Freelancing Archives - Deskless Nomad

I first filed taxes while living abroad over a decade ago and since then I’ve learned a lot of essential lessons and practical tips along the way. I have compiled this tax guide for digital nomads and remote workers living and traveling abroad based on my own experiences and official resources from the IRS. I provide direct links to those resources wherever possible. While this tax guide is primarily for American digital nomads, you’ll also find plenty of essential tax tips for non-American digital nomads. As always when reading something online, remember that I am just another random person on the internet. I am not a lawyer or an accountant. The information I provide is a practical guide to help you begin to understand the complex world of international taxes for digital nomads and remote workers. It is for informational purposes only and I recommend you read the official IRS resources yourself or consult a tax professional. Taxes for digital nomads and remote workers can be very complicated. The laws in the U.S. and abroad haven’t entirely caught up with remote work and this new class of workers. Even the new digital nomad visas being offered by countries around the world don’t always explicitly state how taxes will be handled. I recommend you contact your accountant or tax lawyer about your specific situation before choosing a digital nomad visa. Using a tax preparer can potentially save you money on taxes but it is still important to understand the ins and outs of taxes for digital nomads. Having a knowledge base of digital nomad taxes will help you take important steps to decrease the taxes you pay like: Deciding where you will work remotely to pay less tax (including digital nomad villages) Choosing a digital nomad visa with tax benefits Determining how long to stay in each country Choosing which state to have an address in Deciding whether or not to use a virtual mailbox for your address Maximizing your deductions to pay fewer taxes Qualifying for the big deductions available to digital nomads Avoiding paying double tax to multiple countries Meeting deadlines for the various filing requirements It’s your money and it really does pay to know who is taking some of it and why. So let's get into it and answer your burning questions. Is there a way for American digital nomads to stop having to file and pay US taxes? Let’s address the elephant in the room first. You are probably wondering if American digital nomads and those who work remotely abroad are exempt from needing to file tax returns and pay taxes. If they don’t actually live anywhere maybe they don't owe taxes? You might think that not having to file tax returns is one of the great advantages of being a digital nomad. Sadly this is not true. As an American, you can’t just stop filing tax returns by leaving the country. If you are a U.S. citizen or permanent resident (green card holder), no matter where in the world you are living or traveling, you are required to file a tax return if you make above a certain threshold. But just because you have to file a tax return does not always mean you will actually owe taxes to the IRS. There are a lot of factors I’ll discuss in this article determining how much, if any, you will need to pay in U.S. taxes as a digital nomad. There are some large tax deductions and credits you can take if you earn money while abroad but they come with very specific rules. There are also tax-free digital nomad visas which can help you save money on your taxes. The only way to never have to file US taxes or pay US taxes ever again is to renounce your US citizenship or give up your green card. These actions have huge consequences and should not be undertaken lightly. Figuring out in which country you need to file taxes, under what circumstances you need to file, and how much you will owe to each country can be complicated as a digital nomad or remote worker. I’ll try to clarify these muddy waters based on my own experiences and official sources including IRS and OECD publications. Can you be a non-taxed digital nomad and pay no tax anywhere? In theory, if you are not a U.S. citizen or resident, it may be possible to temporarily avoid filing and paying any taxes by becoming a non-tax resident in your home country. You would then perpetually travel without ever staying long enough in any single foreign country to establish tax residency. I don’t recommend this! You can be certain that taxes will eventually catch up with you. Before deciding to go the non-taxed nomad route, realize that there will likely be some serious financial and legal consequences. If it is discovered that you weren’t paying taxes anywhere, you could owe not only back taxes but also penalties and even face jail time. Digital nomads typically travel from country to country, often staying in places that have a lower cost of living or have particular amenities they are seeking. The frequent travel between countries means that digital nomads often don’t have a home base. Not having a home base may lead some digital nomads to think they also don’t