Digital nomads work from anywhere and everywhere. They are remote employees who rely on technology to perform their work without location constraints.
Though the concept of digital nomads is quite popular nowadays, employers often have concerns about digital nomad taxes. Mostly because, the tax regulations vary by country and state, and keeping track of taxes of digital nomads becomes complicated.
In this blog post, we’ll discuss everything about digital nomad tax – where and how they file taxes, tax tips, digital nomad tax deductions, and much more.
Where do Digital Nomads Pay their Taxes?
Digital nomads pay taxes in their tax residence country or home country – the employee’s place of residence.
Additionally, they may have to file taxes for their presence in different countries during a tax year. State, province, local, and territory taxes may also apply.
How is a Country of Tax Residence Determined for Digital Nomads?
Digital nomad taxes consider the country where an employee’s permanent physical address is their official residence country. The employee may have more than one residence as well.
However, most digital nomads have a permanent physical address for taxation and legal and administrative work.
Since tax regulations vary by country, state, province, and city, digital nomads and their tax implications require proper understanding. Thus, employers must know the criteria and qualifications to understand the country of tax residence.
There are two aspects for employers to know;
- Where a digital nomad has filed an official residence address with the government; and
- The digital nomad tax regulations of the country where they spend most of their time during the taxation year and visa requirements.
Other factors are also considered in determining the country of tax residence, such as where digital nomads maintain their bank account(s). Additionally, other considerations apply to visa-holders, several of whom are allowed to stay in a specific country for a limited period.
In the United States, one must file US tax returns as a US citizen or green card holder, regardless of where they live.
Further, the US (United Kingdom, Canada, and Australia) considers the 183 days criterion when determining tax residence for digital nomads. According to this regulation, an individual may be a country resident but not a tax resident. To become a tax resident, the individual must stay at their physical address for a minimum of 183 days per calendar year.
However, residing for 183 or more days will not make an individual a tax resident of the country. The citizenship country authorities must be notified in writing that the individual no longer qualifies for tax residency. The employee must also mention their details and date along with this application.
The employee must communicate with the country of residence about the residence change for the new tax resident to be valid. Employees must register their new permanent residence with the taxation authorities to obtain their tax number. This number is necessary for multiple purposes, like opening a bank account in the new residence country.
Being a tax resident in a specific country is important for digital nomads. They can choose to earn international revenue in a country without income tax beyond its borders to avoid paying taxes on the income.
How to File Digital Nomad Taxes?
How to pay taxes as a digital nomad is a serious concern since digital nomad taxes involve several country tax regulations.
To simplify things, digital nomads must follow these conventional suggestions to properly file their taxes, regardless of their country of residence.
Track income and expenses. Digital nomads must start tracking their income and expenses, especially travel expenses and income earned overseas. Also, track the days spent in the home country versus in a foreign country. It will help in calculating days for exclusion of the foreign-earned income.
Organize documents. The next step is to prepare your documents for tax filing. If you have a foreign account, bank statements, work expenses, employment income documentation, and Foreign Bank Account Report.
Pro-tip: Keep your receipts safe. Most countries demand original receipts and digital copies to claim digital nomad tax deductions.
Determine your employment status. You need not pay self-employment taxes if you are a digital nomad working for a foreign employer. But if you are a self-employed nomad, you must pay the Self-Employed Contributions Act (SECA) tax consisting of Social Security and Medicare taxes.
Determine the total income sources and check FEIE qualification. If your income amounts to $112,000, you can qualify for tax deductions under Foreign Earned Income Exclusion (FEIE). If you qualify, fill out Form 2555 FEIE.
Fill out IRS Forms online and submit them. You can either choose paper forms or electronic versions of the forms to file your taxes. The forms that digital nomads require for their tax filing include:
- Form 1040 to report income to the IRS
- For 114 FBAR (Foreign Bank Account Report) to report any assets with foreign financial institutions.
- For 2555 (FEIE) or Form 116 to claim tax deductions or credits
- FATCA Form 8938 to report foreign financial assets
- Schedule C and SE to calculate taxable net earnings and self-employment tax, if you are a freelance digital nomad
Additionally, if digital nomads must pay state taxes, separate rules and regulations may be involved.
As mentioned previously, digital nomad taxes can be complicated. In that case, digital nomads must consult with tax professionals familiar with the regulations and tax laws. They can find ex-pat taxation professionals if they work outside their official residence country.
Tax Tips for Digital Nomads across Various Countries
A few digital nomads are DIY enthusiasts; that is, they file their taxes themselves. Here are a few tax tips for them:
Tax filing tips for US digital nomads
- Foreign Earned Income Exclusion (FEIE) – If a digital nomad’s income is below $100k, excluding foreign earned income doesn’t prevent them from filing taxes. It provides a tax credit that reduces the total digital nomad taxes owed.
- Physical presence test – Before digital nomads claim FEIE, they must prove that they live abroad. The physical presence test involves proving that the individual has been in one or more foreign countries for more than 330 days in a year. Similarly, digital nomads can also undergo the Bona Fide Residence test that involves proving that they are the official resident of another country.
