U.S. Trade or Business

"Engaged in a trade or business within the United States" is a phrase from the U.S. tax code. It is not a description of how busy you are. It is a switch. For a person the IRS does not count as American, that switch decides whether the United States gets to tax the profit of the business at all.

The IRS explains the order of operations on its own page about effectively connected income. First you ask whether the foreign person is engaged in a trade or business within the United States. Only if the answer is yes does U.S. income connected with that business become effectively connected income. If the answer is no, that second step never happens.

So this is the first question a non-resident founder has to answer, and it is the one with the least comfortable answer. The tax code does not give a complete definition. Section 864(b) tells you one thing the phrase includes, and then lists the situations it leaves out. Everything else is left to the facts.

What the law actually says

The section to read is 26 U.S.C. § 864(b). It works by inclusion and exception, not by definition.

The inclusion is this. The term "trade or business within the United States" includes the performance of personal services within the United States during the tax year. If you fly to the United States and do work there, you are inside the phrase, unless one of the exceptions catches you.

Then come the exceptions. There are two that matter, and both are narrow.

Exception 1: a small amount of personal services

Personal services performed in the United States are not a U.S. trade or business if all of the following are true at the same time:

• the person doing the work is a non-resident alien individual temporarily present in the United States, and
• the services are performed either for a non-resident alien individual, a foreign partnership or a foreign corporation that is not itself engaged in a trade or business within the United States, or for an office or place of business maintained in a foreign country (or a U.S. possession) by a U.S. citizen or resident, a domestic partnership or a domestic corporation, and
• the person is in the United States for 90 days or fewer in total during the tax year, and
• the pay for that work is $3,000 or less in the aggregate.

Every condition is joined by "and". If you break one, the exception is gone and the work falls back into the general rule.

Work through it with numbers. You come to the United States for 60 days, and a foreign company that is not engaged in a U.S. trade or business pays you $2,800 for that work. Every condition holds, so the exception applies. Now change one number. The same 60 days, but the pay is $3,200. The exception no longer applies, because $3,200 is more than $3,000. Change a different number instead. Pay stays at $2,800, but you stay 95 days. The exception no longer applies, because 95 is more than 90. There is no partial credit here, and there is no rounding.

Notice who this exception is written for. It is for a non-resident alien whose pay for U.S. work comes from one of two places: a foreign employer that has no U.S. trade or business of its own, or the foreign office of a U.S. employer. It is not a general allowance of $3,000 of U.S. income for everyone. If the foreign employer is itself engaged in a U.S. trade or business, the exception is not available, whatever the days and the dollars say.

Exception 2: trading securities and commodities

Section 864(b) also carves out trading. It does so on two separate tracks, and the tracks do not carry the same conditions. Most summaries merge them and get the conditions wrong.

Track one: trading through an agent. Trading in stocks, securities or commodities through a resident broker, commission agent, custodian or other independent agent is not a U.S. trade or business. The condition on this track is the office condition. Under § 864(b)(2)(C) it applies only if, at no time during the tax year, you have a U.S. office or other fixed place of business through which, or by the direction of which, the transactions are effected. Open such an office and run the trading through it, and this track closes.

Track two: trading for your own account. Trading in stocks, securities or commodities for your own account is also not a U.S. trade or business. The condition on this track is different: the statute says the clause does not apply to a dealer in stocks or securities, or to a dealer in commodities. The office limitation in § 864(b)(2)(C) names only the agent track, so the own-account track is not switched off merely because you have a U.S. office.

For commodities there is one further condition on both tracks. The commodities must be of a kind customarily dealt in on an organized commodity exchange, and the transaction must be of a kind customarily consummated there.

What the law does not give you

Here is the part most articles skip, so read it slowly.

The only clear numerical lines in § 864(b) are the ones above. The 90 days and the $3,000 belong to the personal services exception. The office condition belongs to the agent track of the trading safe harbour.

For an ordinary business, such as selling software or services online to U.S. customers from another country, the statute gives no dollar threshold, no day threshold and no safe harbour at all. Whether that activity amounts to a U.S. trade or business depends on the facts: how continuous the activity is, how substantial it is, and where it is actually carried on.

We are not going to invent a rule that does not exist. If someone tells you that a fixed amount of U.S. revenue is automatically safe, ask them which section they are reading.

🇺🇸 If the IRS counts you as a U.S. person

This phrase is not a gate for you, and it will never decide whether your business profit is taxable. It already is. A U.S. person is taxed on income earned anywhere in the world, so there is nothing for a threshold to switch on.

That does not make the term useless in your lane. It becomes relevant in three situations.

You pay or work with people who are not U.S. persons. Whether a foreign contractor, partner or investor is engaged in a U.S. trade or business changes how the United States taxes them, and therefore what they will ask you for. If you tell a foreign contractor "do not worry, it is under $3,000," you have just given advice about a rule you did not read. The $3,000 is one condition out of several, and one of the others is about who is paying. If you are a U.S. company paying for work done in the United States, the exception is not built for that payment at all.

You have foreign partners in a U.S. entity. Their side of the entity is where this question lives, not yours.

You may not stay a U.S. person forever. The moment the IRS stops counting you as one, this becomes the first question you have to answer every year.