have a tax residency or tax obligation. Even if you think you don’t have a current tax residency, many countries have a “tax fallback law.” If you aren’t currently paying taxes anywhere then you are probably required to file taxes in either your home country or your last country of residency. In addition to tax fallback laws and other international tax laws, there are also organizations like the OECD, or Organization for Economic Cooperation and Development that are working to stop people from evading taxes. These organizations have set out rules that can help digital nomads figure out when and where they need to pay taxes. One way to significantly reduce the amount of tax you owe as a digital nomad is with a digital nomad visa. Many of these visas come with generous tax benefits, among other advantages. How do digital nomads pay taxes? There are three main ways in which digital nomads and remote workers pay their taxes while living and traveling in foreign countries: A digital nomad or remote worker may keep their tax residency in their home country and only pay taxes there. They do not pay local taxes in the foreign countries where they are traveling and never stay long enough to become a tax resident in another country. A digital nomad or remote worker establishes a tax residency in a host country and pays taxes to the host country. Depending on their home country’s tax laws, they may also pay some taxes to their home country. A digital nomad or remote worker who has a digital nomad visa would fall into this category. A digital nomad may move their tax residency to a low-tax country and become a non-resident in their home country. They pay minimal or no tax in their low-tax residency country, ignore local taxes in their home country, and ignore taxes in the foreign countries where they travel. This type of setup can be quite complicated and often requires capital investment in a low-tax country for a golden visa and legal assistance. Unfortunately, Americans will still need to file taxes in this arrangement because US tax filing requirements are citizenship-based. It is important to remember that paying taxes to your home country doesn’t always exclude you from potential tax obligations in foreign host countries where you spend time. Your tax filing requirements will depend on which host countries you spend time in, how long you are in each host country, and if you are working and earning money while in each host country. Luckily, establishing a tax residency and paying tax to a host country doesn’t always mean you end up paying double taxes to the host country and your home country. There are Double Taxation Agreements between many countries to help prevent your income from getting hit twice. Understanding double taxation agreements and their impact on the taxes you will owe is one of the many tips I wish someone had told me before I moved abroad. What determines how foreign countries tax digital nomads? You’ll definitely want to include taxes when you budget for the digital nomad lifestyle and plan long-term travel. Understanding how and where digital nomads pay taxes is an important factor as you choose which countries to spend your time in and how long you will stay in each foreign country. Whether or not you need a digital nomad visa to work and earn income while traveling is another question. Legally, you cannot work in most countries when traveling on tourist visas or even long visitor visas that allow you to stay for several months. You will generally be considered a tax resident in a given country and be expected to file taxes there if you have been in that country for 183 days or more. If you have not been a resident in any single country for at least 183 days then the country you owe tax to will be determined by the OECD rules described in the next section. Be aware that a few countries like Taiwan and Switzerland consider you a tax resident and liable for tax payments at only 90 days. Some countries, like Portugal, will claim you are a tax resident if your primary residence is in Portugal, even if you are physically out of the country for the whole year. You can find the rules for each country on the OECD website. Once your country of tax residency is determined, there are four general taxation systems countries may use for taxation. Wikipedia has a complete list of taxation systems by country. No income tax. There are a number of countries that have no personal income tax. See the Wikipedia list. Citizenship-based taxation. The US has a citizenship-based tax system. If you are a US citizen, you are responsible for filing US taxes, no matter your location or where you live. Except for the United States and Eritrea, most countries have residence-based or territorial tax systems. Residence-based taxation. Residence-based taxation is the most common tax system in the world. In residence-based taxation, a country taxes worldwide income (including foreign income) earned by residents living within their borders (usually for at least 183 days of the year but check the rules for your situation). Territorial-based taxation. In