Digital nomads choose where to live based on their preferred lifestyle and leisure, which can be at home or while traveling the world.
Although in the past digital nomads were mostly remote based freelancers or business owners, as remote work has become the new normal across many industries and previously in-office based companies, many more full-time employees are also now becoming digital nomads.
Whether as a remote based employee or freelance, digital nomads need to pay taxes. This guide is designed to help digital nomads to do so.
Failure to comply with these tax rules and follow these procedures could result in tax evasion charges. Although various countries may have a lot of rules and compliance that you need to adhere to, this guide will help you and give you a head start.
For United States digital nomads, all the forms you need to fill in are discussed and thoroughly explained. If you are not from the United States, we have included links to tax sites for other countries but not all of them. Tax laws are similar for most countries, but there are significant differences to note and take into consideration.
What is tax, and who pays it in the US?
Whether you are working at an office with a nine-to-five job and must deal with traffic every day or working sitting on the Mauritius beach or the freezing ice in Iceland, you still need to pay your taxes. For Americans, only the people considered United States (US) Persons are required to pay tax. A United States person is any person who is a citizen of the US. This applies to citizens who are born in the US or are born outside of the state, but one of their parents is a United States citizen.
If you hold a green card, you will have to file an annual return on all income you have received, whether it is on American soil or foreign soil. Even if you currently do not live in the US. The United States of America uses income tax brackets to determine how much income tax each person should pay. Each bracket will be subject to a certain tax rate. America uses the progressive tax system, which means the more you earn, the more taxes you pay. This applies to digital nomads too.
However, your income, disability, filing status, and age will inform you on whether you should file tax returns or not. The table here will determine whether you are liable for a tax return or not.
For people who are citizens of countries other than the US, you are still liable to pay tax according to the standards and stipulations of your country. You must understand the tax laws and abide by them. Although this document largely references the United States tax laws with regards to nomads, there is a consensus that some of these laws will also apply to other countries. They could just be named differently. This guide will serve as a foundation for your tax questions.
When do I pay tax, and how frequently?
Digital nomads are required to file their tax returns by the 15th of April. If you are unable to do so, this date is automatically extended to the 15th of June for that particular year. For digital nomads with bank accounts in foreign countries, they can apply to extend their returns until the 15th of October as they make sure that the documentation listed below is in order. If your tax home is in Puerto or a foreign country, you can qualify for an extension too.
If you want to apply for an extension under these special circumstances, you will have to fill in form 2350. If you have already filed your tax return but want to change it, fill in form 1040-X and file it.
Step by step guide to filing your tax as a digital nomad:
1. Gather and organize your documentation
Tax is all about documentation. As a digital nomad, there is documentation that you will need to prepare for your tax season.
- Your address is the first thing to sort out. It is recommended that you keep your United States home address for mails but not use this address for tax returns. There is a more simplified and advanced way to get mail, such as creating a virtual mailbox. When you create a virtual mailbox, choose a no-tax state such as South Dakota, Florida in Tallahassee, Nevada in Las Vegas, Washington in Seattle, Alaska, and Texas in Dallas. Digital nomads usually have their mails forwarded to them by their family, but this can get tiring, and sometimes forewarned mail could be delivered late or eventually get lost. Mail can pile up if you are traveling, and you might miss important things. As such, it is better to create a virtual mailbox using a no-tax state and save yourself some trouble while filing your tax returns.
Virtual mailbox allows you to still have financial accounts based in the US and be able to access your mail quickly online.
- Foreign Bank Report (FBAR) is a report that will be required when you file your tax returns. This is only required in cases when there is an aggregation of financial accounts that are not based in the United States. The term financial accounts refer to pension, savings, checks, and brokerage accounts. You need to file FinCEN Form 114. This is if the balance of all your foreign accounts has exceeded $10 000. Make sure this report is ready when preparing to file your tax returns.
- You might also be required to fill in FATCA Form 8938, which is a form for those digital nomads with assets larger than $200 000.
- Get all your bank statements ready for the year in which you are filing your tax return. This is helpful to track all expenses and income as you travel if you have no proper way of tracking them.
- Keep a record of all expenses with regards to your working space, moving expenses, your working equipment, meals purchased when traveling, and any mileage you drove if it was for business purposes (these expenses can contribute to you reducing your tax bill)
This is a list of deductible expenses as they are considered things that you need to do your work: phone expenses, PayPal and banking fees, office supplies such as notebooks and pens, licenses, and insurance that you need to operate professionally, and any legal expenses you incur.
