There’s a certain allure that comes with being a digital nomad. The opportunity to be location independent, explore new cultures and enjoy unparalleled flexibility are just a few of the perks. However, there are a few logistics to iron out and make sure that you have covered. Paying taxes as a digital nomad is one of them.
As a location-independent worker, you may travel around a bit. This can make it difficult to determine where to pay your income tax. Unfortunately, figuring out the correct method for paying digital nomad taxes is not cut-and-dry. In fact, it’s far more complicated than we’re qualified to share.
Ultimately, it boils down to a few important factors;
- Where you are originally from i.e. where do you hold citizenship
- How much you travel throughout the year
- The amount that you earn
- Where you hold permanent residency
Each individual will have different tax requirements depending on these factors, and so it is best to seek professional advice from a qualified practitioner. Under no means does this constitute financial advice and a professional’s counsel should be used for confirmation. In the meantime, this article should point you in (roughly) the right direction.
* Just to let you know that this article may contain affiliate links. If you click on them we might receive a small commission, at no extra cost to you.
Identifying Tax Residency
So, as ‘citizens of the world’, where do digital nomads pay their taxes? There’s a very far-fetched myth that says digital nomads don’t pay taxes, however, this is untrue.
Firstly, taxes are automatically paid as spending occurs. Think back to the last time that you bought a product that had VAT applied to the total – this is tax! However, this sort of tax is probably not why you’re here…
It’s important to know where you are liable to pay tax on the money that you earn. This question could be easily answered as a permanent employee of a location-based company. If you’re a self-employed individual, then it can get quite tricky.
You may have heard of the 183-day rule. This rule is acknowledged in several countries and can dictate where you pay taxes as a digital nomad. Essentially, spending more than 183 days in a single country during a tax year will make you liable as a tax resident.
If you are registered as a primary resident in a specific country, then you may be expected to pay tax there. Whether you’re physically living in the country or not. An example of such a country is Portugal.
Another issue to consider is whether you are the subject of Permanent Establishment, which is a rather complex situation to navigate. Typically, if you are deemed to have a Permanent Establishment in a country, which means a fixed place of business in which the business of the enterprise is wholly or partially carried out, then you need to pay taxes on business profits. As well as any other social security contributions.
Some jurisdictions have drawn up contracts and signed bilateral tax treaties. What this means is that the source of your income and tax residence have an agreement to avoid you having to pay tax twice, in two separate areas. With this in mind, be very wary of finding yourself as a tax resident in two countries that have not signed the double tax treaty as you’ll have to pay tax in both countries.
U.S Digital Nomad
If you’re a citizen of the United States, then you’re a tax resident as well. If you have a green card then you need to file and pay U.S taxes regardless of where you live and work. If you want to stop, then you have to expatriate and give up your American citizenship.
Overall, you’ll be required to pay taxes on your global income, unless you qualify for Foreign Earned Income Exclusion (FEIE). That’s a whole other kettle of fish that has a stringent set of requirements and is only relevant to earned income outside of the United States. One of the main factors is that your tax home is outside of the United States and that you pass the Physical Presence Test.
Digital Nomad UK Tax
The United Kingdom has the Statutory Residence Test to measure how well you are connected to the country. From here, they will determine your situation based on the results.
Several experienced UK-born digital nomads choose to continue paying taxes in the UK by registering as self-employed and setting up a partnership. By doing so, you have an easy and convenient online system to pay taxes and you don’t lose your residency while traveling the world.
Tax for Digital Nomads in Canada
Remote workers stemming from Canada have different options for paying tax. Certain details, such as how long you’re traveling, will impact whether you’re a factual resident, a non-resident, an emigrant, or a general Canadian resident. You can determine your residency status here.
Deciding which sort of resident you are will depend largely on your assets in the country and other complicated matters. For these reasons, it’s best to speak to a professional that is familiar with Canadian tax law.
How to Save as a Digital Nomad
Keep in mind that any expense incurred while working as a digital nomad could be deductible. This includes your laptop, office supplies, internet, phone expenses, coworking membership, and other professional fees.
Make sure that you track all of your expenses in whatever way works for you. One way is to use a spreadsheet on the cloud and keep all named invoices in an online folder. There are also financial tracking apps that are very useful and efficient. Whatever works best for you. Tracking your income with invoices and keeping a tally is equally important for filing tax as a digital nomad.
Don’t forget to bookmark important dates in the tax calendar for the country that you owe money to. Find an accountant that you trust is familiar with your local tax law and start filing your returns earlier rather than later. This will prevent fines for delayed payments.
Taking matters to an extreme level, you can choose to open a business or live in a low-tax jurisdiction. Examples of some countries are Estonia, Panama, Cyprus, Portugal, and Bulgaria among others. This can be quite a commitment so it’s best to do your research on the quality of life, entry requirements, and long-term plan.
Don’t Skip Taxes
If you do a quick Google search, you’ll find a fair bit of tempting information on how to avoid paying taxes or jimmy the system. This may save you a few pennies at the moment but can cost you a lot in the long run.
It’s best to get advice from a professional and stay on top of your tax game. Keep a strict record of all invoices and receipts, and update your financial record regularly. Diarize important dates for the tax year and get a professional to help you file your returns.