Taxes. Nothing stresses a digital nomad quite like the prospect of figuring out how to deal with taxes on income earned while working from a laptop in multiple foreign countries. There is a lot of speculation and false information circulating on the Internet regarding digital nomad taxes, so I figured I’d talk to a tax expert and get answers.
I emailed Stewart Patton, a U.S. tax attorney currently living in Belize, to ask him some of the most common digital nomad tax questions I’ve seen. Please keep in mind these questions are targeted at Americans. Disclaimer: This blog post is not legal or tax advice. You should always seek out a professional regarding your specific situation. Nevertheless, I hope you find it helpful!
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If I’m an American citizen living outside the U.S., do I still owe taxes to the U.S. government?
You’re definitely still subject to US tax. Whether you end up actually paying any or not is a different issue. I like to think of the concepts here as being in a pyramid. The base of the pyramid has the most fundamental concepts, and then the concepts get more refined as you go higher. At the base, all US citizens are subject to US tax on their worldwide income, no matter where they live. Also, US citizens are required to file a US tax return if their gross income is over the applicable threshold (generally $10,000 for single people and $400 for people with self-employment income). But, moving up one step in the pyramid, US citizens who live outside the US can take advantage of special US tax rules to reduce their US tax. The centerpiece here is the “foreign earned income exclusion,” discussed next.
Finally, moving to the top of the pyramid, there are special structures digital nomads can use to best take advantage of these special rules. For example, a digital nomad who operates a location-independent business can often hold that business through a non-US corporation structure. This structure allows the digital nomad to make up to about $100,000 per year completely free of US tax.
What is the Foreign Earned Income Exclusion (FEIE), and can digital nomads use it?
Yes, digital nomads absolutely can qualify for the FEIE as long as they plan correctly. The FEIE allows a digital nomad to make up to about $100,000 from providing personal services without paying any US income tax. To qualify, you generally need to be in a foreign country for 330 days in a 12-month period (and that 12-month period can start on any day). If you work as a self-employed person (an independent contractor, freelancer, solopreneur, professional, etc.), then you still have to pay self-employment tax, which is 15.3% of the first $118,000 and 2.9% above that. Also, when you own a business (not a profession) directly in your own name, there are some rules that reduce the effectiveness of the FEIE. So, for these reasons, it’s best for a digital nomad with a business to operate through a non-US corporation structure. That way, they eliminate the self-employment tax (perfectly legally) and avoid the special FEIE-limiting rules, thus allowing them to simply receive a salary of up to $100,000 from the company completely free of US tax. Now, obviously these rules are complicated, so it’s difficult to summarize in just the space above. See a longer explanation for how this works here.
What are some of the biggest mistakes you see digital nomads making when it comes to taxes?
The single biggest mistake I see digital nomads make is failing to plan in advance. Several of my clients have had huge US tax bills for income earned before they started working with me, which they could have easily (and legally) avoided by setting up a proper business structure from the beginning.The second biggest mistake I see is not thoroughly vetting sources when it comes to tax information. There are lots of “offshore gurus” who will promise you the moon and beyond, and churn out plenty of free content on how they think tax works, but they don’t have the education or experience necessary to make their advice actually worth anything. US international tax is one of the most complicated bodies of law known to man, so it takes an experienced US tax attorney to actually decipher it and apply it correctly.
One of the biggest concerns many digital nomads have is that by being in a country and doing work (even though it’s completely online), they’re violating their tourist visas and/or now owe tax to that country. Is this true?
As I mentioned above, it’s a big mistake to simply believe things you read from unqualified people. Well, I am absolutely not qualified to express an opinion on the laws of any jurisdiction other than the US. So, please take my comments here only as a springboard for further research on your specific situations. The tourist visa issue is generally more problematic than the tax issue. Tax in most countries can generally be avoided simply by not spending more than 6 months out of any 12 months in that country (see here for more discussion). The rules in each country can be different than this, so please check further. Plus, enforcement here is obviously complicated. The tourist visa issue is a little more difficult. You have to actually be in front of an immigration officer to enter or leave each country, so you may have to actually try to prove you’re simply traveling as a tourist. For this reason, some nomads will avoid carrying items that look too “businessy” (like business cards), and will be ready to show how they use their laptop simply for their photography hobby (or whatever). The bottom line here is that there’s no way around it—this is one of the “gray areas” about the digital nomad lifestyle. However, two additional thoughts here:
- The tourist visa issue isn’t typically enforced that stringently because many countries are happy to have you come in, buy some goods and services, and pay some sales tax or VAT while you’re there.
- I simply haven’t seen this be an issue among my clients and other digital nomads I interact with. It’s definitely an issue on paper, but on the ground I haven’t seen people actually getting dinged left and right.
Are there certain countries that are very strict about digital nomads paying tax there if they’re working online while living there? Conversely, are there any “digital-nomad-friendly” countries you’d recommend?
My clients have not had any tax issues in countries they’ve visited. This just doesn’t seem to be a real problem that a lot of digital nomads are struggling with.
Some countries, such as Germany and the Netherlands, have self-employment visas. Do digital nomads need to obtain these to lawfully live and work online in these countries?
A digital nomad would need to check the laws of each country they want to visit to determine if entering and remaining in that country is legal. Again though, this isn’t something my clients have talked a lot about, so I don’t think it’s much of an issue on the ground.
I read on your site that California does not recognize FEIE and is stringent about collecting taxes from ex-residents. Would it be beneficial for digital nomads from California (or other high-income-tax states) to establish residency in a different state and then leave the country?
The absolute best thing to do is to actually move to TX or FL (or another no-tax state) before becoming a digital nomad. This obviously takes time and money, so isn’t really worth it for the vast majority of people. California looks at several factors to determine whether you have an intent to return to California (and are therefore still subject to California tax). So, the second best thing is to try and get as many of the following things as possible pointing to a state other than California:
- driver’s license,
- bank accounts,
- library card, and
- voter’s registration.
You can use a service provided by www.escapees.com to get a driver’s license in TX, FL, and SD.
Where can we follow you and find more information about U.S. tax law and living abroad?
My site is www.ustax.bz. I’ve got a bunch of free articles, three online courses, and a handy online calendar for scheduling consultations.
Stewart Patton is a US tax attorney and expat entrepreneur. He specializes in helping expats and digital nomads understand and optimize their tax situations. He grew up in Midwest City, Oklahoma, then attended Texas A&M University and the University of Houston Law Center (graduating magna cum laude and Order of the Coif). He practiced for 12 years as a tax attorney in three large law firms, culminating as a partner in the Chicago office of Kirkland & Ellis LLP. Three years ago, after one too many cold Chicago winters, he moved with his family down to Belize (where his wife is from).