- Documents showing your employment income. If you are employed by various companies, keep documents for all of them.
- Keep documents of interest income, dividends, and any charitable contributions, any taxes you paid, interest paid on the mortgage, taxes paid on income, and any expenses with regards to your children’s educational needs. Keep all bills relating to your housing needs while traveling and working, such as water, electricity bills, and insurance. All these documents should be for the tax year that you are filing for.
2. Know your employment status?
Your tax obligations, deductions, and credits are dependent on your employment status. Employment status refers to whether you are employed by someone or self-employed. This information is important for every nomad to know as the tax implications can be rewarding. Most digital nomads are self-employed, but some are employees. We will address the different categories concerning the tax you should file.
These kinds of nomads might have to pay the Self-Employed Contributions Act (SECA) tax. The good news for you if you fall under this category of nomads is that the following list of countries will exempt you from paying the SECA tax: Poland, Netherlands, Norway, South Korea, Portugal, Czech Republic, Greece, Canada, France, Slovak Republic, Austria, Denmark, Finland, Chile, Ireland, Luxembourg, Japan, Australia, Spain, Italy, Sweden, UK, Belgium, Germany, and Switzerland. You pay Social Security and Mediocre of 15.3%. This is only for the initial $137 700 that you earned as a self-employed person.
As a self-employed person, be sure to file your taxes properly to avoid double taxation (double taxation means paying the self-employment taxes in two different countries). The Totalization Agreement is also known as the International Social Security Agreement, which helps you eliminate dual contributions for the same tax (i.e., double taxation). You only pay social security tax once to one country. This agreement has been signed by the United States of America and 30 other countries. Make sure that you know whether the foreign country you are currently working in or plan to visit next is on that list.
If you are an employed digital nomad, irrespective of where your employer is located, your employer will pay the SECA tax, so you don’t have to. You will still have to do your tax returns and follow the remaining steps.
3. Know your total income sources
If you earn up to $107 000 (this number changes yearly) abroad in income, you can exclude this from your tax. This is due to the privilege of Foreign Earned Income Exclusion (FEIE). This exclusion is only applied to money that you make outside the United States or on foreign soil (professional fees, salary/wages, and consulting fees), but it excludes any interest, capital gains, dividends, social security payments, and pensions) (these are categorized as unearned income). For you to qualify for this, make sure that all income is earned while you are physically in a different state or foreign soil. If you meet these criteria, you are earning foreign income and could qualify for various tax credits and deductions that we will discuss. There are more conditions or criteria that you need to meet to qualify for the FEIE.
Criteria to qualify for FEIE
- Pass the Physical Presence Test (PPT), which states that you should be working and living out of the United States for a minimum of 330 days. These 330 days are counted per consecutive 12 months period. Count all the days you were out of the United States and physically on foreign land even if it was on holiday. If you were in transit (flying in the air or traveling on the sea) on your way to another country, this does not count towards the 330 days. If you are traveling between foreign countries where you are in transit for less than 24 hours, you can add this to your 330 days. In cases where this in-transit period lasts longer than 24 hours, you will lose 2 days from the 330 days. You can start counting the days at any point in the month. If you pass this test, you can qualify for tax reduction, or if you are lucky, you might not even have to pay taxes at all.
- As a digital nomad, if you were in a different country outside the United States and can prove this, you are liable for tax credits such as Foreign Earned Income Exclusion, Foreign Housing Credit, and Foreign Tax Credit.
- Any time you spend in the United States, even if it’s a few hours or for emergency cases, will result in a deduction of a whole day from the minimum of 330 days. Some may argue that they only landed on the evening of a particular day and left early the next morning. But this will be counted as two days spent in the United States and will count against your total minimum of 330 days. The rule of thumb is not to spend more than 35 days in total on US soil for a consecutive 12-month period (the days do not have to be consecutive).
- After you pass the PPT, you would have to pass the Bona Fide Residence Test, which states that any United States resident should stay outside the United States for more than 365 days (full calendar year) consecutively.
- To pass the Bona Fide Residence Test, you will need to have set up residence in another country for a full calendar year and not be planning to move. This means people who have a temporary residence for approximately 12 months and move to another foreign country do not qualify.