- Foreign Account Tax Compliance Act (FATCA) – Digital nomads must declare foreign assets of more than $200k (excluding home) in their tax returns.
- Foreign Tax Credit – In the US, digital nomads get to deduct the tax paid in another country. This tax credit is beyond the FEIE deductions.
- Foreign Bank Account Report (FBAR) – In the FBAR, digital nomads must declare all their foreign account assets (savings, pension, checks, etc.) if the total is more than $10k.
- Avoid state tax – Digital nomads must pick their tax residence country carefully. If their mailing address is a location in states like New Mexico, Virginia, etc., they have to pay state taxes even if they do not live in their official address anymore. They must prove that they will never return to the place to avoid paying state taxes.
- Exclude spouse – If a digital nomad is married to a foreigner, it is recommended to file as ‘married but filing separately’. Dragging them into the US tax system can make things more complicated.
- Take professional help – One of the most helpful tips is to get help with digital nomad taxes. If digital nomads are not sure about filing their taxes correctly, they must get a professional to manage the taxes.
Tax filing tips for Canadian digital nomads
Canadian digital nomads must consider their residence status as it makes all the difference in filing tax returns.
Depending on the period of travel, digital nomads are classified as:
- Factual resident
- Emigrant or
- Canadian resident
Being a non-resident prevents the digital nomad from paying taxes in Canada. They can set new residency if they want.
Factual residents can claim their global income earned on their Canadian tax returns.
Digital Nomads Tax Deductions – A Quick Checklist
Tax deductions include any expense that an individual incurs while earning their living. For most digital nomads, tax deductions include the following expenses.
- Desktop/ Laptop, computer-related equipment, bags, and accessories
- Office expenses like stationery (notebooks, pens, paper, etc.) and other supplies
- Internet connectivity services
- Phone-related expenses like the cost of the phone, SIM cards, and service
- Membership in coworking space
- Banking fees or PayPal fees deducted during payment receipts from clients
- Accounting and legal expenses
- Association fees, subscriptions, and memberships
- Expenses related to skills training; course fees related to the field of work
If the digital nomad is a freelancer and owns a blog or a website, they get more tax deductions.
- Domain fees, website hosting
- Newsletter programs
- Boosting posts on Facebook and other ad expenses
- Blogging courses or educational expenses incurred to run the profession successfully.
- Payment to affiliates
- Virtual assistants and employees payments
The 3 Must-Know Things about Digital Nomad Taxes
Besides the above information on digital nomad taxes, there are a few other things that digital nomads must know about.
1. Digital nomads and state taxes
Whether digital nomads must file state taxes or not depends on where they resided last and how recently they have left. Generally, digital nomads file state taxes if they live in a state for a specific period during the tax year and earn an income there.
However, a few US states impose taxes on their former residents too.
- New Mexico
- South Carolina
These states can impose taxes on digital nomads after they have moved out if;
- The issue ID cards or driver’s license
- Digital nomads own property in the state
- Dependents (children/spouse) reside there
- The vehicle is registered in the state
- The digital nomad has a bank account or if they maintain a mailing address of the state
Digital nomads can avoid state taxes if they change their country of residence. The states that do not charge tax income at all are:
- South Dakota
2. Digital nomads and self-employment taxes
Several digital nomads are self-employed. In the US, they are liable for self-employment taxes as well. This tax involves;
- 2.9% of the income of Medicare
- 12.4% of the income from Social Security taxes
Self-employed digital nomads cannot avoid paying these taxes. Neither can they be excluded through FEIE or Foreign tax credit.
However, a few countries like Italy, Canada, the UK, Germany, etc. are in a totalization agreement with the US. If the digital nomad is in one of these countries, they may be exempt from self-employment taxes.
3. Tax forms for digital nomads
Depending on the situation, digital nomads use different tax forms when filing their taxes. Given below are the ones generally used.
- Form 1040 – This is the individual income tax return form. All US citizens including digital nomads are required to fill out this form.
- Form 2555 – Digital nomads must fill out Form 2555 to claim FEIE and exclusion from foreign housing. They must attach this form with Form 1040.
- Form 1116 – This form is used to claim the foreign tax credit.
- Form 8938 – If a digital nomad living abroad owns foreign assets of more than $200k (excluding home), they must declare in their tax returns using this form.
Onboard More Digital Nomads with Multiplier
Tax filing in a single country is sufficient to make life stressful and get more complex regarding digital nomad taxes.
To simplify the taxation process, it is recommended to consult professionals like Multiplier.
Multiplier’s EOR/PEO solution helps businesses to set up remote teams. The platform takes care of everything related to taxation, payroll, multi-currency payments, employment law compliance, etc.
Therefore, Multiplier can be your ideal solution to the digital nomad tax issue. Multiplier’s services can manage digital nomad taxes across different countries. It can make filing taxes easier for employers who have digital nomads working with them across the globe.