How are “virtual” international internet-based service businesses taxed?

 

If you own a single owner LLC then unless you file an election to be taxed as a corporation, the tax authorities look through the LLC to you.  The LLC is what is known as a disregarded entity for tax purposes.  What that means is your income primarily is taxable based not on the LLC’s physical presence, but based on your own individual physical presence.

As a general rule for personal services, which would include building custom websites or software, you pay tax where you are physically located while doing the work.  This can be complicated for a digital nomad, because different countries and different states within the US have different rules about how long you can be in one place before you are considered a tax resident.  The time might vary from 1 day to 1 year.

Assuming you are a US citizen traveling outside the US, then you also have to consider immigration and visa laws as well as potential tax treaties. As a US citizen, all of your income is reportable in the US, but may not all be taxable.  There are provisions such as the foreign earned income exclusion, foreign tax credit and tax treaty provisions, that may work to reduce your US tax liability.   The downside is you may have obligations to report and pay tax in some of the foreign countries where you worked during the year.

Also as a US citizen, if you are traveling on any type of work visa, then in most countries you will be considered a tax resident of that country the first day you arrive.  If you are traveling on a tourist visa, then technically you are not allowed to work while you are in the country, which could open a complete other set of problems for you.

Within the US, some states assess taxes based on what is known as economic nexus. You mention California which is one state with such tax laws.  Basically what economic nexus means is if enough of your business comes from California customers, then California requires you to report and pay taxes in California. The LLC being formed in Wyoming means, you are always subject to Wyoming taxes.  Given that there is no state income tax in Wyoming, all that really means is franchise tax for the LLC.

Unfortunately there are way too many variables for a one size fits all answer, so you probably need to have a discussion with a tax professional to consider your specific facts.

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