If you’re a digital nomad in 2023, it’s important to understand all the tax implications of your lifestyle. Taxes can be tricky, and different countries all have their own rules and regulations. With that said, this article will primarily focus on US nomads with American citizenship.
A Comprehensive Guide on Taxes for Nomads
To help you navigate the world of taxes, use this guide. We’ll give you a comprehensive overview of how to handle your taxes as a digital nomad originally from the United States.
Working and Paying Taxes
The first thing to keep in mind is whether or not you need to file a tax return. Different countries have different thresholds for when you need to file. If you haven’t disclosed all your income and you don’t file a return, then you may face penalties. You’ll also need the right documents to file.
Each country will have its own requirements, but a few common denominators are usually needed. You’ll usually need a valid identity document, proof of address in that particular country, and evidence that you’ll be doing business or staying for a specific duration of time.
If you’re a corporation or LLC, you’ll also have different requirements for filing your taxes.
Establishing Your Tax Residency
A person who possesses a US citizenship or green card always has to pay US taxes, no matter where they work or live. They have to claim all self-employed income but are only taxed after their income reaches $400 in a tax year. They may also be taxed by the country they live in.
If a US citizen or green card holder also sells to Canada, they may be taxed thrice on goods.
Fortunately, many digital nomads can qualify for the Foreign Earned Income Exclusion (FEIE) benefit, allowing US citizens to earn up to $120,000 in 2023 without paying US income tax.
Taxes on Foreign Income
In most countries, you’ll have to pay taxes on income received from outside of the country. This is true even if you’ve already paid taxes on that income in the country you received it in. But if you qualify for FEIE, you can exempt your salary and wages, consulting income, and fees.
To prove your income to the IRS and another country’s tax agency, you may need pay stub generation software like FormPros or PayStubCreator . You may also need invoices or bank statements.
There are two ways to qualify for FEIE: the physical presence test and bona fide resident test:
- Physical Presence Test: Must spend more than 330 full days in foreign countries in a consecutive 12-month period. Travel over international waters counts in these days.
- Bona Fide Resident: Must be a US citizen, have moved to a foreign country and set up residence, have your residence there for the whole tax year, and have no plans to move.
Nomads should use Form 2555 to apply for FEIE. Keep in mind that you still may be taxed even if you qualify, so make sure you keep 25% to 30% of your income available for tax season.
Tax Deadlines
Taxes are usually due around April 15th in the US unless you’re paying quarterly taxes, which you’ll do if you’re taxed more than $1,000 in a tax year. In the US, even if you qualify for FEIE, you’ll still have to pay 15.3% (Social Security and Medicare) on the first $147,000 of net income.
The deadlines for quarterly taxes include April 15th, June 15th, September 15th, and January 15th of the next year. To estimate your quarterly taxes, divide the amount you paid for taxes in your previous year by 4. If you paid $20,000, you’d pay $5,000 every quarter starting April 15th.
With that said, some states don’t tax your income at all if you’re a nomad:
- Alaska
- Nevada
- South Dakota
- Florida
- Washington State
- Texas
- Wyoming
If you want to have more flexible deadlines or pay fewer taxes in general, you can set up a foreign corporation. But even self-employed nomads get a two-month extension if they live outside of the US (July 15th) or a six-month extension (October 15th) if they file Form 4868.
Required Forms
If you’re an individual filing taxes, you’ll may need all or some of the following:
- IRS Form 1040: Individual tax return
- Form 2555: To get FEIE
- Form 1116: To receive credits for taxes paid abroad
- Form 5471: If you own a part of a foreign corporation
- Form 8938: For foreign assets totaling more than $200,000
- FinCEN Report 114: For foreign bank accounts totaling $10,000
You may also receive form 1099-NEC from clients who you work with inside the United States. Other countries will have their own version of this document or none at all. For example, Canada doesn’t expect local or foreign clients to send the CRA a document as proof of income.
Also Read: Simple, Smart Reasons to Establish an LLC
