My CPA said IRC 871 governs how I'm taxed as a nonresident alien — what does this section actually cover?

Section 871 is the foundational provision governing how the U.S. taxes nonresident alien individuals. It establishes two completely separate tax regimes based on the type of income:

1. IRC 871(a): Fixed, Determinable, Annual, or Periodical (FDAP) income — taxed at a flat 30% rate (or lower treaty rate) with no deductions allowed. 2. IRC 871(b): Effectively Connected Income (ECI) — taxed at graduated rates (the same rates that apply to U.S. citizens) with deductions allowed.

These two categories are mutually exclusive for any given item of income. Understanding which category your income falls into is essential to determining your tax liability.

FDAP income includes: interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, and emoluments — essentially passive or investment-type income from U.S. sources. The 30% tax is imposed on the gross amount with no deductions.

Critically, FDAP tax is collected through withholding at the source under IRC 1441. The person paying you is required to withhold 30% before sending you the payment. If your country has a tax treaty with the U.S. (Japan does — the U.S.-Japan Tax Treaty), the rate may be reduced or eliminated for specific income types.

For your marketing agency, if all your income is from providing services to U.S. clients from Japan, this income may not be FDAP at all — it may be either ECI (if you have a U.S. trade or business) or not U.S.-source income at all (if services are performed entirely outside the U.S.).

If you are engaged in a U.S. trade or business (as defined under IRC 864(b)), any income 'effectively connected' with that business is taxed under IRC 871(b) at the same graduated rates that apply to U.S. citizens and residents. You would file Form 1040-NR to report this income and can claim business deductions.

The key advantage of ECI treatment is that deductions are allowed — you can subtract business expenses, which often results in a lower effective tax rate than the flat 30% on gross FDAP income.

Whether you are engaged in a U.S. trade or business depends on the specific facts of your situation, analyzed under IRC 864(b) and (c).

For a foreign individual performing all services from outside the U.S., the income may not be U.S.-source at all. Under IRC 861 and 862, compensation for personal services is generally sourced where the services are performed. If you perform all marketing work from Tokyo, the income is Japanese-source, and IRC 871 does not apply — even if your clients and LLC are in the U.S.

However, if your LLC is treated as being engaged in a U.S. trade or business (for example, through a dependent agent in the U.S.), the analysis changes. The disregarded entity status of your LLC means the IRS looks through the LLC to you personally.

The U.S.-Japan Tax Treaty can override IRC 871's default rates. Common modifications include:

- Business profits (Article 7): Not taxable in the U.S. unless attributable to a 'permanent establishment' in the U.S. This is a higher threshold than 'trade or business' under domestic law. - Dividends (Article 10): Reduced withholding rates. - Interest (Article 11): May be exempt or subject to reduced rates. - Royalties (Article 12): May be exempt or reduced.

Treaty benefits must be claimed — they do not apply automatically. You or the withholding agent must take affirmative steps (such as providing Form W-8BEN) to claim reduced rates.