territorial-based taxation, a country taxes only income that is sourced from within the country. Foreign income sourced from another country is not taxed. What if a digital nomad doesn’t spend enough time in any single country to become a tax resident there? How do you determine tax residency then? The OECD, or Organization for Economic Cooperation and Development is an organization working to reduce and eradicate tax evasion. The OECD Articles of the Model Convention with Respect to Taxes on Income and on Capital was drafted in part to prevent member countries from double taxing personal income. This document also outlines some helpful rules for determining your tax residency if you are a digital nomad perpetually traveling and don’t have a clear country of residency. According to the OECD rules, if you don’t have a clear country of residency, your residency is then determined by: The country where you have a permanent home (owned or rented) If you have a permanent home in more than one country or none at all then it is the country where you have closer personal, social, and economic relations If you have too many personal, social and economic relations in multiple countries to determine which is closer, then your resident country it is the country where you spent the longest amount of time that year. If the amount of time you spend is equal between countries or indeterminate because you are constantly on the move then you fall back on your nationality and that becomes your country of tax residency. If you are a national of more than one country then the countries’ authorities get to determine by mutual agreement where you are a resident. You will have to contact the tax authorities in those countries to have them determine your tax residency based on their tax laws. Do American digital nomads need to file US tax returns? Yes, no matter where you live or if you are working remotely, if you are a US citizen or have a green card you must file income taxes if you earn over the threshold ($13,850 for 2022 or $27,700 if married filing jointly or you make just $400 of self-employment income in 2023). You do not get to avoid filing tax returns just by leaving the United States. An American citizen living abroad or green card holder must file taxes for their worldwide income which includes all income made outside of the U.S. If you are a remote worker for a US company, your US employer will continue to withhold taxes on your paycheck because they are required to do so by law. Even if you are a freelancer, and you don’t have an employer withholding tax, you must still pay tax. In fact, if you are a freelancer or self-employed you may have additional tax obligations. Thankfully, there are additional deductions you can take as well. I discuss this more below. The good news is that just because you have to file a tax return does not always mean you will owe taxes to the IRS. You may not need to pay tax on all of your foreign earned income due to special tax deductions for the income you earn while abroad. You may even get a large tax refund on the taxes withheld by your employer. I discuss this more below. Do American digital nomads always have to pay federal US taxes? The short answer is there are ways to exclude some if not all of your foreign earned income (within limits) from federal taxes. As stated above, if you are a U.S. citizen and make over the threshold of worldwide income ($13,850 for 2023 or $27,700 if married and filing jointly or you make just $400 of self-employment income), you have an obligation to file US taxes. Determining if you have to pay any federal taxes is a bit more complex. There are a couple of ways to reduce how much of your earned income is subject to federal taxes. The foreign earned income exclusion allows you to exclude up to $120,000 (for 2023) of foreign earned income from federal taxes. If you qualify for the foreign earned income exclusion, you may still owe US taxes on the amount you earn above the foreign earned income exclusion. For example, if you make $124,000 and are able to exclude $120,000, you may still need to pay federal taxes on the remaining $4,000 ($124,000-$120,000=$4,000). If you are married and both you and your spouse work abroad, you can each exclude $120,000 for a total of $240,000 if each of you qualifies individually in 2023. Together, you and your spouse can avoid paying federal tax on as much as $240,000 of your income with the foreign earned income exclusion. There are other ways to exclude your income from federal taxes including the foreign tax credit or deduction and the foreign housing exclusion. I discuss these more below. What are the IRS reporting and tax filing requirements for American digital nomads abroad? Tax Form 1040 Individual Federal Tax Return Almost all US citizens and green card holders, including remote workers and digital nomads, must file this form. This is the same tax form you file when living in the U.S. The annual filing deadline for form 1040 is usually April 15 of each year but if you are filing from abroad you get an automatic 2-month extension