It is important to note that these PPT rules and Bona Fide Residence tests could be waived if you left the foreign country due to civil unrest and war and were forced to leave. You would have to prove that you were forced to leave and that you intended to stay there longer to meet the test requirements. There is a list published by the IRS of countries that qualify for the waiver yearly so you can know whether the country you were in qualifies or not. Be sure to attach a statement with proof to explain why you need the waiver.
For self-employed digital nomads, beware of the scaleback rule. If your net income is lower than the gross income, this reduces the money to exclude from tax within the FEIE.
If you tick all the above boxes confidently, you can start filling in Form 2555. Be careful when filling this form, as incorrect information may result in penalties and you not getting the FEIE privilege. Read and understand the instructions for filling in this form 2555. Please read the section on the Cuba conundrum if you are working from Cuba before filling in the form.
4. There is another catch with qualifying for the FEIE
The catch is your tax home is crucial to being eligible for FEIE. For digital nomads, it is recommended that you have your tax home in a foreign country. This is because even if you complete the PPT and the Bona Fide Residence Test, you may not qualify for the Foreign Earned Income Exclusion.
What is a tax home?
Your tax home is defined by the IRS as a place where you conduct most of your work, business, and personal life. This is a place where you work and live most of the time. If most of your business and work is done in a foreign country, and that is where you live, then that is likely to be considered your tax home.
There is a flip side to this that every digital nomad should consider. If you have an abode (a nomad’s place of residence, dwelling, or habitation) in the United States, you cannot have a tax home in another country for the period in which you have that abode unless you are serving the United States. However, just because you own an apartment in the US and your family stays there does not necessarily mean your tax home is the United States.
If you expect to be employed and stay in a different country indefinitely, you can use the foreign country as your tax home.
The Cuba conundrum
Traveling to Cuba is considered a violation of US travel restrictions. This means that there are specific rules that apply to digital nomad US citizens that go to Cuba and want to do their tax returns.
If you earn income in Cuba, it is not considered as foreign earned income, and the days you spent there do not count towards the PPT and Bona fide residence test. You cannot claim housing expenses for any expenses you incurred for housing in Cuba. In essence, working in Cuba is not beneficial to your tax returns as a digital nomad.
5. Double tax
If you are already paying tax in the foreign country where you are working, you should declare this to the United States federal government so that you can decrease your tax liability and get credits.
S-corp is a way to reduce the tax paid by self-employed people. S-corp reduces the taxable income which falls outside the boundaries of the FEIE, limit liability, and protects your income from personal tax. If you are a digital nomad who is also an entrepreneur, it would be best to consider incorporating your online business and choosing the right business entity. If you are unsure of which business entity to pursue, it would be best to start with an LLC, also known as a Limited Liability Company.
Once you are an LLC, then the tax you pay is considered as that of a ‘Disregarded Entity. This means you will be taxed as an S-Corp. This is a technique used by many nomads to save on tax because, as an S-corp, there are certain payments that one can make to themselves which cannot be taxed. These payments can be in the form of a proper salary (you will have to pay tax on this salary that you pay yourself).
7. Health care costs on your tax returns
There is tax exemption from health care coverage for people who have been abroad in a foreign country for more than 330 days for a consecutive 12-month period. This helps you navigate and go around the Affordable Care Act, which makes it compulsory to have health insurance for all citizens of the United States. If, as a digital nomad, you qualify for the FEIE you are likely to qualify for this exemption too. This means you can also get a Short-term Gap Exemption. This exemption means that for 2 months in a year, you are allowed to not have insurance. This is a huge thing that you need to take into consideration while filing tax as a digital nomad.
Am I liable for tax deductions?
This is referred to as reducing the amount of income that the government is allowed to tax you on. Remember, if you reduce the amount of income that can be taxed, your tax bill will also be lower. This will put money back into your pocket and make you less tax liable. Travel bloggers who are nomads have their lives made easier as almost all their expenses are tax-deductible.
There are various tax deductions; as we have discussed earlier, you just need to know which ones apply to you. For example, if you are a digital nomad who owns a website or blog, you could get more expenses that are deductibles such as virtual assistants, advertising expenses, website hosting, blogging courses, affiliates, and newsletter programs.
