Understanding the essence of an Individual Taxpayer Identification Number is crucial for non-resident entrepreneurs intending to set up, or already running, an LLC, Limited Liability Company, in the United States.
A lot of foreign business owners assume that setting up an LLC in the U.S. means they do not need to deal with the IRS, only to find out they cannot open a bank account or get paid through U.S.-based platforms.
In case you do not possess a Social Security Number, you will likely require an ITIN to fulfill your tax responsibilities, acquire a bank account, or operate your business effectively.
This article will explain ITIN for LLC owners regarding its necessity and how to get one.
What is an ITIN?
An ITIN or Individual Taxpayer Identification Number is a tax ID allocated by the USA’s Internal Revenue Service to individuals who do not possess a Social Security Number (SSN) but need to comply with U.S. tax legislation.
An ITIN is a tax identification number for individuals (ITIN) is a sub eleven digit number issued by the IRS targeting a specific group of people.
It permits you to use a purpose that does not allow employment in the US, Social Security benefits, or as a travel document; rather, it only allows absolute tax advantages along with some fiscal benefits while providing services in the United States.
Why An ITIN Is Important For Foreign LLC Owners
Having an LLC in the US as a non-resident comes with certain obligations, even if the entire business is run remotely. Here are some relevant pointers on the matter:
1. To Avoid Incuring Federal Taxes
If an LLC has income effectively related to a U.S.-initiated business (ECI), it is bound to file federal income tax returns. Based on how your LLC operates, the following may apply:
- Form 1040-NR if you’re the sole owner and the LLC is a disregarded entity
- Form 1065 if the LLC is treated as a partnership.
Without an ITIN, the IRS cannot link your identity with your tax filings, and therefore, you will not be able to adhere to US tax laws.
2. To File Form 5472 for Foreign-Owned Single-Member LLCs
The IRS has focused its attention on foreign-owned single-member LLCs in the past couple of years. If you are the sole foreign proprietor of a US LLC, you are required to:
- Complete Form 5472 (Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business)
- Submit it with a pro forma Form 1120
These documents reveal your ownership status and any dealings you have with the LLC in which you are a part. And without these documents, the foreign owners could face penalties of 25,000 dollars or more. Most of the foreign owners of the corporation have to obtain an ITIN to fill out these documents.
3. To Open a US Commercial Bank Account
A growing number of US banks, both online and traditional, as well as fintech banks, require the owners of LLCs to possess a US tax ID. In the absence of an SSN, an ITIN is the only option left.
Banks follow the anti-money laundering (AML) policies and also need to verify the identity of the account holders. Having an ITIN enables a person to:
- Obtain a business checking account.
- Obtain merchant services such as Stripe or PayPal.
- Get ACH or wire transfers from clients.
4. Collaborate with US Marketplaces and Payment Processors.
If you run an eCommerce business, freelance, make or sell affiliate links, or offer services online, you will probably make use of these:
- Amazon FBA or Seller Central.
- Upwork or Fiverr.
- With Stripe or PayPal.
These services require an anti-tax evasion document, which is the W-8BEN tax form or W-8ECI declaration, which is must for other sub-deducting resident taxes, as most other forms ask for a Taxpayer Identification Number, which is an ITIN for non-nationals.
Your life may be more difficult without an ITIN, as you may:
- Lacking the advantages of tax treaty allocations, opt out with the ITIN app
- Face Automatic Indexing Withholding
- Engage in Account Limitation or encounter a delay in disbursements
5. To Eliminate Backup Withholding
In the case you provide services to a U.S.-based entity without an ITIN on file, you might find out that your payment is being grossly reduced to a mere fraction. To be precise, you only receive 70% of your payment, as the other 30% is withheld by the IRS.
In addition, you may not legally lower your payment or receive nothing at all, which makes the repayment rate cap you face highly inconvenient.
