US Tax Guide for Digital Nomads

By Ines Zemelman, EA

Who Should Use This Guide?

Anyone who is considering (or already in the process of) becoming a digital nomad. US citizens who are working abroad.

Why Use This Guide?

To understand the pros and cons of the US tax regime for digital nomads - how can you plan ahead to make the most of your global employment opportunities while staying on the right side of Uncle Sam.

How To Use This Guide?

Apply the considerations discussed below in deciding whether or not to pursue opportunities abroad, choosing where to reside if you do, and how to minimize any US tax obligations while doing so.

DIGITAL NOMADS

The number of digital nomads - namely US Citizens and GC holders who work while traveling overseas - is on the rise. Technology has enabled millions of people to live where they want, while working with clients all over the world. While digital nomads have freed themselves of commutes, and water-cooler talk, their US tax obligations remain - this is where we at TFX can step in.

Filing US tax returns for Americans who work outside the U.S. is our main line of business. Some digital nomads may have moved recently while others have been globetrotting for years - but they all need an expert to help and guide them through the complexities of U.S. taxes.

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. We currently serve clients in over 165 countries and are intimately familiar with the issues you face no matter where in the world life may take you.

Exclude more than $100k of Income from US Tax - Foreign Earned Income Exclusion

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.

“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.

Tax Due Dates & Filing Requirements

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 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.

Self-Employed Digital Nomads - What do we need to be aware of?

If you have an employer, whether in the US or abroad, you 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, many digital nomads are self employed, and may be liable for SECA (Self-Employed Contributions Act) tax. Choose your destination country wisely -- some countries have signed a ‘Totalization Agreement’. If you reside in a country that has signed this agreement, you are exempt from SECA tax.


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    

If the only source of income is self-employment in a country with a Totalization Agreement, please be aware that the IRS may request a Certificate of Coverage from the resident country Social Security administration.

If you are not covered in the resident country then U.S. SECA tax cannot be exempt. If you are self employed and live in a country without Totalization Agreement, then U.S. SECA tax must be paid, even if you paid into the Social Security system of the non-US country. 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

International Social Security agreements, often called "Totalization agreements," have two main purposes.


  • First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings.
    • Key note - if your return is filed properly, you will not pay self employment taxes in both countries and avoid double taxation.
  • Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country.
    • Under a Totalization agreement, if a worker has some U.S. coverage but not enough to qualify for benefits, SSA will count periods of coverage that the worker has earned under the Social Security program of an agreement country.
    • In the same way, a country party to an agreement with the United States will take into account a worker's coverage under the U.S. program if it is needed to qualify for that country's Social Security benefits.
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.

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.


Thinking of incorporating your business abroad?

Please review our comprehensive guide on foreign corporations - there are many pros/cons - as well as additional filing requirements.

Frequently Asked Questions

1. Will I have to pay tax in my resident country if my income is US-sourced?

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?