Understanding US business taxes is essential for any foreign founder, because the American system operates on several layers at once. Unlike countries with a single national tax authority, the United States imposes taxes at the federal level, the state level, and sometimes the local level. For Korean entrepreneurs entering the market, this multi-layered structure can feel confusing at first. This guide breaks down the main types of US business taxes, so you know what to expect and can plan accordingly.
Federal Taxes
Federal taxes are collected by the IRS and apply nationwide. How your business pays federal income tax depends primarily on its entity type.
- C corporations pay corporate income tax on their profits at the corporate level. When profits are distributed to shareholders as dividends, those dividends may be taxed again on the individual’s return, a situation often called double taxation.
- LLCs are flexible. By default, a single-member LLC is treated as a disregarded entity and a multi-member LLC as a partnership, with profits passing through to the owners’ returns. An LLC can also elect to be taxed as a corporation.
- Partnerships and S corporations are generally pass-through entities, meaning the business itself does not pay federal income tax; profits and losses flow to the owners.
Foreign-owned businesses have additional federal considerations. A foreign-owned single-member LLC, for example, must file specific informational returns with the IRS even when no tax is owed. Depending on your activities and any tax treaty between the US and Korea, withholding taxes may also apply to certain US-source income. Because these rules are complex, foreign founders should work with a tax professional experienced in international matters.
State Taxes
Each of the fifty states sets its own tax rules, and they vary widely. Some states impose corporate income tax, some impose a franchise tax, and a few impose neither. This is why the state where you form and operate your company matters so much.
Common state-level taxes include:
- State income tax. Many states tax business income, with rates and rules that differ by state.
- Franchise tax. Some states charge this simply for the privilege of existing or doing business there, regardless of profit. It may be a flat fee or based on revenue, capital, or shares.
- Gross receipts tax. A handful of states tax total revenue rather than net income.
A common misconception is that forming in a state with no income tax means you owe no state tax anywhere. In reality, if you actually conduct business in another state, you may need to register there and pay its taxes too. The location of your real operations often determines your obligations, not just the state of formation.
Sales Tax
Sales tax is one of the most misunderstood areas for foreign founders, especially those selling physical products online. There is no federal sales tax in the United States. Instead, sales tax is administered at the state and sometimes local level, which means rates and rules differ across thousands of jurisdictions.
The key concept is nexus. Nexus is the connection between your business and a state that creates an obligation to collect and remit sales tax there. Nexus can be created by:
- Physical presence, such as an office, employees, or inventory stored in the state, including inventory in a fulfillment warehouse.
- Economic activity, where exceeding a certain sales threshold in a state creates nexus even without physical presence.
For sellers using fulfillment services that store inventory in multiple states, nexus can arise in many places at once. Once you have nexus in a state, you generally must register for a sales tax permit, collect the correct amount from customers, and remit it on a set schedule. Marketplaces like Amazon may collect and remit sales tax on your behalf in many states under marketplace facilitator rules, but you should still understand your own obligations.
Employment and Other Taxes
If your company hires employees in the US, additional taxes apply. Employers are generally responsible for payroll taxes, including Social Security and Medicare contributions, federal unemployment tax, and often state unemployment tax. You must also withhold income tax from employee wages and remit it. These obligations begin as soon as you have US employees, so factor them into your hiring plans.
Independent contractors are treated differently from employees, and misclassifying workers can lead to penalties. Understanding the distinction is important before you build a US team.
How to Stay on Top of US Business Taxes
With multiple layers and varying deadlines, staying organized is critical. A few practical habits make a big difference:
- Keep clean records. Accurate bookkeeping makes every filing easier.
- Track deadlines. Federal, state, and sales tax filings have different due dates.
- Monitor your nexus. As sales grow, you may trigger obligations in new states.
- Budget for taxes. Set aside funds so payments do not disrupt cash flow.
- Work with professionals. A qualified accountant familiar with foreign-owned businesses can prevent costly mistakes.
Understanding the structure of US business taxes early lets you plan your pricing, choose the right entity, and avoid surprises that could stall your US expansion.
This article provides general information and is not legal or tax advice. Tax laws and thresholds change frequently and vary by jurisdiction, so consult a qualified professional for guidance specific to your business.
Frequently Asked Questions
Is there a national sales tax in the United States?
No. The United States has no federal sales tax. Sales tax is administered by individual states and sometimes local governments, so rates and rules vary widely across thousands of jurisdictions.
If I form my company in a state with no income tax, do I avoid all state taxes?
Not necessarily. If you actually conduct business in another state, you may need to register there and pay its taxes. Where you operate, not just where you form, often determines your obligations, and some no-income-tax states still charge franchise or other fees.
What is sales tax nexus?
Nexus is the connection between your business and a state that requires you to collect and remit sales tax. It can be created by physical presence, such as inventory in a warehouse, or by economic activity that exceeds a state’s sales threshold.
US taxes can feel overwhelming, but with the right structure and guidance they become manageable. If you would like help understanding your US business taxes and setting up your company correctly, we invite you to a free consultation with USdongsan, where we help Korean founders navigate the US tax landscape with confidence.