to June 15. Tax Form 2555 Foreign Earned Income You must complete this form to claim the FEIE (foreign earned income exclusion) and FHE (foreign housing exclusion). These are two of your largest deductions when working abroad so it pays to fill out this form correctly. I discuss the FEIE and what counts as foreign earned income for the foreign earned income exclusion below. Form 2555 is submitted with Form 1040 and the due date is the same: April 15. Tax Form 1116 Foreign Tax Credit Form 1116 is used to claim the Foreign Tax Credit. Like Form 2555, this form must be attached to your Form 1040 and submitted on April 15. The foreign tax credit is a dollar-for-dollar credit of the money you paid in foreign taxes against your US taxes. You can take either a tax credit or a deduction for income taxes you have paid to a foreign country or a U.S. territory. You should consult your tax professional about which choice is best for your situation. State taxes Whether you are required to continue paying state taxes as a digital nomad traveling abroad will vary from person to person. If you continue to have financial ties in a state like a house, rental property, financial accounts, or business interests then you may need to file state taxes. Each state has its own tax rules for residents and recent residents. I discuss this more below. Self-employment taxes Many digital nomads have chosen to start freelance businesses and become self-employed or independent contractors. Even if self-employed digital nomads live abroad and their income is exempt from income taxes due to the foreign earned income exclusion, they may still have to pay self-employment taxes, including social security taxes (12.4% ) and medicare taxes (2.9%). If you reside in one of the 24 countries that have totalization agreements with the U.S. you are exempt from paying US social security taxes on self-employment income if you make contributions to your host residency country’s social security system. If you are self-employed, choosing one of these countries to establish a tax residency may save you money on your self-employment social security taxes. FinCen Report 114: Report of Foreign Bank and Financial Accounts (FBAR) This form is separate from your US tax return. If you stop being a digital nomad for a year or more but maintain your financial accounts abroad you still have to fill out this form if you meet the filing requirements. You must file a Foreign Bank Account Report (FBAR) if you have foreign registered bank accounts or other financial accounts with a collective sum of more than $10,000 at any time during the year. You file this form online and send it directly to the Financial Crimes Enforcement Network (FinCEN), and not the IRS. The deadline is April 15 but if you miss it you get an automatic extension to October 15. IRS Form 8938: Statement of Specified Foreign Financial Assets (FATCA) Digital nomads living abroad may need to file Form 8938 if the value of their foreign assets in foreign bank accounts exceeds $200,000 on the last day of the tax year or $300,000 at any point during the tax year For joint returns, the filing threshold is $400,000 on the last day of the tax year or $600,000 at any point in the tax year. For digital nomads not considered to be living abroad, the thresholds are reduced to 25% of the amounts listed above. For example, for joint returns, the filing threshold would be $100,000 on the last day of the tax year rather than $400,000. Uncle Sam will know if you aren’t reporting your assets. Most banks worldwide report the foreign assets of Americans abroad to the IRS. The IRS has a list of countries participating in the Foreign Account Tax Compliance Act (FATCA). Schedule C and SE for freelancers and self-employed persons Schedule C and SE are specific to freelancers and self-employed persons. They are used to calculate your taxable net earnings and self-employment tax. You can learn more about Schedule C and Schedule SE on the IRS website. Will you be taxed twice as an American digital nomad working abroad? Which factors determine how much of your worldwide income is double taxed if you are an American citizen? Filing taxes in the US and your country of residence does not always mean you will be taxed twice on the same income. The foreign earned income exclusion allows you to exclude up to $120,000 in 2023 from double taxation. The foreign tax credit and foreign housing exclusion can also further reduce the amount of your income that is double taxed. One of the most important factors for determining how much tax you will pay is whether or not the country where you are living has a double-taxation treaty with the US. These treaties help prevent people living in those countries from being double-taxed on the same income. The IRS provides a list of the countries with double taxation treaties. What special tax deductions and credits are available for American digital nomads? There are 4 main tax deductions and benefits available to digital nomad Americans abroad in addition to self-employment business deductions and the usual tax deductions