Being a digital nomad gives you the freedom to travel the world and make money at the same time. But there are drawbacks to this freedom, particularly with regard to taxation on digital nomads. Notwithstanding the numerous regulations, intricacies, and challenges related to tax compliance, independent contractors and businesses that provide remote work need to be aware of:

• Home country and host country tax laws
• Common tax challenges for nomads
• Solutions to overcome tax compliance challenges
• Tax planning strategies
• Best ways to handle tax disputes and audits
• Future of digital nomad taxes
• The role of international payroll and tax compliance partners like Multiplier

In doing so, both digital nomads and companies with offshore employees can ensure compliance without ever facing harsh fines, license (and work permit) cancellations, or reputational damage.

Home and away tax obligations for digital nomads

As an employee operating in remote settings, your tax obligations are predominantly determined by two factors: your country of residence and the countries where you earn income (or operate). Needless to say, it’s essential to familiarize yourself with the tax compliance regulations of both your home country and the host country you visit or reside in for work.

It’s known that in most cases, remote workers are mandated by law to file tax returns and pay taxes in their country of origin, regardless of where they earn their income.

Having said that, many countries have specific tax rules in place for non-residents. Long story short, if you generate income in a foreign country without holding citizenship, you could be subject to additional digital nomad taxes or income reporting requirements.

Common Tax Challenges for Nomads

While the life of freedom and flexibility as a digital nomad sounds exciting, it also presents complex tax challenges that can discourage the most talented and productive remote workers.

1. Double taxation

Essentially, double taxation is the tax levied on the same income by the country of origin and the country you live in and work from. This can be a significant financial burden for digital nomads and requires careful understanding of cross-border tax treaties and tax compliance strategies.

2. Varying tax regulations

Each country has their own regulatory framework for taxes and reporting requirements which can be cumbersome to monitor. Digital nomads moving between multiple jurisdictions face difficulties navigating separate regulatory environments.

3. Determining tax residency

Entering international markets and for work can be challenging, especially if a digital nomad is constantly on the move.

Since tax compliance hinges on tax residency, offshore work explorations means having to deal with different country-specific tax residency definitions and criteria. Such a scenario adds to more confusion and non-compliance.

4. Documentation and record-keeping

Digital nomads often have to manage substantial paperwork and maintain detailed financial information for reporting. As a direct result of multiple income streams and currencies, accurate paperwork and record-keeping becomes an uphill task for digital nomads.

How to Overcome Digital Nomad Tax Challenges

While navigating digital nomad taxes can be challenging, there are several solutions and best practices that can help simplify the process and ensure compliance:

1. Acknowledge tax treaties

Many countries have tax treaties in place to prevent double taxation and provide guidance on tax residency and income sourcing. Familiarizing yourself with these treaties and how they apply to your situation can help minimize your tax burden.

2. Maintain accurate records

Keeping detailed records of your income, expenses, travel dates, and financial transactions is essential. They aid in maintaining accurate tax reporting and backing up your claims if any tax auditing is carried out by authorities.

3. Leverage technology

Take advantage of tax software like Multiplier, designed specifically for digital nomads, remote workers, and startups expanding globally. These tools can help you track your income, expenses, and tax obligations across multiple jurisdictions.

4. Solicit professional advice

Consulting with a tax professional who specializes in international taxation and digital nomad tax planning can provide valuable guidance.

What’s more, tax compliance and global payroll experts like Multiplier can help ensure compliance with home and host countries’ regulations.

5. Utilize tax-efficient structures

Based on your tax residency and nature of work, exploring tax-efficient business structures can simplify tax compliance. For instance, setting-up an offshore company or a corporation for global expansion could help in lessening tax liabilities.

6. Stay in the know

As a digital nomad, you have to be vigilant of changes surrounding digital nomad taxes. Since cross-border regulations are dynamic and ever-changing, always stay updated about the evolving tax landscape to bypass confusion and non-compliance penalties.

7. Be proactive

Don’t wait until the last minute to address your tax obligations. Stay proactive by setting reminders for crucial tax deadlines, filing estimated tax payments, and addressing any potential issues or questions as and when they arise.

