What Is Effectively Connected Income (ECI)?

"When a foreign person is engaged in a trade or business in the United States (USTB), all United States (U.S.) source income connected with the conduct of that trade or business is considered Effectively Connected Income (ECI)."

IRS, Effectively Connected Income (ECI). Page last reviewed or updated August 18, 2026.

Most summaries collapse this into "do you have US customers," which is not the question.

Step one: are you engaged in a US trade or business?

"A foreign person generally must be engaged in a U.S. trade or business during the tax year to treat income received in that year as ECI, which is taxable in the U.S."

Same source.

If the answer is no, you do not reach step two.

Step two: is the income US-source and connected with that trade or business?

Only income that clears both is ECI.

Having American customers is not the same as being engaged in a US trade or business, and this is the distinction that decides most non-resident founders' positions. Whether a given set of facts amounts to a US trade or business is a genuine legal question, not a checklist.

The IRS puts the ECI side this way:

"Income you receive during the tax year that is effectively connected with your trade or business in the United States is, after allowable deductions, taxed at the graduated rates that apply to U.S. citizens and resident aliens."

Same source.

Graduated rates after deductions is sometimes better than flat withholding and sometimes worse. It is not automatically the bad outcome, and treating ECI as a disaster to be avoided leads people to structure around a question they have not actually answered.

Whether you have ECI. That depends on what you do, where you do it, who does it, and where the value is created, and no page written for everyone can answer it for one person.

Two things are worth saying plainly. Owning a US LLC does not by itself create ECI. And owning a US LLC does not by itself avoid US tax either. Anyone selling you either of those as a general rule is selling you something.

If money is at stake, this is the point to pay a US tax practitioner. It is a narrow, answerable question and it is worth a few hundred dollars to have answered properly.

ECI is a definition, and definitions matter here because three separate obligations hang off this one.

Whether you owe US tax at all turns on it, and that is worked through against a non-resident owner's real situation on are you taxed in the US.

What you file even when you owe nothing does not turn on it. A foreign-owned single-member LLC files Form 5472 and a pro forma 1120 regardless, because that is an information return rather than a tax return. People conflate the two constantly and conclude that no tax means no filing.

Withholding on payments to your foreign contractors uses a different test again, the source rule for personal services, covered on paying contractors.

And if you ever add a partner, section 1446 puts withholding on ECI allocated to foreign partners at the individual rate. That is on adding a co-founder, and it is the single most expensive consequence of getting this definition wrong.