available to most US citizens and green card holders. The details for these deductions can be found on the IRS form 2555 instructions. I discuss these in more detail in the sections below. If you qualify, the foreign earned income exclusion allows you to exclude up to $120,000 in 2023 of foreign earned income from double taxation. If you qualify for and take the foreign earned income exclusion you can use the foreign housing exclusion on any qualifying amount you earn above the $120,000 threshold if your employer pays for certain housing expenses with taxable funds. The maximum foreign housing exclusion for 2023 is $36,000 but the calculation is variable (see more below). If you are self-employed you may be able to use the foreign housing deduction instead of the foreign housing exclusion. The foreign tax credit is a dollar-for-dollar reduction in your US tax obligation based on the foreign tax you have paid. If you have a digital nomad visa with tax benefits you can benefit from paying reduced or even no taxes in your host country while still taking advantage of the deductions and credits listed above. What is considered foreign earned income for digital nomads? It is important to understand what foreign earned income actually is so you know how much of your earnings will qualify for the Foreign Earned Income Exclusion, the largest tax break for digital nomads. The money you earn while performing your work when you are physically outside the US is “foreign earned income” even if you get paid into a US bank account by a US employer or client. Where the money is deposited or how you are paid (i.e. paypal, wire transfer, direct deposit, etc) has no effect on whether the income is considered foreign sourced. Moving your money from a US bank account to a non-US bank account or vice versa also has no consequences on whether the money is considered foreign sourced. What matters is where you are while working and earning that money. This concept is super important: The term foreign earned income only applies to income earned while you are physically outside of the United States. If you were physically inside the United States while performing the services that earned you money then that money is not considered foreign earned and will be taxed normally. What is the Foreign Earned Income Exclusion (FEIE)? The foreign earned income exclusion (FEIE) allows you to exclude up to $120,000 in 2023 of foreign earned income from US federal taxes. This essentially helps to avoid double taxation on your first $120,000 of foreign earned income. This amount is adjusted upward each year. The FEIE is not an automatic exclusion and you must qualify as described below. Even if you make less than the FEIE exclusion amount and don’t owe federal taxes you still have to file taxes as part of your U.S. citizenship tax obligation if you make more than $13,850 for 2023 or $27,700 if filing jointly. The FEIE applies only to earned income such as : Wages and salary Bonuses Commissions Self-employment income Professional fees Rental income (up to 30% of your net rental income can be considered earned income if you perform services in connection with the production of rent) The FEIE does not apply to unearned income. This type of income is taxable at the usual US tax rates and includes: Dividends Interest Capital gains Pensions Social security payments Annuities Rental income (if you use a property manager and do not perform personal services related to the production of rent then rental income is considered unearned) How do you qualify for the Foreign Earned Income Exclusion (FEIE)? To qualify for the Foreign Earned Income Exclusion (FEIE) you must pass either the physical presence test or the bona fide residence test. To meet the physical presence test, you have to have been outside of the U.S. for at least 330 days in a consecutive 12-month period that begins or ends in the tax period. So you can’t spend more than 35 days in the US during a 12-month period. To meet the bona fide residence test you must be a US citizen or resident alien, maintain a residence in a single foreign country and live there from January 1 to December 31 with no plans of returning to the US in the foreseeable future. In addition to the physical presence test, you must also have a tax home outside of the U.S. According to the IRS your tax home is the “general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home.” Your tax home is not necessarily your residence for tax purposes. How much is the Foreign Housing Exclusion and how do digital nomads qualify? The Foreign Housing Exclusion (FHE) lets digital nomads living abroad deduct certain housing expenses from their US taxes. The foreign housing exclusion applies only to housing expenses from employer-provided income and includes any amounts your employer paid to you or paid on your behalf as long as that money is taxable. If you are self-employed then see the Foreign Housing Deduction below. To use the Foreign Housing Exclusion you must first qualify for and claim the FEIE. This means you must pass either the physical presence test or