5 Proven Strategies for Digital Nomad Tax Compliance

Effective tax planning techniques are essential for navigating complex digital nomad tax laws, since they can reduce your tax liability and guarantee compliance.

Here are some strategies to think about:

1. Pick a tax-friendly country

Establishing a tax home in a country with favorable tax laws can provide significant benefits. This involves demonstrating stronger ties to that country, such as maintaining a permanent residence, opening a banking account, or registering a business there.

Read Also: The Best Digital Nomad Jobs and Careers

Keep in mind to first understand the specific regulatory requirements and potential implications of your preferred country before formally building any ties.

2. Leverage foreign tax credits

Many countries offer foreign tax credits to prevent double taxation on income earned abroad. By claiming these credits, you can offset taxes paid in one country against your tax liability in another, effectively reducing your overall tax burden.

3. Prioritize tax treaties

Tax treaties between countries exist to prevent double taxation and provide guidance on aspects, like residency, income sourcing, and tax rates. By understanding and leveraging these treaties, you can effectively minimize your tax obligations and ensure compliance.

4. Consider alternative structures

As mentioned earlier, investing in alternative business structures like an offshore company or corporation can offer tax advantages and simplify compliance.

However, make it a point to seek professional help from global expansion experts like Multiplier to ensure that you, as a digital nomad, comply with existing compliance laws and regulations.

5. Maximize deductions and exemptions

As a digital nomad, you may be eligible for several deductions and exemptions for travel, housing, and business expenses. Keeping detailed records and consulting with a tax professional can help you maximize these opportunities and reduce your taxable income.

What Tax Benefits Are Available for Digital Nomads?

For digital nomads living abroad, significant tax benefits can be available. The biggest three are the following:

• Foreign Earned Income Tax Exclusion (FEIE)
• Foreign Housing Exclusion
• Foreign Tax Credit

Let’s go over each.

Foreign Earned Income Exclusion (FEIE)

The FEIE lets expats and digital nomads exclude a certain amount of foreign-earned income from US taxation. The exact number changes from year to year, for the 2024 tax year, the exclusion is $126,500.

The FEIE applies only to qualifying earned income, including:

• Salary
• Wages
• Bonuses
• Commissions
• Self-employment income
• Professional fees

…and not to unearned income, such as:

• Interest
• Dividends
• Pensions
• Social Security payments
• Capital gains

The FEIE isn’t an automatic exclusion for anyone living outside of the US, either. To qualify for the FEIE, you must pass at least one of two tests:

• The physical presence test
• The bona fide residence test

Foreign Housing Exclusion

The Foreign Housing Exclusion lets Americans living abroad deduct certain housing expenses from their US taxes. This exclusion can only be claimed in addition to the FEIE, meaning there is a tax implication that you must first qualify for and claim the FEIE to be eligible.

There are a few other requirements as well:

• You must have qualified housing expenses (hotel and Airbnb stays usually don’t qualify for this tax purpose.)
• You must pay your housing expenses from employer-provided income (self-employed digital nomads must use the Foreign Housing Deduction instead.)
• Excludable expenses include rent, utilities (but not cable or phone), property insurance, small out-of-pocket repairs, and parking expenses near your home.

Because the housing exclusion is a bit complex, we like to explain it by saying that the sweet spot is between 16% and 30% of the FEIE. Only housing expenses over 16% of the base amount can be excluded. Amounts below this base amount cannot be excluded. There is also a maximum of 30% of the year’s FEIE limit that can be excluded.  

For reference, with an FEIE limit of $120,000 in the 2023 tax year, housing expenses below 16% of $120,000, or $19,200, cannot be excluded. Amounts over $19,200 up to a maximum of 30% of the FEIE limit, or $36,000, can be excluded.  

As an example, housing expenses of exactly $19,200 would give you no extra exclusion. Housing expenses of $19,201 would give you $1 of extra exclusion. Housing costs of $36,000 would give you $36,000-$19,200, or $16,800 of extra exclusions.  

