Escaping the traditional 9-to-5 and being a digital nomad has become common among millennials and Gen Z employees. Having the freedom to travel while they fulfill their job responsibilities remotely allows them to achieve a sustainable work-life balance. They aren’t stuck in a cubicle, and they can literally travel anywhere they want—more freedom than expat freelancers.
However, such liberty doesn’t mean that you’re also free from the responsibilities of being a citizen of your home country. Even when working remotely and traveling to another country, you still have to file and pay your taxes.
Just as tax filing can be overwhelming for U.S. expats, it’s the same for digital nomads. Here are some tips and tricks to help you with your digital nomad tax responsibilities.
1. Organize your documentation
Filing taxes is all about gathering and organizing the necessary paperwork. For traveling remote workers, there are several things you need to sort out for tax filing.
- Address: Digital nomads essentially have no permanent address as they move frequently. You can have a family member forward the mail you receive back home to you, but they can get delayed or, worse, lost. One workaround is getting a virtual mailbox to ensure you receive all the important mail when filing tax returns.
- Bank statements: Request your bank statements be sent directly to your email to track all your expenses easily as you travel.
- Work expenses: From work equipment to moving costs, keep a record of your work-related expenses to help decrease your tax bill.
- Employment income documentation: Digital nomads often have more than one employer. If this is the case for you, make sure to keep a record of your employment contract and income.
- Foreign Bank Account Report (FBAR): If you have a foreign bank account, this will be required for your tax documentation. You might also need to submit a Statement of Specified Foreign Financial Assets Form 8938 to report foreign financial assets with interest more than the reporting threshold.
2. Determine your employment status
Your tax requirements also depend on your employment situation. There are self-employed digital nomads and company employees who get to live as digital nomads. Even when you have the same work as another person of the same nationality, your paperwork differs if you’re self-employed while the other is a company employee.
- Employee: If you’re working for a foreign employer, you won’t need to pay U.S. self-employment taxes. The company should deduct your Social Security and Medicare automatically from your salary.
- Self-employed: For self-employed nomads, you are required to pay the Self-Employed Contributions Act (SECA) tax consisting of Social Security and Medicare taxes.
3. Identify your total income sources
Under the Foreign Earned Income Exclusion (FEIE), you can be qualified for tax credits and deductions if your income amounts to $112,000 (this amount adjusts annually). This applies if your income is earned in a different state or country. Other conditions to qualify for FEIE include:
- Passing the Physical Presence Test (PPT): To prove that you work and live outside the U.S. for a minimum of 330 days
- Passing the Bona Fide Residence Test: After passing the PPT, you need to pass this test next, which says you are a bona fide resident of a foreign country if you stayed outside the U.S. for an entire tax year.
4. Check if you qualify for the FEIE
Digital nomads can be eligible for the FEIE if they have a tax home in a foreign country. A tax home is a place where you do most of your work and live most of the time. Know that even if you pass the PPT and Bona Fide Residence Test, you may still not be entitled to the FEIE. If you are employed in a foreign country and expect to stay there indefinitely, you can state that country as your tax home.
5. Be wary of double taxation
Find out whether the country you’re working or planning to visit next is on the list of the Totalization Agreement that helps self-employed Americans avoid double taxation. If you’re already paying taxes in the country you’re working in, you should declare it to the U.S. federal government to reduce your tax responsibilities and receive credits.
6. Know S-corp
S corporation is a special tax status that passes corporate income, losses, deductions, and credits to their shareholders for federal tax purposes. Going through the S-corp route allows digital nomad entrepreneurs and self-employed individuals to pass the business tax burden to their shareholders. This will now be processed and recorded in the personal tax records of the shareholders, respectively which avoids double taxation.
7. Don’t forget health care costs on your tax returns
If you’ve been working in a foreign country for over 330 days for 12 consecutive months, you get tax exemption from health care coverage. You can check the Affordable Care Act (ACA) tax provisions to see which ACA topics apply to individual taxpayers.
If you already qualify for the FEIE, you may check to see if you are eligible for a Short-term Gap Exemption, where you are allowed to go without coverage for two months in a year. You can read through IRS’ Health Coverage Exemptions to learn more.
To Sum It All Up
Knowing and understanding your tax responsibilities as a U.S. citizen while traveling and living in a foreign country can be challenging to navigate. Tax filing is not easy, but you can make the job more manageable with the help of experts.
For digital nomad tax residency advice and tax resolution services, get in touch with a tax resolution partner. Tax Samaritan provides the best-in-class service to ensure you sort your taxes right no matter your employment status.