To remain competitive in the US labor market, more and more employers are looking to hire digital nomads to their workforce. While that’s great news for workers, digital nomads should know what they’re getting into. With a more flexible lifestyle often comes more complex filing requirements.
What Are Digital Nomads?
Digital nomads are different than individuals who simply work from home. While both perform their work duties away from a fixed business location, digital nomads typically work while traveling to new destinations. Their on-the-go lifestyle means they can work from multiple different cities, states, or even countries in a single tax year.
Digital nomads can be employed by a business, be self-employed, or they can work on a contracted basis. As long as they have access to the internet and perform the job functions required of their position, their hiring managers don’t typically care when — or from where — they work.
What Are the Tax Filing Requirements of a Digital Nomad?
Digital nomads have unique tax concerns. These are some of the most common questions we get about tax filing requirements for US citizen digital nomads.
Do I still need to file a US tax return?
If you are a US citizen, you are required to file a US tax return regardless of where you work. The only way you can avoid filing a federal US tax return is if you establish residency in another country and renounce your US citizenship.
Will my income be taxed in the US?
If you are a US citizen, 100% of your earnings will be taxed in the US even if you earned that income while living in another country. However, you may be able to lower your US tax bill with one or more of the following opportunities:
- You may be able to exclude all or a portion of your foreign-earned income from US taxation with the foreign earned income exclusion.
- You may be able to reduce your taxable income with the foreign housing exclusion/deduction.
- If you’ve paid taxes in a foreign country, you may be able to reduce your US taxes owed with a foreign tax credit.
Do I still need to file state taxes?
If you are domiciled in a state that assesses income taxes, then yes, you likely still need to file a state tax return, even if you work from another country for most or all of the tax year.
What is my tax domicile for state tax purposes?
Your tax domicile is where you ultimately attach yourself in the US; it’s where you intend to return to when you are done traveling, and where all your US activities are based. Typically, your state tax domicile defaults to where you lived before you began traveling.
Can I change my tax domicile?
Digital nomads often get the advice to change their tax domicile to a state that doesn’t assess income taxes (like Florida, Texas, or Nevada) before they venture out of the country, but we want you to be careful if you attempt to do this. You can’t simply change your tax domicile on paper; you must actually call this new state home.
The taxpayer is responsible for proving they’ve changed their domicile, which isn’t as easy as it sounds. New York state, for example, has been conducting a high volume of residency audits in the past decade, and it’s reported that more than half of those audited lost their cases. If your former state determines that you have not effectively cut ties with their jurisdiction, they can tax all the income you earned that year, even if you didn’t set foot within their borders.
If your domicile comes into question, jurisdictions will look at all the facts and circumstances of your situation to see if you’ve changed residencies. They will look at:
- The time you spent in each state.
If you’ve truly changed your tax domicile, you should spend a good portion of your time in that state when you return to the US.
- The location of your property.
Do you rent an apartment in the US? Where do you store your personal belongings? If you have real property rentals, which states are those in?
- If you severed connections in your prior tax domicile.
The state will look to see if you’ve cancelled banking relationships, gym memberships, civic memberships, etc. in your prior state.
- Other factors.
Other factors states will consider are:
- Your mailing address
- Where you have a driver’s license
- Where you are registered to vote
- Where you registered your vehicle
- Your city/state listed on social media
- Where you have working relationships with proprietors like insurance agents, accountants, and lawyers
- Where you registered your business and the business address listed on official documents
- Where your estate plan, trust, or will has been executed
If you choose to change your tax domicile before you begin living nomadically, be prepared to defend your position.
Do I need to file a tax return in a foreign country?
Maybe. The answer to this question could depend on:
- Which country you’re in
- The amount of time you’ve spent in that country
- The company you work for
- The type of work you do
- Who your clients are
Some countries have bilateral agreements with the US that allows travelers from both countries to travel abroad without incurring tax. Additionally, some countries provide visas that exempt digital nomads from local taxes for a specified period of time or provide exemptions for certain types of income. For example, if you have a digital nomad visa in Malta, you can live and work from Malta for up to three years, and you will only be required to pay Maltese tax on income you earn locally (like if you provide services to a Maltese resident or business).
Because each country’s tax laws are different, we recommend you talk to a CPA before moving to a foreign country so you’re aware of your foreign filing responsibilities.
Will I still need to pay into Social Security?
Yes, you will still owe Social Security taxes in the US on income you earn while living overseas. Depending on the country, you may also owe social security taxes to the country you’re living in. Fortunately, the US has reciprocal agreements with a handful of countries that eliminate or reduce double taxation on social security-type taxes for digital nomads. When these agreements are in place, individuals will only pay social security taxes to their home countries and will be exempt from social security taxes in foreign jurisdictions.
Will I still owe self-employment tax?
Yes, if you are a freelancer or otherwise self-employed, you will owe self-employment tax on the self-employment income you earn while living in a foreign country. Effectively, self-employment tax is both the employer’s and the employee’s portion of payroll tax, which is a combined 12.4% tax on Social Security and a 2.9% tax on Medicare. If the country you’re living in has a reciprocal agreement with the US for social security taxes, you may be able to avoid paying social security taxes to the foreign country, but there is no way for you to avoid self-employment tax in the US.
Have More Questions?
These aren’t the only tax requirements for digital nomads. In our upcoming articles, you’ll learn more about how to source income while you’re working as a digital nomad, and about special tax concerns for working international travelers.