US Tax Guide for Digital Nomads

When you’re a digital nomad, taxes are probably not the first thing you think about. It’s easy to understand why, considering that the nomadic lifestyle is filled with difficulties. From dealing with visas to arranging accommodations through Airbnb, there are already numerous things to manage, and adding taxes to the mix only makes it more complicated.

What digital nomads should know about U.S. taxes

1. Yes, American digital nomads must file U.S. taxes, even when working remotely abroad

The question we commonly receive is, “Are digital nomads required to file U.S. taxes?”

Digital nomads are obliged to file a U.S. tax return if their income exceeds the minimum filing requirement.

Whether you reside in the U.S. or not, if you meet the legal requirements of being a U.S. citizen and earn an income surpassing the minimum threshold worldwide, you are obligated to pay taxes. It should be noted that this obligation remains regardless of your lack of income generated within the U.S.

Included in the taxable foreign income for digital nomads are:

Wages
Interest
Dividends
Rental Income

Filing taxes can be perceived as challenging for individuals who lead a digital nomad lifestyle; however, H&R Block ensures convenience regardless of your location worldwide. You have the option to either independently handle your expat taxes or receive assistance from an advisor.

2. Remote workers can catch up on U.S. taxes with Offshore Streamlined Compliance Procedures

If you are a digital nomad who has never filed a U.S. tax return, there is a way to become compliant without facing penalties. The IRS has a program called Streamlined Foreign Offshore Procedures that allows mistakenly non-compliant filers to catch up on their taxes without penalties. Our Expat Tax Advisors at H&R Block can assist you with this process.

In order to be eligible, you must:

Have lived in a foreign country for at least 330 days during one of the last three years and not maintained a U.S. abode.
Confirm that your failure to file U.S. tax returns and FBAR was not willful.

3. Not filing taxes as a digital nomad can result in steep penalties and fines

Attempting to evade your U.S. tax responsibility can lead to severe repercussions, and the likelihood of detection is quite high. Thanks to FATCA, numerous financial institutions across the globe share the financial account details of U.S. citizens with the U.S. government.

Expat tax penalties vary, with consequences ranging from small fines to penalties exceeding $10,000. In severe cases of non-compliance, individuals may potentially forfeit their passport.

Even if you are a digital nomad, it is worth it to file your U.S. taxes every year.

4. There are two tax benefits available to reduce digital nomads’ U.S. tax bill

If you are concerned about paying excessive taxes, you can take advantage of two options as a digital nomad to reduce your tax burden and prevent being taxed twice: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).

By excluding your foreign earned income from U.S. income tax, the FEIE reduces or eliminates your U.S. tax liability, making it applicable to digital nomads who meet either the Bona Fide Residency test or the Physical Presence Test.

The FTC is another valuable instrument for reducing your U.S. tax liability. It provides a one-to-one reduction of your U.S. tax responsibility based on the amount of foreign taxes you have paid.

5. Americans working overseas must track time carefully to claim certain tax benefits

Accurately tracking your time in each country is crucial for digital nomads to ensure a seamless tax return process. To qualify for tax benefits such as the FTC or the FEIE, it is necessary to spend a specific number of full days (equivalent to 24 hours) in foreign territory. Even a slight discrepancy of 30 minutes could lead to disqualification, meaning that time spent on a 12-hour trans-oceanic flight might not be considered for fulfilling the full days requirement due to the technicality of being in international airspace.

When you cross time zones, accurately keeping track of the hours spent in-country becomes more challenging. Seeking advice from an international tax expert, such as the professionals available at H&R Block Expat Tax Services, is advantageous.

If you are self-employed outside of the United States, you will be required to pay U.S. self-employment tax on your foreign earned income. This rule remains in effect even if you are eligible for the foreign earned income exclusion. Nonetheless, Social Security Totalization Agreements with numerous foreign countries may exempt you from the obligation to pay self-employment taxes in both countries.

Digital nomads may encounter an issue when moving between countries due to residency requirements of totalization agreements. The totalization agreement will not be applicable if you are not taxed as a resident in another country. Hence, it is advisable to seek assistance from a tax professional to handle the necessary paperwork.

If you are self-employed and not paying self-employment taxes in another country as a resident, you are required to pay them in the U.S.

Step 1

Digital Nomads

The number of individuals known as digital nomads, referring to US Citizens and GC holders who work and travel abroad, is increasing. The advancement of technology has allowed numerous people to choose their desired location to live while having clients from various parts of the globe. Although digital nomads have eliminated the need for commuting and office socializing, they still have tax responsibilities in the United States. This is where TFX can offer assistance.

We specialize in the preparation of US tax returns for American individuals who are employed abroad. Whether they are digital nomads who have recently relocated or seasoned travelers who have been moving around for a long time, our main focus is to provide professional assistance and guidance to navigate the intricacies of US tax regulations.

Our main focus is to eliminate the burden of U.S. tax responsibility for our clients, allowing them to concentrate on enjoyable activities in their home country. Presently, we cater to clients in more than 165 countries and possess a deep understanding of the challenges you may encounter regardless of your global location.

Step 2

Exclude $100k+ from US Tax

The Foreign Earned Income Exclusion (FEIE) is the largest exclusion for Digital Nomads. It enables them to exclude up to $100k of income if the income is earned abroad (not from unearned income or income earned in the US) and if they have spent sufficient time outside of the US.

The Residence Test

The taxpayer must meet either of the following two criteria in order to benefit from the Foreign Earned Income Exclusion.

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)

Although the two criteria may seem similar, they differ significantly in their application to your US taxes.

The PPT means that if a person has been absent from the United States for more than 35 days in a consecutive twelve month period, they are considered to have left the country. This does not have to align with a calendar year, it can be any twelve month period (e.g. April to April or September to September). It is important to note that the duration of the person’s trips back to the US does not matter, as long as the total number of days spent in the country during the twelve month period does not exceed 35. Therefore, even if a Digital Nomad made multiple trips lasting between 2 to 7 days back to the US, they would still be disqualified if the total days spent in the US during the twelve month period added up to more than 35. To satisfy the “physical presence test,” one must ensure that they have spent less than 35 days in the US within 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.

As digital nomads, it is unlikely that you will have to go through the BF test since you do not settle in one country to establish residency.

Step 3

Tax Due Dates & Filing Requirements

If you live outside the US on April 15, you have until June 15 to file your taxes. Besides the usual tax obligations, digital nomads may also need to submit the FBAR (Foreign Bank Account Report). This report must be filed by June 30 and includes information on all non-US financial accounts (such as checking, savings, brokerage, pension, etc.). From 2017 (for 2016 reporting) onwards, the due date for the FBAR is changing to April 15, with the possibility of extending it to October 15. If you have a bank account overseas.

If you have US sourced income, such as being a contractor for a Massachusetts firm who issues you a 1099, you may still have state tax filing obligations even if you file an extension to extend your federal return until October 15.

Step 4

Self-Employed? Important Info

If you have an employer, regardless of whether they are in the US or another country, you are not obligated to make self-employment tax payments, such as Social Security and Medicare. It is the duty of your employer to handle these payments on your behalf.

If you are a digital nomad who is self-employed, you may be responsible for paying SECA (Self-Employed Contributions Act) tax. It is important to carefully consider which country you choose as your destination, as certain countries have entered into a ‘Totalization Agreement’. If you live in a country that has signed this agreement, you are not required to pay SECA tax.

Totalization Agreements Explained

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.