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.
Let’s start!
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.
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;
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 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:
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.
A few digital nomads are DIY enthusiasts; that is, they file their taxes themselves. Here are a few tax tips for them:
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:
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.
Tax deductions include any expense that an individual incurs while earning their living. For most digital nomads, tax deductions include the following expenses.
If the digital nomad is a freelancer and owns a blog or a website, they get more tax deductions.
Besides the above information on digital nomad taxes, there are a few other things that digital nomads must know about.
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.
These states can impose taxes on digital nomads after they have moved out if;
Digital nomads can avoid state taxes if they change their country of residence. The states that do not charge tax income at all are:
Several digital nomads are self-employed. In the US, they are liable for self-employment taxes as well. This tax involves;
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.
Depending on the situation, digital nomads use different tax forms when filing their taxes. Given below are the ones generally used.
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.
