One of the most alluring things about freelancing and self-employment is the flexibility to work from wherever you want. Globally, there are nearly 35 million digital nomads with 15.5 million of them coming from the U.S. For those from the U.S., tax season may come with unique challenges depending on what state you have residence in, which countries you’ve stayed in, and how long you’ve been there.
The United States is one of the few countries that uses citizenship (over residency) as a requirement for taxation. So even if you’ve spent the majority of the previous year outside the country, you still need to file taxes in the United States. Here are our guidelines for paying taxes as a digital nomad.
Even if none of your income came from within the United States, you are still required to pay taxes on that income. Taxable income includes wages, interest, dividends, & rental income. The threshold for taxable income is just $400 if you are self-employed, so in almost all cases you will be required to file your taxes as a digital nomad.
You may not have lived in your state for the majority of the year, but you may still have to pay state taxes.Your state income tax will depend on your state of residence. Even from state to state, the income tax laws and regulations are different. For example, California, New Mexico, Virginia, and South Carolina will require you to pay state income tax if:
In fact, many digital nomads opt to switch state residency before they leave the country so that they can avoid these states’ strict income tax laws. If you wish to make another state your home base, these states do not require state income taxes:
Many digital nomads are self-employed and will be required to pay self-employment taxes. Self-employment tax includes your contributions to Medicare and Social Security, roughly 15% of your income. These taxes are usually not excluded even under the available tax credits & exclusions for digital nomads. Budget for this tax expense regardless of where you live.
Unlike the United States, most countries require taxes based on residency rather than citizenship. If you plan on spending several weeks or months in one country, make sure you are familiar with their tax specifications. Most countries define you as a resident after 183 days in their country (6 months).
There are two types of taxes you might run into: residence-based and territorial-based. Residence-based means the country will tax all residents earning income within their borders, while territorial-based only taxes on money earned within the country.
Popular countries with residence-based taxation:
Territorial-based is less common, but still found in:
There are several credits and exclusions available to digital nomads when paying taxes. This not only reduces your tax bill, but prevents you from getting taxed multiple times by different countries. Understanding how/when you qualify for these is important to decrease your tax bill. Some of the most common are:
There are two “tests” that determine your eligibility for these tax credits. First is the physical presence test. There is only one qualification for this. You must have spent a total of 330 days outside of the United States during the tax year. This could be in one country or several, but as long as you were legally traveling abroad and meet this requirement, you can qualify for the FEIE and other digital nomad tax credits.
Second is the bona fide resident test. This is less commonly associated with digital nomads and more suited for ex-pats with no immediate intention of returning to the United States. To meet this qualification you must have lived outside of the US for the entire tax year and have a residence in another country.
However, if you meet either of these criteria, you will qualify for the Foreign Earned Income Exclusion.
With the rise in remote workers, more countries are welcoming digital nomads with open arms. Digital nomad visas (or similar) are available in a number of countries and may help you determine the length of your stay. Some countries will cut your visit to 180 days, just shy of the 183-day mark, to avoid taxation. While other countries are allowing longer stays depending on the type of visa. Some visas, like the new digital nomad visa in Bali, will allow you to stay there for up to five years without paying taxes. (Taxes to Bali that is. If you are a U.S. citizen, you’ll still be filing your U.S. taxes)
Digital nomads are masters of travel, but also have to be masters of logistics. Preparing to pay taxes as a digital nomad is just part of the process. Check the tax requirements of each country to plan to stay more than 183 days in to ensure you can correctly file your taxes. Consult a tax professional with a background in digital nomad/ex-pat taxes when it comes time to file.