Many founders outside the US worry that billing American clients creates a US tax problem. The truth is more specific than that, and it depends on where the work happens and what kind of presence you have in the US, not on where your clients live.
The phrase the IRS actually cares about
"Engaged in a US trade or business," often shortened to ETOB, is a test the IRS uses to decide if a foreign person or foreign-owned entity has enough activity inside the United States to owe US tax on business profits. It is not about your customers' location. It is about your own activity, your people, and your assets.
If you are a foreign founder running a service business from abroad, having US clients on your invoice list does not by itself trigger ETOB. What matters is whether you or your staff perform the work while physically in the US, whether you keep a dependent agent there, or whether you maintain a fixed place of business inside the country.
What usually does not count
These situations are common for online founders and usually fall outside ETOB, though every case has its own facts:
- You deliver consulting, design, development, or marketing services entirely from outside the US, even though the client who pays you is American.
- You sell software, digital products, or subscriptions online and all your development and support work happens outside the US.
- You use US-based tools for invoicing or payment processing, like Stripe, without having staff or an office in the US.
- You have a US LLC that holds a US bank account and a virtual mailing address, but no employees, contractors, or inventory physically located in the US.
In these cases, the income is often treated as foreign-source business profit, and the foreign owner may have no US income tax return obligation on the business profit itself, separate from the LLC's own information filing duties.
What usually does count
Certain facts tend to push a business into ETOB territory. Check the details of your own setup against these, since the line can be fact specific:
- You or an employee works from inside the United States on a regular basis, even part-time.
- You have a dependent agent in the US, meaning someone who regularly negotiates or closes contracts on your behalf inside the country.
- You lease a physical office, warehouse, or storefront in the US.
- You hold inventory in the US and fulfil orders from there, which is where things get less clear-cut.
The Amazon FBA grey area
Fulfilment by Amazon is one of the most debated ETOB questions, and there is no single settled answer for every seller. Amazon controls the warehouse and the shipping process, and the seller does not choose which warehouse holds the stock or operate the facility. Some practitioners argue this distance from the physical fulfilment process means FBA sellers are not engaged in a US trade or business. Others take the position that having inventory physically present and orders fulfilled from US soil is enough on its own to create ETOB, regardless of who runs the warehouse.
Because the IRS has not issued a bright-line rule that covers every FBA scenario, and because outcomes can depend on details like sales volume, product type, and whether you use any other US-based services, this is exactly the kind of question a licensed tax professional needs to review against your specific setup. Do not assume either answer without that review.
Why the answer changes your filings
Whether you are treated as engaged in a US trade or business decides which return you file and how your income is taxed.
| Situation | Typical filing | What it covers |
|---|---|---|
| Foreign individual, not engaged in US trade or business | Form 1040-NR, often not required if no US-source income | Reports only US-source income subject to tax, if any |
| Foreign individual, engaged in US trade or business | Form 1040-NR | Reports income effectively connected with the US trade or business |
| Foreign corporation, not engaged in US trade or business | No 1120-F required for that income | No US net income tax owed on that business profit |
| Foreign corporation, engaged in US trade or business | Form 1120-F | Reports effectively connected income at corporate tax rates |
Separately, if you run your business through a foreign-owned single-member US LLC, you still have an information filing duty regardless of the ETOB answer. That means Form 5472 attached to a pro forma Form 1120, due by 15 April each year. This filing exists to report transactions between the LLC and its foreign owner, and it applies even when the LLC itself owes no US income tax. Under the current 2026 interim FinCEN rule, US-formed companies are exempt from BOI reporting, but check FinCEN's site since this kind of rule can change.
Why a tax adviser needs to look at your case
ETOB is a facts-and-circumstances test, not a checklist you can fully complete on your own. Two founders with similar-looking businesses can land on opposite sides of the line because of small differences, like whether a contractor works from a US address or whether inventory sits in a US warehouse for part of the year. Getting this wrong in either direction causes real problems, either an unfiled US return that should have been filed, or unnecessary tax paid on income that was never taxable in the US.
A licensed tax professional can review your actual setup, ask about where the work happens and who touches US soil, and tell you which forms apply to your specific business. This is not a step to guess through.
What to do next
If you want your US LLC or C-Corporation set up correctly from the start, with the right registered agent, EIN, and finance stack in place, you can start at powerlaunch.solutions/signup. If you are unsure whether your business counts as engaged in a US trade or business, book a free 20-minute consultation at powerlaunch.solutions/book and talk it through with a tax professional before you file anything.
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