Submission of relevant documents along with your ITIN enables you to:
- Claim benefits from tax treaties
- Prevent excess withholding
- Get complete remuneration for the provided services or products
Who Needs an ITIN?
An ITIN is a must for you if all the following statements apply:
- You are a foreign national and an out-of-stater
- You don’t meet the requirements of a Social Security Number(SSN)
- You or your business partner owns a Limited Liability Company in America, or
- You intend on filing your taxes with the Internal Revenue Service, or are named in some form of a tax document
Also, an ITIN may be essential for you if you are:
- A non-state national owning real estate in America
- Earning royalty or dividend payments from the United States
- Filing a request for benefits from treaties pertinent to taxation for tax deficit reduction
Shifting now to How to Apply for an ITIN
Obtaining an ITIN may seem challenging to a lot of people, but it is simply a matter of steps. Here is an elaborate approach to acquiring your ITIN:
Step 1: Submitting IRS Form W-7
Filling out form W-7 is applying for an ITIN with the IRS. In this case, say that you will apply for a treaty invitation to receive:
- b. Non-resident alien ITIN claim tax treaty benefits will be necessary
- c. Doesn’t happen very often for remote LLC owners, US tax resident alien (based on presence in the United States)
Make sure to fill in every field correctly, including your name, foreign address, nationality, and category of U.S. tax return.
Step 2: Attach a U.S. Federal Tax Return or Other Relevant Documents
If you are not exempt, you must include a tax return with your application, for example, Form 1040-NR, Form 5472, and Form 1120. If you’re not quite at the filing stage yet, some other conditions may apply, such as:
- Correspondence of an American withholding agent or bank
- Documents that pertain to holdings in a Form 5472-eligible foreign-owned LLC, which require submission of Form 5472.
Make sure to compile all of the pertinent documents before applying.
Step 3: Provide Evidence of Identity and Foreign Citizenship
To prove your identity, you need to submit original documents or certified copies. A passport is the most common document and fulfills both criteria.
Identification documents may be submitted in one of three ways:
- Mail the original passport (not the best option)
- Present a certified copy of the passport from the issuing authority
- Engage a CAA (Certified Acceptance Agent) who can confirm your identity without your sending any original documents.
Step 4: Submit Your ITIN Application
There are three primary ways in which you can apply for an ITIN number:
By mail to the following address:
IRS ITIN Operation
P.O. Box 149342
Austin, TX 78714-9342
USA
Schedule an appointment to submit your application directly to an IRS Taxpayer Assistance Center (TAC)
Using the services of a Certified Acceptance Agent (CAA), particularly if you are outside the US.
How Long Does It Take to Receive an ITIN?
ITIN applications typically undergo a routine 6 to 10 weeks of processing, depending on the year and the completeness of your application. Applications submitted during tax season (January-April) typically incur delays.
You can obtain information about the status of your application by calling the IRS at 1-800-829-1040 or +1-267-941-1000.
Can The ITIN Application Be Expedited?
While there are no official means of expediting ITINs through the IRS, particular Certified Acceptance Agents or perfectly prepared documents can accelerate the process. CCAs that guarantee prompt handling have been known to send applications through verified documentation channels directly to IRS agents.
Note: ITINs remain valid for three years of non-usage after which they expire. You will have to renew it using the same Form W-7.
Wrapping Up
Understanding your tax commitments is critical for a foreign entrepreneur conducting business in the U.S. An ITIN allows one to:
- Legally file tax returns
- Claim treaty benefits
- Reduce tax withholding
- Obtain business banking accounts and merchant services
Though the process does appear technical, there are services like EasyFiling that make the entire journey easy, right from forming an LLC, getting an ITIN, and ensuring compliance throughout the year.
Got questions regarding your ITIN application?
As a non-resident entrepreneur looking to grow in the U.S, EasyFiling is the right partner for you. Get in touch with us today for assistance with your ITIN, U.S. LLC formation, or bookkeeping services.
Swostika Silwal
