Digital nomads are a new breed of the workforce - they are unencumbered by location,
only by availability of WiFi. Advances in technology have made remote work no longer taboo,
and arguably “trending” as hoards of young people grab their laptops and travel the world either
on their own, or with the help of new companies popping up that provide coworking
spaces worldwide and arrange for travel.
While the lifestyle is certainly sexy, the one aspect that US citizens and GC holders
cannot forget is the unsexy IRS and the requirement to file a US tax return declaring their worldwide
income, no matter where they live and work. This is where TFX comes in - we work with thousands of digital
nomads worldwide and understand your unique situation - filing U.S tax returns for Americans residing abroad
is our main line of business, as clients in 175 countries can
attest.
We consider it our primary job to remove the hassle of U.S. tax obligation so that our clients can focus on
more fun things in their resident country.
Self-employed Digital nomads - Choose Destinations Wisely
Digital nomads employed by a US company, whether in the US or abroad, are not required to pay
self-employment taxes (Social security and Medicare); it is the responsibility of your employer to pay this
for you.
However, for the entrepreneurial bunch, awareness of SECA (Self-Employed Contributions Act) tax is vital &
can have a large impact on your bottom line. Lifestyle, language, culture, and food are not the only factors
that digital nomads need to be aware of when determining where they want to reside -- some countries have
signed a ‘Totalization agreement’.
Residing in a country that has signed this agreement, if your tax return is properly filed, digital
nomads can be exempt from SECA tax.
Totalization agreements
| Italy |
Germany |
Switzerland |
Belgium |
UK |
| Sweden |
Spain |
France |
Austria |
Finland |
| Ireland |
Luxembourg |
Chile |
Australia |
Japan |
| Denmark |
Slovak Republic |
Norway |
Greece |
Czech Republic |
| Canada |
Portugal |
Netherlands |
South Korea |
Poland |
Essentially - you don’t have to pay into both SS systems, but you must pay into one (and this must be
correctly accounted for on your US tax return). For example, if you are living in Spain, and pay into
Seguridad Social - please be aware that the IRS may request a Certificate of Coverage.
The downside of moving to a country without a Totalization Agreement, even if you pay into the local Social
Security system, you are still liable for U.S. SECA tax. However, you may still utilize this amount as
‘Foreign Tax Paid’ and use it for calculation of the foreign tax credit. If you choose to reside in a
low-tax country like Hong Kong or Singapore, this is especially important.
U.S. International
social security agreements
If you are not covered in the resident country, then U.S. SECA tax cannot be exempt.
Frequently asked questions
1. Will I have to pay tax in my resident country if my income is US-sourced?
- That’s a great question, but one which we are unfortunately not able to answer across the board. It really depends on the rules and regulations of the country in which you reside, your visa status, etc.
- We would recommend getting in touch with a local accountant in your resident country to find this out. We partner with local firms globally - please let us know if you need a referral.
2. Why am I required to file a tax return if I don’t live in the US?
3. Will I be double taxed on my earnings?
4. What is the minimum income level at which I must start filing a US tax return?
5. Is it possible to actually receive a refund if I don’t pay any US tax?
6. I heard I can exclude up to $100k while living abroad, how does this work?
The biggest exclusion available to Digital Nomads is the Foreign Earned Income Exclusion (FEIE). This allows you to exclude up to $100k of income provided that your income is earned abroad (as opposed to unearned income or income earned in the US) and that you have spent enough time outside of the US.
The Residence Test
In order to benefit from the Foreign Earned Income Exclusion, the taxpayer must meet one of the following two criteria:
- Live and work outside of the United States for at least 330 of any 365 day period - known as the Physical Presence Test (PPT)
- Live and work in a foreign country for an entire calendar year- known as the Bona Fide Residence Test (BF)
While the two criteria may appear to be similar, they are actually quite different in terms of how they apply to your US taxes.