I need help filing my tax returns
Filing tax returns can be a complex, time-consuming exercise, and no one wants to mess it up. Especially if you are a digital nomad, run a business, and are generally busy, you need experts to do it for you. These are people who know and understand the law and will do it right, and you are stress-free.
Some companies are willing to help you, such as Tax for Expats, H&R Block, Online Taxman, and Greenback tax. This is a company that specializes in Taxes for Expats, and their charges are affordable. They excel in tax for digital nomads or any United States citizen who is working outside the United States of America.
For those of you who want to do things on your own, be sure to download and complete Form 1040 for individual tax returns. The most basic forms to complete are the FBAR (FinCEN Form 114), Form 5471 for those who own a foreign corporation or are a part of it (citizens, directors, or officers in foreign companies), FATCA Form 8938 for those who have foreign assets worth $200 000 and more, Form 2555 for FEIE, Form 1116 for the foreign tax credit (this form ensures that nomads are not double taxed), Form 8621 for those nomads who hold shares in a passive investment company, Form 3520 that reports ownership of the foreign trust that you have, pensions and gifts from foreign countries.
Some countries also offer electronic filing systems that you can use. This system is designed to collect all your data and organize it for you. You might need to upload a few documents and fill in some personal information about yourself and your income. There are also community volunteer tax clinics that are available to assist you. Find out how to access these from your local area.
You could also contact a tax preparer who will advise you on your taxes and help file your tax returns. It is preferred that this person should be from your tax home.
Once you get someone to help you with tax filing, send them all the documentation you collected and prepared at the beginning of the guide. Make sure it is well organized. Remember, the more accurate and detailed information you send to the person helping you, the better your tax filing will be.
If you are in Canada, decide whether you are a non-resident, factual resident, plain Canadian resident, or emigrant and file your tax accordingly. This decision will guide you on how to file your tax returns and the kind of information needed. An expert will be able to advise and help you, or you can do it yourself using Netfile. If you are an Australian, use the Australian online Tax system. If you are in the United Kingdom, you can use the HMRC online form to do your tax return calculations.
What happens if you do not pay your taxes as a digital nomad?
Say you did not know that you need to pay tax as a digital nomad and can prove that you didn’t intend to avoid tax, you are allowed to play catch-up and pay all your tax returns. While doing this, there will be no penalties for this if you are a first-time tax filing individual. It is advisable to get an expert to help you.
If you do not file your returns intentionally, you might lose your passport or incur a heft penalty in the USA. In Canada, if digital nomads do pay their tax, then they are served with a letter that gives them a deadline for paying their tax. Missing or ignoring this deadline will mean that Canada’s Revenue Agency (CRA) is allowed and will seize the digital nomad’s bank accounts.
The amount of tax you pay is sometimes a lot, and some people might not want to go through the process. There is a way out. You could give up your United States citizenship and the green book. If you do this, then you are sure that you will be leaving the US for good and do not need that citizenship. If you stay in Virginia, New Mexico, California, and South Carolina, you might experience some difficulty giving up your citizenship.
This is because they consider various things before revoking your citizenship, such as your bank, mailing address, where your family lives, vehicle registration, and where your ID was issued. It is also advisable to sell your property if you have any, as that will be an area of concern when you decide to terminate your citizenship. However, for most other states, it is an easy process.
For some countries, you are considered a resident only if you stay there for more than six months, and as such, you could be liable for tax in that country. Some digital nomads do not stay long enough in any country to be liable for tax, and they keep moving between foreign countries to avoid tax. This is not a viable solution and could result in persecution by your local or federal government. Paying tax in foreign countries has its own set of complications because the tax laws of that country are designed to be good to the local people and, as such, could be unfavorable for you as a digital nomad.
Tax is a tricky thing to navigate for digital nomads, but it is not an impossible task. You can use tracking apps to track your expenses, as you will need all those details to complete your tax returns. Make use of the FEIE and Foreign Tax Credit to reduce your tax bill. For the self-employed people do not forget to pay the self-employment tax in one country.
If you have stayed in a specific country for a long time, you may be required to pay tax in that country and ultimately follow the laws of that country. The bottom line is that digital nomads are bound by the same tax laws as every other working person. Also, take note of the tax reform changes, especially when it comes to corporate tax changes. This is because it needs any nomad who owns a corporation in foreign counties to repatriate deferred untaxed income.
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