Physical Business & Import Tax

U.S. Employees and Payroll Tax for Foreign-Owned LLCs (2025-2026)

10 min readArticle
Filing path

How to approach this

A source-based path from understanding the rule to filing and recordkeeping.

  1. Determine the requirement

    Confirm whether and how the rule applies to you.

  2. Identify the forms

    Map the requirement to the specific IRS forms involved.

  3. Prepare and file

    Complete the forms accurately and submit on time.

  4. Retain records

    Keep documentation supporting every figure you report.

Key formsIRS guidance

Key Takeaways

  • U.S. employees create both payroll tax and income tax consequences.
  • Services performed in the U.S. are highly relevant to ECI analysis.
  • FUTA can apply to wages for services performed within the U.S. unless an exemption exists.
  • Payroll setup should be treated as a tax-structure event.

Hiring U.S. workers is not just another vendor expense

The IRS pages on foreign employers make this point clearly. Wages paid for services performed within the United States by a foreign employer can be subject to employment tax rules, including FUTA unless an exemption applies. IRS guidance also says that wages paid by a foreign person to an individual who is neither a U.S. citizen nor U.S. resident for services performed in the U.S. are effectively connected with a U.S. trade or business.

That means payroll changes both the employment tax and income tax picture.

Where founders often get caught off guard

Many foreign founders think a U.S. employee can be treated the same way as a contractor until revenue grows. That is dangerous. Once there are employees working in the United States, the business should assume higher scrutiny on payroll compliance, withholding, FUTA, and whether the business is engaged in a U.S. trade or business.

This is one of the strongest signs that a founder should stop relying on generic LLC setup content.

What to keep organized before the first payroll run

Keep offer letters, work locations, payroll registrations, state location records, and a written map of who works where. If some staff work outside the U.S. and some inside, document that carefully because the IRS treats wages performed outside and inside the U.S. differently.

Payroll is not just admin. It is structural tax evidence.

Frequently Asked Questions

Are wages for work performed in the U.S. subject to FUTA if the employer is foreign?

Yes, generally. The IRS says wages paid for services performed within the United States for a foreign employer are subject to FUTA unless an exemption applies.

What if my employee works entirely outside the U.S.?

The IRS says wages paid for services performed outside the United States for a foreign employer are not subject to FUTA taxes.

Can U.S. employees make the business look like a U.S. trade or business?

Yes. Employees performing services in the United States are one of the clearest facts that can affect U.S. trade or business and ECI analysis.

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