of each state. The deadline for its presentation and payment will vary depending on the state and will be made during the month following the assigned period. 

Another determining factor at the time of filing this tax is the county tax rate, that is, an additional charge to the state tax rate. Then, the county tax rate must be added, for example, in the state of Florida, it varies between 0% and 1.5%. That is, for a recordable sale in Miami, the state tax rate is 6 % + the county Surtax of 1 %: (7 %), that, we clarify, is going to depend on the county. The form to be filed is the DR-15. 

It is important to clarify that even if the company has not obtained any sales during the month, it must comply with the formal duty to inform the state of its operations, this will avoid penalties and interest.

Finally, we want to make the clarification that payroll contributions, known in the USA as Payroll, have a surcharge of 15% in addition to the accrual of wages. These surcharges are related to the contributions to be made by the employee at the federal level and by the employer at the state level. The same, that will vary depending on the policy of each state. 

‍About the latter we wrote a blog, we explain each of the taxes and values to take into account: