Earnings from the Internet: Where to Pay Taxes and How to Avoid IRS Traps

What has changed in the IRS’s approach to digital income, and what should Ukrainian startups working with the U.S. market keep in mind?

In January 2025, the IRS (Internal Revenue Service) finally formalized rules that IT companies had been awaiting for years. This new regulation on the taxation of internet-sourced income is a game changer for startups, SaaS businesses, software developers, outsourcing firms, and anyone connected to the U.S. digital economy.

Sounds like another layer of bureaucracy? In fact, it’s a practical revolution. If your company earns money from U.S. clients — this directly affects you.

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How the IRS Classifies Internet Income: 5 Scenarios

One of the most important updates: the IRS now clearly distinguishes between types of digital activity. This matters, because each type is taxed differently depending on the source of income.

Transfer of Copyright (IP)
If you assign rights to software to a U.S. company that will later resell it, the deal could be classified as:
- Full assignment of IP rights;
- Licensing agreement;
- Sale of a copyright-protected article.
Sale of Copyright-Protected Work
A classic SaaS example: a customer pays $10 to download and own the software. This counts as a sale, not a license or service.
Custom Software Development
You develop code for a specific client and deliver it. This is a service — and does not involve a transfer of IP.
Transfer of Know-How
If you share technology or methodology without transferring ownership, the IRS classifies it separately as know-how.
SaaS — Software as a Service
The user connects to your server but doesn’t own the software. This is treated as a service, not a sale.

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Where Income Arises — and Who Pays the Tax?

According to the new IRS rules, what you sell is not enough — where the income is generated is equally crucial. Here's how it breaks down:

Software Sales
→ Income is sourced to the buyer’s billing address.
Licensing, Rental, Know-How
→ Income is taxed proportionally to where the software is used. If it’s used in both the U.S. and Ukraine — the income must be allocated.
Services (including SaaS)
→ If the work is performed outside the U.S., the income is considered foreign, even if payments come from the U.S.

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Why Should Ukrainian Founders Care?

If you:

Sell SaaS to U.S. clients;
Receive payments via Stripe, Paddle, or PayPal;
Have contracts for software development or support with U.S. companies —

You’re already on the IRS’s radar.

The most common mistake startups make? Misclassifying their income.

For example, you might think you’re providing a service (and owe no U.S. tax), while the IRS sees it as a sale of IP — and demands tax on U.S.-sourced income.

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Practical Advice: How Not to Hurt Yourself

Classify each revenue stream correctly — A single project can involve multiple types of income.
Track where your product is used — This is crucial for licenses and know-how.
Review contracts before signing — Wording determines tax classification.
Set up the right company structure — A U.S. LLC with a C-Corp blocker is a common strategy.
Don’t delay international tax consulting — Once contracts are signed, restructuring may be too late.

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Why Did the IRS Act Now?

The U.S. tax authority has discussed these rules for years. Why formalize them now?

The rising share of IT income in U.S. GDP;
The need to control IP assets increasingly registered abroad;
Political uncertainty in 2025 — with fears new rules could be repealed under a different administration.

We now have a long-awaited — albeit imperfect — system. And it’s already in effect.

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A Mistake Even Experienced CFOs Make

Some companies still believe that no office in the U.S. = no tax obligations. Not true.

The IRS determines income source not only by physical presence, but also by:

Location of servers;
Client IP addresses;
Where the software is used;
Payment origin.

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What’s Next?

Our next webinar will focus on jurisdiction selection and building a resilient structure for IT companies operating globally.

Key Takeaways

The IRS has officially classified types of digital activity — this is a good thing.
The source of income now has clear criteria — ignoring it is risky.
SaaS, custom development, IP — all have different tax rules.
Ukrainian companies need a flexible international structure to legally minimize taxes.

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Want to avoid costly mistakes and build the right structure for working with U.S. clients?
Watch the webinar replay and stay tuned for the next session:
→ “How to Choose a Jurisdiction Without Losing IP or Investors”

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The right structure isn’t just legal formality — it’s a survival strategy.

How to Pay Taxes in the USA Correctly? AVITAR & iFindTaxPro

How to Pay Taxes in the USA Correctly? AVITAR & iFindTaxPro (Part II)

How to Pay Taxes in the USA Correctly? AVITAR & iFindTaxPro (Part III)

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