US Taxes 2026: Federal Taxes, State Taxes and Obligations for International Entrepreneurs

The three-tier US tax system

The US levies taxes at three levels: federal, state and local. Each level has its own laws, authorities and rates. This federal system differs fundamentally from the centralised models of most European countries.

Federal taxes

Federal taxes are collected by the Internal Revenue Service (IRS). Individual income tax is progressive and ranges from 10% to 37% in 2026. The top rate applies to single filers from USD 640,600 of taxable income. The standard deduction is USD 16,100, or USD 32,200 for married couples. Corporate tax has been a flat 21% since the Tax Cuts and Jobs Act of 2017. The One Big Beautiful Bill Act (OBBBA) of July 2025 extended these rates permanently.

• ✛Income tax: progressive, 10 to 37%
• ✛Corporate income tax: 21% for C corporations
• ✛Capital gains tax: 0%, 15% or 20% on long-term gains, plus 3.8% net investment income tax for high earners
• ✛Estate and gift tax: 40% above an exemption of USD 15m per person from 2026. Non-resident foreigners only get a USD 60,000 exemption on US assets.
• ✛Payroll taxes: Social Security 6.2% and Medicare 1.45% each for employee and employer; the self-employed pay 15.3% in total

The IRS publication for US citizens living abroad explains international tax obligations and the treatment of foreign income in detail.

State taxes

Each of the 50 states has its own taxing power. Nine states levy no income tax on wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Washington does, however, tax capital gains. California has the highest top rate at 13.3%.

Sales tax excluding local surcharges. The Tax Foundation analyses state tax rates and their development every year – a key basis for choosing a location.

Local taxes

Cities and counties levy property tax, local sales tax and in some cases their own income tax. New York City, for example, charges up to 3.876% income tax on top. With local surcharges, sales tax exceeds 10% in some cities.

Tax liability and residency: who pays US taxes?

Whether and to what extent someone is taxable in the US depends on residency status. US tax law distinguishes three groups with different obligations.

US citizens and green card holders

US citizens and green card holders are taxed on their worldwide income (citizenship-based taxation). Regardless of where they live, they must report all their income in the US. This makes the US practically the only country that taxes based on citizenship rather than residence.

The main protections against double taxation are:

1. 1Foreign Earned Income Exclusion (FEIE): exclude foreign earned income up to USD 132,900 (2026) using Form 2555
2. 2Foreign Tax Credit: credit for foreign taxes using Form 1116
3. 3Foreign Housing Exclusion: additional allowance for high housing costs abroad
4. 4Tax treaties: with around 60 countries. Because of the saving clause, however, they protect US citizens only to a limited extent.

The FEIE only applies to earned income, not to dividends or capital gains. It does not exempt self-employment tax.

Resident aliens and the substantial presence test

Foreigners without a green card are treated as resident aliens if they meet the substantial presence test. The official regulation defines it as at least 31 days in the current year and a total of at least 183 days over three years, weighted as follows:

• ✛all days in the current year (in full)
• ✛one third of the days in the previous year
• ✛one sixth of the days in the year before that

Example: someone spends 120 days in the US in each of 2026, 2025 and 2024. Calculation: 120 + 40 + 20 = 180 days. The test is not met. Just five more days in the current year would trigger resident status (125 + 40 + 20 = 185).

Nonresident aliens

Anyone who does not meet the test is a nonresident alien and pays tax only on US income. Income from a US business (effectively connected income) is taxed at regular rates. Passive income such as dividends is subject to 30% withholding tax, reduced by treaty – to 15% for Swiss residents. Capital gains on US shares are generally tax-free for nonresidents. IRS Publication 519 explains the tax treatment of foreigners in detail.

Corporate taxation: LLC, C corp and S corp

The legal form determines how and where profits are taxed. For US taxes in a business context, the most important decision is therefore made at formation.

Limited liability company (LLC)

By default the LLC is taxed as a pass-through. Profits are taxed not at company level but at member level. There is no double taxation.

• ✛Single-member LLC with a US owner: taxed like a sole proprietorship (Schedule C)
• ✛Single-member LLC with a foreign owner: disregarded entity, annual Form 5472 with a pro forma Form 1120
• ✛Multi-member LLC: taxed as a partnership (Form 1065, K-1s to members)
• ✛Election: taxation as a C corp or S corp via Form 8832 or 2553

If an LLC with foreign members earns no effectively connected US income – no office, staff or warehouse in the US – no federal tax is due. Taxation then takes place in the member's country of residence. Tax-free does not mean reporting-free, though: the Form 5472 obligations are explained in our article on Form 5472 and the Farhy ruling. How Germany treats such an LLC is covered in our article on permanent representatives and CFC taxation.