the bona fide residence test. You can then use the foreign housing exclusion only on the remainder of your foreign earned income over the FEIE threshold ($120,000 for 2023) that wasn’t already excluded with the FEIE. The calculation of the housing expense limitation is a bit complicated. The foreign housing exclusion (30% of the FEIE) is adjusted by subtracting what is called the base housing cost (what the IRS says it would cost to live in the US). The base housing cost is calculated as 16% of the FEIE and is subtracted from your overall housing expenses. The amount that is left over after subtracting the base housing cost is the amount of your housing costs you can actually deduct from your income. Housing expense limitation (30% of the FEIE for that year) – Base housing cost (16% of the FEIE) = Maximum housing exclusion you can use ($120,000 multiplied by 0.3) $36,000 – ($120,000 multiplied by 0.16) $19,200 = $16,800 (maximum foreign housing exclusion amount for 2023) You then multiply the maximum foreign housing exclusion by the qualifying number of days you were in the host country divided by 365. To make things more complicated, the actual calculation may vary depending on your tax home (country or city). You may want to consult this table of locations for which the IRS has adjusted the housing limitations based on geographic differences in housing costs. Your housing expenses must exceed the base amount specified for your location. Housing expenses that qualify under the FHE may include: Rent (hotel and vacation rental stays usually don’t qualify) Property or rental insurance Utilities (except cable and telephone) Fees for securing a lease Residential parking fees Occupancy taxes Furniture rental (but not purchase) Necessary repairs The FHE does not include housing expenses such as: Domestic labor Mortgage payments Purchased furniture What is the Foreign Housing Deduction? The Foreign Housing Deduction allows self-employed digital nomads to deduct their allowable rental housing expenses and works in a similar way as the Foreign Housing Exclusion. The Foreign Housing Deduction is only for self-employed individuals and applies only to amounts paid for with self-employment earnings. It also applies only to income that is not already deducted with the FEIE. See the Foreign Housing Exclusion section above for the housing expenses that qualify. What is the Foreign Tax Credit? The Foreign Tax Credit is a dollar-for-dollar tax reduction on your foreign earned income that would otherwise be subject to dual taxation. For example, if you paid $5,000 to France but you owe $5,000 to the US on that same income then you can take a federal tax credit for those foreign taxes already paid. What business expenses can self-employed digital nomads deduct? Starting a freelance business is one of the best ways to live the digital nomad lifestyle. As a self-employed digital nomad or independent contractor, you can deduct all of the usual business expenses related to your self-employment income. You’ll want to track and deduct certain business expenses from your US self-employment income including: Internet service Mobile service VPN service Co-working space or home office space Professional license and insurance fees Professional association fees Office equipment (including laptop, hotspot) Web hosting, domain fees, and web security services for your websites Educational courses related to your profession Social media and marketing expenses Expenses for work-related travel Mileage to client meetings 50% of business-related meals PayPal fees and other banking fees for payments Legal and accounting expenses Memberships and subscriptions Also, as per the Tax Cuts and Jobs Act (TCJA), owners of eligible businesses can deduct 20% of their qualified business income and not pay any tax on it. This deduction is available through the end of 2025. Can you use the foreign earned income exclusion or foreign housing exclusion if you are a digital nomad and don’t stay in any single country long enough to become a tax resident? According to the IRS, to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have your abode outside of the US, must earn income while physically outside of the U.S., and be one of the following: A U.S. citizen who is a bona fide resident of one or more foreign countries for an uninterrupted entire tax year. A U.S. resident alien (green card holder) who is a citizen or national of a country with which the United States has an income tax treaty and who is a bona fide resident of one or more foreign countries for an uninterrupted entire tax year. A U.S. citizen or a resident alien (green card holder) who is physically present in one or more foreign countries for at least 330 full days during any period of 12 consecutive months. If you are traveling between multiple countries, staying outside of the US for at least 330 days during any period of 12 consecutive months, and you don’t have an abode in the US then you may be able to claim the foreign earned income and foreign housing exclusion. TAX TIP: Typically the foreign housing exclusion