How Are E-2 Visa Holders Taxed in the U.S.?

The E-2 Treaty Investor visa allows foreign entrepreneurs to live in the United States and actively manage a U.S. business. While immigration requirements get most of the attention, U.S. tax compliance for E-2 visa holders is often misunderstood and costly mistakes are common.

Depending on tax residency status and business structure, E-2 visa holders may be subject to federal tax, state tax, self-employment tax, payroll taxes, and worldwide income reporting. Understanding how E-2 visa holders are taxed in the U.S. helps prevent penalties and supports successful visa renewals.

Are E-2 Visa Holders Considered U.S. Tax Residents?

Holding an E-2 visa does not automatically make you a U.S. tax resident. The IRS determines tax residency using specific rules, not immigration status.

Substantial Presence Test (SPT)

You are treated as a U.S. tax resident if you meet one of the following:

• Physically present in the U.S. for 183 days in the current year, or
• Meet the three-year weighted formula:
  • All days in the current year
  • 1/3 of days in the prior year
  • 1/6 of days two years prior

Most E-2 visa holders meet the Substantial Presence Test within their first one to two years in the United States.

Green Card Test

E-2 visa holders do not meet this test because the E-2 is a non-immigrant visa.

Key takeaway: Once the Substantial Presence Test is met, E-2 visa holders are taxed as U.S. residents for tax purposes, even without a green card.

How Is Income Taxed for E-2 Visa Holders?

If You Are a U.S. Tax Resident

U.S. tax resident E-2 visa holders must report worldwide income, including:

• U.S. business income
• Salary from the E-2 business
• Owner distributions
• Foreign rental income
• Foreign dividends, interest, and capital gains

If You Are a Non-Resident for Tax Purposes

• Only U.S.-source income is taxable
• Foreign income is not taxable in the U.S.
• File Form 1040-NR

How Is an E-2 Business Taxed?

The taxation of an E-2 business in the U.S. depends on the entity structure chosen.

Common E-2 Business Structures

Single-Member LLC (Disregarded Entity)

• Income flows directly to the owner
• Reported on Schedule C
• Subject to income tax and self-employment tax

Multi-Member LLC / Partnership

• Files Form 1065
• Issues Schedule K-1
• Income passes through to owners

S-Corporation

• Owners must take a reasonable salary
• Salary subject to payroll taxes
• Distributions may reduce self-employment tax

C-Corporation

• 21% federal corporate tax
• Dividends taxed at the shareholder level
• Common for reinvestment and growth strategies

Salary vs. Distributions for E-2 Visa Holders

E-2 visa holders actively working in their business must receive a reasonable salary. Payroll taxes apply, and underpaying salary can trigger IRS penalties. Proper structuring helps balance tax efficiency, IRS compliance, and E-2 visa renewal requirements.

Do E-2 Visa Holders Pay Social Security and Medicare?

In most cases, yes. E-2 visa holders working in the U.S. generally pay Social Security and Medicare taxes. Self-employed owners may pay up to 15.3% self-employment tax.

Some countries have Totalization Agreements with the U.S. that may reduce double contributions.

Foreign Asset and Bank Account Reporting

• FBAR (FinCEN Form 114) – Required if foreign accounts exceed $10,000
• Form 8938 (FATCA) – Certain foreign financial assets
• Forms 5471, 8865, or 3520 – Foreign companies, partnerships, or trusts

Failure to file these forms can result in significant IRS penalties, even when no tax is owed.

State Taxes for E-2 Visa Holders

State tax obligations depend on where you live and where the business operates. States such as Texas and Florida do not impose personal income tax, while others may impose income, franchise, or gross receipts taxes.

Tax Planning Tips for E-2 Visa Holders

• Choose the correct business entity
• Optimize salary and distributions
• Plan cross-border income carefully
• Coordinate U.S. and foreign tax filings

Why Work With a CPA Who Understands E-2 Visas?

E-2 visa taxation is complex and often misunderstood by general tax preparers. A CPA experienced with E-2 visa holders helps ensure compliance, supports visa renewals, and provides audit-ready financial statements.

Conclusion

E-2 visa holders are taxed based on tax residency status, business structure, and worldwide income. With proactive tax planning, E-2 entrepreneurs can remain compliant, reduce taxes legally,
and build a sustainable U.S. business.

Frequently Asked Questions (FAQs)