A Comprehensive Guide To Taxation For US Digital Nomads
As a digital nomad, where you pay taxes depends on your country of residence. According to United States laws, if you are an American citizen, you are still responsible for paying your self-employment tax on your income, no matter where you live. The US is one of the few countries in the world that taxes its residents based on citizenship and not on if you are living there presently. Here is a guide to taxation for US digital nomads.
This comprehensive digital nomad taxation guide will walk you through the key things you need to know about meeting your local and international tax obligations as a US digital nomad.
The Duration of Stay Matters
As a digital nomad, you can work and live anywhere in the world. Most countries offer a grace period where you can live and work there tax-free. However, you could owe taxes if you remain in one country for too long.
In most cases, this is usually from a continued stay of up to 6 months. For this reason, consider visiting a country that offers digital nomad visas that exempt you from filing taxes for the destination country.
Tax filing deadline
As a digital nomad or expat, you might be curious about double taxation from the US and your current country of residence. Luckily, this rarely happens because the US has tax treaties with most countries, which helps prevent double taxation for expats and digital nomads up to $100,000. You only need to file your self-employment taxes.
Remember to expense and deduct other business costs
For example, suppose you are a digital nomad and travel blogger who makes an income from travel trips. In that case, you can expense flights, hotel costs, and anything related to running your business. Deductions can help lessen your tax burden because there is less taxable income.
The deductions you can make depend on what you do as a taxable digital nomad, but some things you can deduct when filing taxes include the following:
- Laptops and computer devices
- Internet services
- Coworking spaces payments
- Website hosting and domain fees
- Virtual assistants
- Payment transaction fees
As you’re probably aware, you’ll need to keep receipts to prove your deductions.
Track your taxable income
As a freelancing digital nomad, you may have multiple income sources who all pay in different currencies. If that’s the case, you can make your tax filing process easier by converting all your income into one currency that acts as a baseline. This can help you account for the conversion rates of each currency and deduct them as an expense.
Consider forming a separate legal entity
A good way to secure your personal assets against legal business suits, a common occurrence among nomad-owned businesses, is to set up a separate tax entity. For example, you can consider setting up an LLC or an S Corp.
An LLC, or Limited Liability Company, cushions you legally and gives you the tax deductions benefits of writing off expenses used to run your freelancing/self-employment business. You will still have to pay 15.3% in self-employment tax.
Once you’re ready to set up a separate entity to take advantage of tax benefits, consider opting for an S Corporation because it saves you on self-employment taxes, which helps by splitting your income equally into two:
- W-2 Salary- you still pay self-employment taxes
- Distribution- self-employment tax exemption
You can save a portion of your taxes from this. The general rule is that it becomes worth it once you’re a digital nomad who owns a business that generates around $40,000 or more in annual net income.
Know the types of tax claims you can make
While filing taxes as a digital nomad, there are special taxes and claims you should consider.
If you have had $10,000 in foreign financial accounts combined during a year, you must file this tax introduced to help prevent money laundering. Intentionally failing to file an FBAR is a willful violation that can result in a $100,000 fine or more or 50% of the money ii\n your bank at the time of the violation.
The IRS offers US expats a chance to benefit from tax exclusions by manually filling out a form requesting these exclusions as you file your taxes. The easiest way to qualify for this is to prove that you have been physically present in a foreign country for at least 330 full days in a given year consecutively.
Managing your travel plans as a digital nomad while keeping in mind your tax obligations as a US citizen can be challenging but easier when you know what to look out for and your tax obligations, as discussed in this guide.