As the world becomes increasingly interconnected and technology enables more people to work remotely, the digital nomad lifestyle has exploded in popularity.
Digital nomads are individuals who leverage technology to work entirely over the internet while traveling, without a fixed place of business.
While this freedom to work from anywhere offers incredible opportunities for personal growth and adventure, it also comes with unique challenges – particularly when it comes to taxes.
What is Tax Residency?
The first step for any digital nomad is to establish their tax residency. This is different from citizenship – tax residency is determined by factors like where you spend the majority of your time and where your primary ties are (like family, property, bank accounts, etc.) Many countries, like the US, tax based on citizenship, meaning citizens are required to file taxes even if they don’t reside there. But most countries tax based on residency.
Generally, you become a tax resident in a country if you spend more than 183 days there in a year. However, just residing somewhere temporarily won’t automatically make you a tax resident. Authorities also look at your “center of vital interests” – things like where your permanent home, family, and economic/social ties are. Your country of citizenship is often considered your “domicile” and a strong candidate for tax residency.
Some digital nomads assume that if they travel continuously and don’t spend more than 183 days in any single country, they are “tax residents of nowhere.” While this sounds great in theory, in practice it rarely works out that way.
Most countries have fallback rules that will still consider you a tax resident, usually based on your last place of residency, if you can’t prove stronger ties elsewhere. Truly having no tax residency is very difficult to achieve.
How to Pay Taxes as a Digital Nomad
So where do digital nomads actually pay taxes? The majority pay in their country of citizenship/domicile or where they spend most of their time. If you keep ties to your home country, like a driver’s license, voter registration, property, or family, you’ll likely still be considered a tax resident there. Becoming a tax non-resident usually requires demonstrating closer ties to another country.
But even if you’re a tax resident of one country, you may owe taxes to other countries too, based on where your income is earned. Many countries tax income that is sourced within their borders, even if earned by a non-resident. So if a US digital nomad spends a few months working remotely from France, they may owe French taxes on the income earned while physically there, in addition to owing US taxes on their worldwide income.
To avoid double taxation, digital nomads should see if there is a tax treaty between their country of residency and the countries where they earn income. Many treaties have provisions that allow remote workers to be taxed only by their country of residence if their stay is temporary (usually less than 183 days). The US also provides the Foreign Earned Income Exclusion and Foreign Tax Credit to help expats avoid double taxation.
Some digital nomads try to lower their taxes by establishing residency in a country with low or no income tax. A few countries, like Bermuda and the UAE, have no individual income tax at all. Several countries also offer special digital nomad visas that provide tax breaks for temporary residents working remotely, including Croatia, Greece, and Malta. However, Americans in particular need to be cautious, as they are still required to file US taxes on worldwide income no matter where they reside.
Practical Tips for Staying Compliant
Navigating tax compliance as a digital nomad is undeniably complex. But there are some practical steps you can take to make the process smoother:
- Before traveling, notify your employer of your plans and how long you’ll be staying in each location. They may need to make adjustments to payroll withholding.
- Keep detailed records of the dates and locations of your travels, as well as how much income you earn in each place. You’ll need this info for filing taxes.
- Research visas carefully and make sure you’re allowed to work remotely on the type of visa you’ll be traveling on. Tourist visas often prohibit work, even if it’s remote work for a foreign company.
- If you’re self-employed, look into the best business structure for your situation (sole proprietorship, LLC, S-Corp, etc). This choice can have significant tax implications.
- Consider establishing residency in a tax-friendly state before leaving. This is your “domicile” state where you’ll file state taxes as a resident. States like Florida, Texas, and Washington have no state income tax.
- Consult with a knowledgeable tax professional who specializes in expat taxes. The laws are extremely complex and vary based on your unique circumstances. Getting expert advice can save you from costly mistakes.
The Bottom Line
Working remotely as a Digital Nomad while traveling the world is an exciting way to live. But it’s crucial that digital nomads understand the tax implications and take steps to stay compliant. You can’t simply travel continuously and avoid taxes altogether. At a minimum, you’ll almost always owe taxes to your country of citizenship and/or residency.
Do thorough research on the tax laws of the countries you plan to visit. Keep diligent records of your travel dates and income. And when in doubt, consult a professional. While dealing with taxes is rarely a digital nomad’s favorite task, it’s an important part of sustaining this rewarding lifestyle. Safe and happy travels!