🌏 If it does not

This is your gate, and the order matters.

Step one. Ask whether your activity is a U.S. trade or business. Start with § 864(b). If you performed personal services in the United States, you are inside the general rule unless the 90-day and $3,000 exception catches you, and it only catches you if the pay came from a foreign employer with no U.S. trade or business of its own, or from the foreign office of a U.S. employer. If you are trading securities or commodities, work out which track you are on. If the trading runs through an independent agent, the U.S.-office condition applies to you. If you are trading for your own account, the office condition does not, but the dealer exclusion does.

If your business is neither of those, you are in the area with no bright line. Nobody can hand you a number. The answer turns on how continuous and how substantial your U.S. activity is.

Step two. Only if the answer to step one is yes does the next question arrive. U.S. income connected with that business is then effectively connected income, and it is taxed under the ECI rules. We cover that on its own page.

One more thing, so you do not draw the wrong conclusion. Being outside a U.S. trade or business does not mean the United States has no claim on you at all. Effectively connected income is only one of the categories of income the U.S. taxes. Another category, FDAP, works differently and has its own page. This page only tells you whether the first gate is open.

Where the two lanes split

Common mistakes

🇺🇸 If the IRS counts you as a U.S. person

• Trying to use the 90-day and $3,000 exception on your own income. It is written for a non-resident alien whose pay comes from a foreign employer with no U.S. trade or business, or from the foreign office of a U.S. employer. It is not a general allowance.
• Telling a foreign contractor that a small payment is automatically outside U.S. tax. The dollar limit is one condition among several, not the whole test, and if you are the U.S. payer the exception is unlikely to apply at all.
• Assuming your foreign business partner is in the same tax position as you because you share the same company. They are not. Their side of the question runs through § 864(b).

🌏 If it does not

• Reading the $3,000 as a general safe amount of U.S. income. It belongs to one narrow exception about personal services, and it dies if the stay goes past 90 days, or if the pay comes from a source the exception does not name.
• Assuming the foreign employer condition is satisfied just because the employer is foreign. If that foreign employer is itself engaged in a U.S. trade or business, the exception does not apply.
• Assuming that having no U.S. office means you are not engaged in a U.S. trade or business. The office condition belongs to one track of the securities and commodities safe harbour. It is not a rule about business in general.
• Assuming that because there is no bright-line test for online sales, there is no exposure. The absence of a safe harbour is not a safe harbour.
• Assuming a U.S. office always destroys the trading safe harbour. It closes the independent-agent track. The own-account track has its own condition, which is the dealer exclusion.

FAQ

What does "U.S. trade or business" actually decide?

For a person who is not a U.S. person, it decides whether the United States taxes the business at all. The IRS treats it as the precondition for effectively connected income. No U.S. trade or business, no ECI.

Is there a dollar amount of U.S. income that is automatically safe?

No. The $3,000 figure in § 864(b) is not a general allowance. It is one condition inside a single exception about personal services. The exception also requires that you are a non-resident alien individual temporarily present in the United States, that the stay is 90 days or fewer in total, and that the pay comes either from a non-resident alien, foreign partnership or foreign corporation that is not itself engaged in a U.S. trade or business, or from a foreign office of a U.S. citizen or resident, a domestic partnership or a domestic corporation. Break any one condition and the exception disappears.

I was in the U.S. for 60 days and my foreign company paid me $2,500 for that work. Am I engaged in a U.S. trade or business?

Run the conditions. Sixty days is 90 days or fewer, so that condition holds. $2,500 is $3,000 or less, so that condition holds. The remaining condition is the one people skip: the foreign company must not itself be engaged in a trade or business within the United States. If it is not, the personal services exception applies to that work. If it is, the exception does not apply and the days and dollars do not save you.

I trade U.S. stocks from abroad through a U.S. broker. Does that make me engaged in a U.S. trade or business?

Section 864(b) says trading in stocks, securities or commodities is not a U.S. trade or business, and it gives two tracks. Trading through a resident broker, commission agent, custodian or other independent agent is one track, and that track is only available if at no time in the tax year you have a U.S. office or other fixed place of business through which, or by the direction of which, the transactions are effected. Trading for your own account is the other track, and that one is not available to a dealer. Work out which track your facts sit on, because the conditions are not the same.

I sell software online to U.S. customers and I have never set foot in the country. Am I engaged in a U.S. trade or business?

The statute does not answer that with a number. There is no day count and no revenue threshold for this situation. The answer depends on the facts, which means how continuous and how substantial your activity in the United States is. Anyone who gives you a confident yes or no without looking at your facts is guessing.

Does registering a U.S. LLC put me into a U.S. trade or business?

Those are two different questions. Section 864(b) is about activity, not about where a company is filed. Owning a U.S. company also does not make you a U.S. person, which we cover on the U.S. person page. What matters here is what the business actually does and where the work happens.

If I am engaged in a U.S. trade or business, what happens next?

U.S. income connected with that business becomes effectively connected income, and the ECI rules take over from there. That is a separate page in this guide.

Does a tax treaty change the answer?

A treaty between the United States and another country works from its own threshold, which is called a permanent establishment. That is a different test with a different name, and it has its own page. Nothing on this page tells you whether a treaty covers you.