C corporation

The C corporation is a separate taxpayer and pays 21% corporate tax plus any state tax. Distributions are taxed again at shareholder level: at 0%, 15% or 20% for US persons and at 30% withholding tax for foreigners, reduced by treaty.

Advantages despite double taxation:

• ✛unlimited number and type of shareholders
• ✛multiple share classes possible
• ✛standard for venture capital and IPOs
• ✛profit retention at 21%
• ✛for US taxpayers: gains on qualified small business stock tax-free up to USD 15m since the OBBBA

S corporation

The S corp combines the limited liability of a corporation with pass-through taxation. Strict limits apply: no more than 100 shareholders, only US citizens or residents and only one class of stock. Nonresident aliens may not hold shares. For international entrepreneurs the S corp is therefore usually not an option.

A detailed comparison of legal forms after the reform is in our article on US corporations, LLCs and LPs in 2026.

International reporting: FATCA, FBAR and more

US taxes come with extensive reporting obligations for cross-border situations. Under the Foreign Account Tax Compliance Act (FATCA), the US requires foreign banks to report accounts held by US persons to the IRS. This is why opening an account abroad is often difficult for US citizens.

FBAR (FinCEN Form 114)

Every US person with signature authority over or a financial interest in foreign financial accounts whose aggregate value exceeds USD 10,000 at any time during the year must file the Report of Foreign Bank and Financial Accounts. US companies, including foreign-owned LLCs, also count as US persons. The deadline is 15 April, automatically extended to 15 October.

Reportable accounts include:

• ✛bank accounts
• ✛securities accounts
• ✛insurance policies with a cash value
• ✛accounts with foreign payment and financial institutions

Wilful failure to file can cost up to 50% of the account balance per violation. Since the Supreme Court's Bittner ruling (2023), non-wilful penalties are calculated per report and year, not per account.

FATCA Form 8938

Above certain thresholds, taxpayers must also report their foreign financial assets on Form 8938. The thresholds range from USD 50,000 (single filers living in the US, at year end) to USD 600,000 (joint filers living abroad, at any time during the year).

Double tax treaties

The US has double tax treaties with around 60 countries. The U.S. Treasury Department publishes all treaties in force. They determine which country may tax and how double taxation is avoided.

The Switzerland–US treaty dates from 1996; the 2009 protocol has been in force since September 2019. Withholding tax on dividends is 15%, 5% for corporate shareholders holding at least 10%, and 0% for pension funds. Interest and royalties are generally exempt from withholding tax.

Tax optimisation and legal structuring

The complexity of US taxes creates legal room for planning. The prerequisites are real substance, proper documentation and OECD compliance.

Choosing a state

The state of formation affects fees, obligations and privacy. Delaware offers mature corporate law and specialised courts but charges an annual franchise tax (LLC: USD 300). For foreign-owned LLCs without US business, the state of formation makes no difference to federal tax.

1. 1State income tax: 0% to 13.3%
2. 2Privacy: Wyoming and New Mexico do not publish members in the register
3. 3Running costs: annual fees from USD 0 (New Mexico) to USD 800 (California)
4. 4Nexus: physical or economic presence creates tax liability in the state concerned

For purely digital business models without physical presence in the US, company formation in the USA in a state without income tax can offer significant advantages, especially if no US income is earned. More in our articles on the Florida LLC and the Catawba Digital Economic Zone. How banks and payment providers verify a US LLC's address is explained in our article on the trading address for a US LLC.

Using treaties and holding structures

Double tax treaties may be used to reduce withholding taxes – provided there is real substance. US treaties almost always contain a limitation-on-benefits (LOB) clause that excludes pure conduit companies from treaty benefits. Classic treaty shopping therefore hardly works against the US.

The check-the-box election (Form 8832) allows many foreign entities to choose their classification for US purposes, for example as a transparent entity. This is mainly relevant for US taxpayers with foreign companies.

Timing and fiscal year

For individuals, the US tax year is the calendar year. Companies can choose a different fiscal year, which opens additional planning options. Typical timing strategies:

• ✛shift income into lower-tax years
• ✛bring deductions forward
• ✛use installment sales for disposals
• ✛realise capital losses deliberately (tax loss harvesting)

Compliance: forms, deadlines and penalties

The rules are extensive and change constantly. The Brookings Institution regularly analyses the state of the IRS and its consequences for taxpayers.