applies to rentals but not hotels or vacation rentals so you may want to factor this in when choosing your accommodation. Additionally, if you have a digital nomad visa that provides tax benefits to digital nomads and you claim that country as your tax home for the tax year then you get to save on taxes in your host country if applicable. The HRBlock website states that as long as you qualify for either the physical presence test or the bona fide residence test then you can use the FEIE. This implies that you do not need to prove where your new tax residence is as long as you do not have an abode in the US. The Greenback Expat Tax Services website says that if you are a digital nomad and live in multiple foreign countries over the course of the year with no single, main place of residence or work, then you may have multiple tax homes for the year. That could mean that you could have filing requirements and owe taxes to those multiple tax homes. You'll want to make sure you know the rules for each of those countries. The IRS website has a handy interactive tax tool to see if you can exclude your foreign earned income. Do you have to pay US state taxes as a digital nomad living abroad? Whether you are required to continue paying state taxes as a digital nomad traveling abroad will vary from person to person and state to state. If you continue to have financial ties in a state like a house, rental property, financial accounts, or business interests then you may need to file state taxes. If you earned income in a state or lived there for a certain amount of time during the tax year then you may need to file a state tax return. Each state has its own tax rules for residents and recent residents. The last state you resided in before going overseas will have a big impact on whether or not you need to file state taxes. If the last state you resided in before going overseas was California, Virginia, South Carolina, or New Mexico then you will need to file state taxes. These states are notorious for trying to maintain tax jurisdiction over their former residents. Even if you moved out of one of these states, they are more likely to continue imposing state taxes on you if any of the following apply: You still have a driver’s license or ID card in that state Your spouse and/or children live in that state Your vehicle is still registered in that state You’re still registered to vote in that state You have a bank account open in that state You own property in that state You maintain a mailing address in that state TAX TIP: If you don’t want to pay state taxes while abroad, before you leave the country, consider moving to a state that doesn’t collect income taxes from its residents. States that do not collect income taxes include: Florida South Dakota Wyoming Washington Texas Nevada Alaska Do digital nomads have to file and pay US self-employment tax? What are totalization agreements? Yes, self-employed digital nomads and independent contractors must file and pay US self-employment taxes. Sadly, the self-employment tax can’t be avoided with the Foreign Earned Income Exclusion (FEIE) or Foreign tax credit. If you work for a foreign employer you are not required to pay U.S. self-employment taxes (Social security and Medicare). It is important to keep in mind that not paying US social security taxes can affect your future social security benefits when you are ready to retire. If your net self-employment earnings are $400 or more then you have to file self-employment taxes. For 2023, the first $160,200 of self-employment income is subject to a 12.4% social security tax. All of your self-employment income is subject to the 2.9% Medicare tax. You are required to make payments 4 times a year on your estimated taxes if you expect to owe more than $1,000 in taxes for the year. If you don't pay or underpay then you may owe a tax penalty. Similar to Double Taxation Treaties, some countries have totalization agreements with the US where you may be exempt from having to pay US self-employment tax and instead only need to pay social security tax to the foreign country you live in. TAX TIP: If you are self-employed or an independent contractor, living in one of the countries with a totalization agreement may save you money on social security taxes. If you are self-employed and live in a country without a totalization agreement, then you must still pay US self-employment taxes, even if you paid into the Social Security system of the host country. Luckily, you can still use the amount of tax you paid to a foreign social security system in the calculation of your Foreign Tax Credit. For digital nomads intent on avoiding paying self-employment tax, there are other more complicated ways to minimize taxes by incorporating an LLC offshore and other mechanisms such as creating a Belize IBC and forming a Wyoming or Nevada LLC where there are no state income taxes. What is the deadline for American digital nomads to file taxes? If you reside outside the US your tax filing deadline is still April 15 but you get an automatic extension to file until June 15. You can