The PPT essentially means that a person left the United States and has not returned for more than 35 days throughout the twelve consecutive months. This clause in not based on a calendar year; it simply refers to any twelve month period (ie April to April or September to September). Also note that it makes no reference to consecutive days; so a Digital Nomad would be considered ineligible if he made several 2-7 day trips back to the US that totaled more than 35 days during the twelve month period in question. The key to meeting the "physical presence test" is to have spent less than 35 days in the US during a 12 month period.
Two more important things about the PPT.
- The 330 days of the year spent outside the US must be spent on the actual land territory of another state. Therefore if you spend time in the international waters (ie on a ship) - it does not count toward the daycount spent outside the US.
- The days that you arrive and leave the US (even if you are only transferring flights) count towards the days spent in the US. For example if you arrive to the US on July-1st and leave on Jul-10th, you should count a total of 10 days as spent in the US.
For Digital Nomads - the BF test is likely to not apply as you are not moving to a single country where you take steps to establish residency.
7. How do I know if my income is earned or unearned?
The simplest example to explain the difference between earned income and unearned income is to compare wages from consulting work and bank interest. The former requires your active participation and is earned income. Interest, on the other hand, are unearned (those of you who studied Marx in college will recall the struggle of capital vs labor - the IRS happens to agree), and not eligible for FEIE.
Income earned in the US means that even if you spend most of the year in Paris, but fly to New York to give a speech that earns you $10k, you are not able to utilize FEIE to exclude this income, as it is earned in the US. However - if you were to give the speech over Skype, while being physically located in Paris, you would be able to exclude that income.
8. What are the deadlines for U.S Tax returns? Do I have to file any other forms as a digital nomad?
If you reside outside the US on April 15, you get an automatic extension to file until June 15. Outside of regular tax requirements, digital nomads may also be subject to filing FinCEN 114, also known as FBAR (Foreign Bank Account Report). This is an informational report that must be filed if the aggregate of non-US financial accounts (checking, savings, brokerage, pension, etc) by June 30. Starting in 2017 (for 2016 reporting), the due date is being shifted to April 15, with ability to extend to October 15). If you have a bank account abroad.
An extension can be filed to extend your return Federal return until October 15. If you have US sourced income (perhaps you are a contractor for a firm in Massachusetts who issues you a 1099), you may still have state tax filing obligations.
9. I am moving all over the world and don’t spend more than a month in each country - what is my ‘address’?
You’re working and traveling, but you still receive snail mail. Where does it go? Depending on your home state, utilizing a US address can cause issues. Do you want to spend hours on the phone and corresponding via snail mail with the state of Virginia that you don’t live there and shouldn’t pay tax? We didn’t think so.
We recommend to obtain a virtual mailbox (please see this article we wrote that explains how it works and its benefits in depth). One such firm that offers this service and many of our clients use is Travelling Mailbox
Provides a Texas mailing address (No state Tax)
Offers a virtual mailbox and can scan letters for easy review online
Please note - there may be other reasons why you may want to (or are required to) file a state return - then you can continue using your old U.S. mailing address as you are required to file state tax return anyway. Nevertheless - a virtual mailbox offers an attractive option for those who don’t have a ‘home base’ to receive snail mail.
10. I have the option to go abroad for 6 months - will I benefit from any expat treatment?
Unfortunately - no. As discussed above, to be eligible for the biggest benefit of being an expat - exclude up to $100k of foreign earned income through the FEIE, you must meet either the bona-fide residency test or the physical presence test.
If you spent a great deal of time abroad, but not enough to meet the 330/365 day requirement, you might consider spending the rest of the year traveling. As long as you are physically living in a country outside the US - the time will count towards the 330 day rule.
Depending on your situation, you may actually be better off financially not returning for the rest of the year (and not working) - as your earnings (sub $100k) will now be treated tax free, but if you return home after 6 months, you will be taxed just as if you never left. However - this requires thorough analysis, as staying for a prolonged period of time in a foreign country may trigger local country tax filing requirements -- these thresholds vary by country.
11. I’m thinking of incorporating my business abroad - what does this entail?
