Tax and Legal Watch-Outs for Digital Nomads7 min read
There are many legal risks that digital nomads should watch out for before taking the leap. Here are some insights into the legal and tax-related watch-outs you should be cognisant of as you begin your new life as a nomad.
Note: This article is designed to provide some initial best practices to consider; however, it should not be substituted for the guidance of a registered tax accountant (we recommend that all digital nomads work with one) or legal professional, should you end up needing one.
Proactively reduce your liabilities
When working as a nomad, you’ll need to do your due diligence to reduce any and all liabilities. This includes having copies of written company consent regarding your plans to work remotely from several locations. Equally important is maintaining backups of your work efforts, software, systems (like computer drives), and more to cover yourself in the event of unforeseen circumstances.
Research local and regional laws before you leave
Many law libraries have terminals set up where non-attorney persons can access legal search engines (think Google for Law) for information on various legal-related information that is not easily accessible elsewhere. These include WestLaw and LexisNexis, and anyone can use them without having an actual subscription, although you may have to pay per hour for this service.
When you track down a law library, ask the librarian where their patron access is located. If you find yourself having trouble navigating these resources, you can utilize the sites’ reference attorneys (likely free of charge) via your phone or the online chat area on their site for help with this new material. Some law librarians can also help you with researching the local laws and legal structures of the countries of your choices.
Tip: Ask for the “International Business” section on these sites.
Always be transparent about your whereabouts
Be transparent regarding your whereabouts each time you relocate. Your company’s IT team will often be able to tell if and when you are logging in from another country as your IP number will be different. Anything that goes through a company‘s network can and will be tracked. Not to mention, you’ll feel more relaxed if you don’t have to try to navigate timezones to try to appear like you’re online when your clients or employers are. Ensure the terms of your remote engagement are clearly communicated and that your manager and/or colleagues are up to speed on your location and availability.
Be diligent about paying your taxes
IRS tax deductions are also something to consider. For U.S. tax purposes, depending on your citizenship, you could be classified as self-employed or as an independent contractor, and your income earned as a nomad may be fully taxable.
Stating the obvious, just because you’re not on U.S. soil does not mean you’re off the hook when it comes to your responsibility to pay U.S. taxes. Stay on top of your reporting and payment schedule to simplify your work and personal life abroad. Need help? Seek the counsel of a registered accountant to help you prep and file taxes and navigate your new status. The additional cost will be well worth the peace of mind, and it can even be written off as a business expense.
Foreign income exclusions might apply if you are a foreigner living and working abroad in the United States. This will depend on the tax laws of your citizenship abroad. You may not have to pay tax for your home country after taking advantage of exemptions; however, you may want to contribute to your country‘s social security system. The U.S. has a social security treaty with certain countries, meaning that social security payments made in the U.S. can sometimes be credited back to your home country.
Note: U.S. tax laws apply to U.S. “persons”
U.S. “persons” generally include citizens, green card carriers, and resident aliens. The U.S. tax laws apply to work physically done in the U.S. or its territories. A U.S. firm can pay a citizen of another country to work overseas, but a 1099-Misc, W-2, or 1042-S will not be issued, as none of these apply. A citizen of another country doing such work likely should also not fill out a W-9 or a W-8BEN. If a U.S. firm asks for either, it may indicate that they do not understand the reporting requirements and will erroneously issue forms that imply there is U.S. work involved. IRS publication 515. Thus, it is most important to ask your company for the specific documents that apply for your location and citizenship.
Paying taxes out of state and out of country
Often, U.S. persons will pay taxes in the state they work, and not necessarily where their employer is based. For example, if your company is in Louisiana, but you work in Michigan, you’ll pay Michigan taxes. Your employer likely should withhold taxes from your check for these state taxes if your home is considered your base office.
As a U.S. citizen, you’ll file a U.S. tax return on all worldwide income. You would also get credit for foreign tax paid. If you are self-employed, your income is reported on Schedule C and you’ll be required to file a tax return if your income from self-employment is $400 or more. You may not necessarily owe income tax, but you will likely owe around 15 percent of your net profit as self-employment tax (this amount will be applied to programs like Social Security and Medicare).
Even if you have a deduction, as an employee you’ll likely only be entitled to any benefit if you itemize, and only for amounts over 2 percent of your annual gross income (AGI).
Tax deductions as a nomad
- Exclusive business deductions: If you have a designated (separate) phone line and internet connection for business use, these costs are likely deductible. Long-distance phone calls would also qualify here, although tax savings are modest as they are subject to a 2 percent AGI floor.
- Housing deductions: If your company requires you to maintain a home office, you might be able to write off part of your housing expenses as a result (this figure is calculated as the percentage cost of your home office relative to the entire home).
- Cell phone and internet deductions: If you have a business-designated phone or internet service, you can deduct that expense when filing your taxes. However, if your internet and phone services are a mix of business and personal, as many of ours are, then you will only be able to deduct long-distance calls or internet usage associated with your line of work.
- Business-related travel costs: Travel costs relevant to business trips and meetings can be written off. Personal travel expenses are fully taxable.
Trouble getting paid?
According to the Freelancers Union, 71 percent of independent workers have had trouble getting paid by a client. Chances are, you’ve been stiffed before, and if you think it was hard getting invoices paid in your home country, just wait until you are thousands of miles away.
Since many unresolved payments result from miscommunications that stem from a shoddy or incomplete statement of work and freelance agreement, it’s imperative for digital nomads to clearly articulate the terms of work and expectations upfront. Never begin work without a signed and secure contract in-hand. Need help getting started? Check out AND CO’s free customizable contract template.
Remember, most issues really depend on the laws of your location, so make sure to research and ask many questions with your personal advisor and company. Stay not only safe, but legal, as you live and work as a digital nomad.
For more on getting started as a digital nomad, read our free eBook, Anywhere.