request a further extension until October 15th if you need more time. The extension to October 15 is especially useful if you have to file taxes in another country but won’t meet the physical presence test by April 15 to have some or all of your income qualify for the foreign earned income exclusion. What address should digital nomads use on federal and state tax forms? The address you use on your taxes can make a huge difference for both your state and federal taxes. You’ll want to choose your state address carefully. You can still get the FEIE if you use a US address on your return since you’ll be asked to provide your foreign address as well. TAX TIP: If you have no intention of returning to the US anytime soon, you could consider using a virtual mailbox, for example, one that provides a mailing address in a state with no state tax. Virtual mailboxes can also scan your mail for you to review online and make managing your US mail so much easier than asking a friend or relative to take care of it. What are some tax tips and strategies to reduce your US taxes as a digital nomad or while working remotely? There are a number of tax tips and strategies you can reduce your US taxes as a digital nomad or while working remotely abroad. Apply for a digital nomad visa offering tax benefits. Stay out of the country for 330 days in a consecutive 12-month period to take advantage of the Foreign Earned Income Exclusion (FEIE) and possibly the foreign housing exclusion or deduction. Use the Foreign Tax Credit to reduce your US tax liability on your worldwide income. Use the Foreign Housing Exclusion or Deduction to reduce your US tax liability on your worldwide income. Before leaving the US for your travels, establish residency in a state without state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Don’t stay in any country long enough to establish tax residence and owe taxes there, especially ones with high tax rates (unless you have a tax-free digital nomad visa) Establish a tax residency in a territorial tax country where you only pay taxes on the money sourced there (Costa Rica, Gibraltar, Malaysia, Hong Kong) and then source your income from outside those countries. If you are self-employed you can contribute up to $22,500 to your Solo 401K + 20% of operating profits to a maximum 401(k) contribution of $66,000 for 2023 and deduct these contributions from your taxed income. If you are self-employed, track all of your work-related expenses to deduct them. If you are self-employed, use your travel strategically so your travel expenses qualify as work expenses. If you are self-employed and end up being a tax resident in another country, try to choose a country with a Totalization Agreement so you don't have to pay social security taxes to two countries. Learn about the US tax filing requirements so you don't miss deadlines and can avoid future penalties. What happens to your student loan payments if you are a digital nomad? I first read about this strategy on www.studentloanplanner.com. If you have an income-drive repayment plan (IDR) like Pay As You Earn (PAYE), you can reduce your payments to $0 if you make less than the FEIE ($120,000 for 2023) because it effectively makes your adjusted gross income (AGI) equal to $0 for federal tax purposes. When you submit your tax return with an income of $0 electronically to your loan servicer, your student loan payment becomes $0. This allows you to make no payment but stay in good standing with your loans. You don’t have to opt for deferment or fall into default. Of course, a $0 monthly payment will still cause the loan balance to grow a lot over time. Borrowers with private loans from private lenders don’t get to take advantage of this loophole. What if a digital nomad forgets or is behind on filing US taxes? Intentionally avoiding taxes can result in penalties that range from a minor fine to thousands of dollars and even jail time. But if you forget or fell behind in tax payments the IRS has ways to help you catch up without facing penalties as long as you do so voluntarily before the IRS catches you first. The IRS offers the Streamlined Foreign Offshore Procedures that allows non-compliant taxpayers residing abroad to catch up on their taxes without paying any fines. I hope I’ve answered your most burning questions about taxes for digital nomad and remote worker Americans living abroad. While you don't get to avoid filing taxes as an American digital nomad you've now learned a few tax tips and ways to use the filing requirements to your advantage. Even though US taxes and international tax laws are complicated for digital nomads, the digital nomad lifestyle is worth it! If you think you're ready to become a digital nomad, you may want to learn more before asking your boss to let you go remote. If you’re looking for a career change, let me show you how to find a work-from-anywhere remote job. Or let me convince you why you should start a freelance business to live the digital nomad lifestyle. https://www.pinterest.com/pin/926404585824193631/

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