Any housing costs over the maximum would still only give you $16,800 of extra exclusions. For example, housing expenses of $46,000 would give you a $36,000-$19,200, or $16,800 extra exclusions. This is why we say the housing exclusion “sweet spot” is between 16% and 30% of the year’s FEIE. 

For some high-cost-of-living areas, such as London or Shanghai, the maximum amount is much higher, which will result in a higher exclusion. 

Foreign Tax Credit

If you pay income taxes to the foreign country in which you reside, you can generally reduce the amount of US tax owed by the amount of foreign taxes paid using the Foreign Tax Credit. This is designed to keep expats and digital nomads from being taxed twice on the same income.  

There are limits to the amount of Foreign Tax Credit (FTC) you can claim as a taxpayer. One important limitation occurs when you claim the Foreign Earned Income Exclusion (FEIE). Claiming the FEIE reduces the amount of foreign income tax you can claim as a credit, as you cannot claim a credit for foreign taxes on income that has been excluded from U.S. taxation.

Also, not all foreign taxes will apply. To qualify for a Foreign Tax Credit, you must have a foreign tax liability that: 

• Originated legally in a foreign country 
• Is assessed on your income 
• Is imposed on you as an individual 

What Tax Forms Do Digital Nomads Need To File?

Depending on their tax status, digital nomads may be required to complete a wide range of tax documents. It might be daunting at times to try to remember what you are and are not required to file.

Here are a few of the most popular tax forms for digital nomads to make things easier.

IRS Form 1040: Individual Income Tax Return 

IRS Form 1040 is your personal tax return. Virtually all US citizens—including digital nomads—must file this form.

The due date to file Form 1040 is generally April 15 of each year, but may be a few days later if the 15th falls on a weekend or holiday, (though you can apply for an extension). 

IRS Form 2555: Foreign Earned Income

To claim the FEIE and Foreign Housing Exclusion, you must complete Form 2555 and attach it to your Form 1040.

Because this form is always submitted with Form 1040, it has the same due date: April 15th.

IRS Form 1116: Foreign Tax Credit (Individual, Estate, or Trust)

Form 1116 is used to claim the Foreign Tax Credit. Like Form 2555, this form must be attached to your Form 1040 and submitted at the same time.

FinCEN Report 114: Report of Foreign Bank and Financial Accounts (FBAR)

Any US person—including digital nomads—with more than a combined $10,000 in foreign bank accounts is required to file an FBAR.

This form is filed separately from your Form 1040 but has the same standard due date: April 15th. However, if you miss that deadline, there’s an automatic extension to October 15th.

Either way, this form must be filed online and sent directly to the Financial Crimes Enforcement Network (FinCEN), not the IRS.

IRS Form 8938: Statement of Specified Foreign Financial Assets (FACTA)

If an expat, digital nomad, or other US person living abroad owns foreign assets worth more than a certain threshold, they must file Form 8938.

• For digital nomads filing their taxes individually, that threshold is $200,000 at the end of the tax year or $300,000 at any point during the tax year.
• For digital nomads filing a joint tax return, the threshold is $400,000 at the end of the tax year or $600,000 at any point during the tax year.

However, the thresholds are much lower for digital nomads who are not considered to be living abroad. In that case, the thresholds are reduced to a quarter of the amounts listed above.

Note that the standard for “living abroad” is the same as the qualifications for the FEIE. If you are unable to pass the physical presence test or bona fide residence test, the IRS will apply the reduced thresholds for Form 8938, even if you currently reside outside of the US.

This form is filed with your Form 1040 and has the same due date. Foreign real estate generally does not need to be included on Form 8938.

Summary

Being a digital nomad provides a fantastic opportunity to travel the world and make money at the same time. Nonetheless, it’s critical to comprehend and abide by the tax laws and rules of both your home country and any other nations you travel to or operate in. Financial costs, legal issues, and severe punishments may follow failure to comply.

Digital nomads can more successfully negotiate the complexities of taxation by recognizing obstacles, adhering to best practices, and developing all-encompassing plans.