Key tax forms

• ✛Form 1040: individual income tax return for residents
• ✛Form 1040-NR: income tax return for nonresident aliens
• ✛Form 1120: C corporation income tax return
• ✛Form 1065: partnership return (multi-member LLC)
• ✛Schedule C: profit or loss from business
• ✛Form 5472: information return for US companies with at least 25% foreign ownership, including single-member LLCs

Deadlines 2026

An extension (Form 4868 or 7004) only postpones filing, not payment. Tax owed is still due on the original date.

Penalties

1. 1Failure to file: 5% per month, up to 25% of the tax owed
2. 2Failure to pay: 0.5% per month, up to 25%
3. 3Accuracy-related penalty: 20% for negligence
4. 4Form 5472: USD 25,000 per form and year
5. 5FBAR: up to 50% of the account balance if wilful

Estimated taxes must be paid quarterly – on 15 April, 15 June, 15 September and 15 January – or underpayment penalties apply.

Record keeping

Tax records must be kept for at least three years, or six years if income was understated by more than 25%. For international structures, formation and ownership documents should be kept permanently.

Beneficial ownership (BOI)

Since March 2025, companies formed in the US are exempt from BOI reporting under the Corporate Transparency Act. Only foreign companies registered to do business in a US state remain subject to it. Regardless of this, every US company needs a registered agent in its state of formation. SWICOR handles ongoing accounting and tax for US companies.

State tax nexus: when does state tax liability arise?

Nexus determines in which states a company becomes taxable. For sales tax, since the Supreme Court's South Dakota v. Wayfair ruling (2018), economic nexus without physical presence is enough.

Physical nexus

• ✛offices, warehouses or other premises
• ✛employees or agents on site
• ✛property in the state, such as inventory held by Amazon FBA
• ✛regular business activity on site

Economic nexus

In most states it arises from USD 100,000 of annual sales into the state. Many states have dropped the former alternative of 200 transactions. California, Texas and New York set the threshold at USD 500,000, New York additionally at 100 transactions.

For state income tax, the federal law P.L. 86-272 protects sellers of physical goods whose activity in the state is limited to soliciting orders. This protection does not apply to services or digital products.

Apportionment and unitary business

States with corporate tax divide profits using apportionment formulas. These used to be based on property, payroll and sales. Today most states use sales only (single sales factor). In a unitary business, affiliated companies are treated as one unit, which can require combined reporting.

Digital nomads and remote entrepreneurs

For location-independent workers, US taxes depend mainly on residency status and place of work.

Planning stays and tax home

The tax home is the regular place of business or work, not necessarily the residence. It determines whether travel expenses are deductible and must be abroad for the FEIE.

• ✛monitor the substantial presence test continuously
• ✛document entries and exits precisely
• ✛use the closer connection exception (Form 8840) if fewer than 183 days fall in the current year
• ✛apply the treaty tie-breaker rule in case of dual residence (Form 8833)

State tax liability for remote work

Some states tax remote employees of an employer based there, even if they work elsewhere (convenience of the employer rule). This mainly concerns New York, Delaware, Nebraska and Pennsylvania; Connecticut and New Jersey apply the rule to states that use it themselves. California does not have this rule but taxes income from California sources.

• ✛choose the place of work and the employer's location deliberately
• ✛work as an independent contractor only if the criteria are genuinely met – misclassification is risky
• ✛document a change of residence properly (lease, driving licence, voter registration)
• ✛establish residency in a state without income tax

Anyone planning to move their life abroad entirely will find options under residency abroad.

Sales tax and digital services

The US has no federal VAT. Sales and use tax is levied by 45 states and Washington D.C. Alaska, Delaware, Montana, New Hampshire and Oregon have no state sales tax; in Alaska, however, some municipalities levy their own.

Digital products and software

The treatment of digital services varies widely from state to state:

Simplified overview, as of 2026. Many states have special rules, partial exemptions or local surcharges.

Marketplace facilitator laws

Since the Wayfair ruling, every state with a sales tax has introduced rules under which marketplaces such as Amazon, eBay, Etsy or Walmart collect and remit sales tax for third-party sellers. This greatly relieves small merchants. For sales through their own online shop, for example on Shopify, merchants remain responsible themselves.

Conclusion

US taxes require sound expertise and forward-looking planning, especially for international structures. Federal, state and local taxes and extensive reporting obligations interlock. Setting up the legal form, state of formation, days of presence and reporting correctly from the start avoids costly mistakes and makes use of the legal room for planning.

If you are planning a US presence or international tax optimisation, SWICOR . SWISS CORPORATE SOLUTIONS supports you with OECD-compliant solutions for company formation, a bank account in the USA and cross-border tax structures – at transparent fixed prices.

Frequently asked questions