Digital Nomad Taxes: What you need to know
Nowadays, with employees wanting to work from anywhere and everywhere without location constraints, being a digital nomad is a popular concept. Offering employees the option to become digital nomads can broaden their horizons, boost their mental health, and allow them to work from wherever best suits their needs. The benefits aren’t just for the employee. Offering location flexibility can help you attract top talent, retain staff longer, and even get productivity gains from employees who are happier working from the road. That being said, you might have questions about how to tax your digital nomad employees or what the implications of digital nomad taxes are from a company perspective. Let’s look at the basics of what you need to know about taxes for digital nomads.
What are digital nomads?
Unlike remote workers who are typically stationed in one place, a digital nomad is a location-independent employee who travels from location to location while working remotely. It never hurts to point out, even if it’s obvious to some, that digital nomads are not to be confused with employees who are on assignments outside the U.S.; nor are they the same as remote workers who happen to be outside the country because of a spouse or other family-related assignment. A digital nomad is just that, someone who chooses to work outside the U.S. and is not likely to settle down in the near term.
Do digital nomads pay U.S. taxes?
Digital nomads originating from America are required to file a U.S. Federal Tax Return if they make over the minimum filing requirement, regardless of where they live and if they are working remotely. Why so? The U.S. uses a citizen-based tax system that taxes Americans based on citizenship, not residency. If your digital nomad employee is considered a legal U.S. citizen and makes over the minimum amount of worldwide income, they have a tax obligation.
Although digital nomads are required to file, as is the law of a U.S. citizen, it’s a possibility that they might not actually owe anything as a digital nomad. This will depend on various factors, including their income and any eligible tax exclusions.
Digital nomads and state taxes
As a digital nomad, the beauty in being able to pack up and skip town ends where taxes begin. Depending on where your digital nomad employee last resided and how recently they have left will determine whether or not they will need to file state taxes. The general rule of thumb is that a digital nomad will file state taxes if they live in a particular state for a specific period during the tax year and earn an income while there. Since digital nomad taxes can often involve several state tax regulations, it’s no surprise that certain states will attempt to maintain tax jurisdiction over former residents. Staying abreast of the nuances across states and their specific tax rules will help you and your employee stay prepared when it’s time to file.
Available tax credits and exclusions
Employees who have taken their digital nomad journey abroad have a few options for lowering their taxes and avoiding double taxation. The most common are:
- Foreign Earned Income Tax Exclusion (FEIE): a tax benefit that lets expats and digital nomads exclude a certain amount of foreign-earned income from U.S. taxation. The exact amount allowed for exclusion is adjusted annually for inflation. For example, the exclusion for income earned in 2022 is $112,000; for income earned in 2023 the exclusion will increase to $120,000.
- Foreign Housing Exclusion: allows Americans living abroad to deduct certain housing expenses from their U.S. taxes. Digital nomads must first qualify for and claim the FEIE to be eligible for this exclusion.
- Foreign Tax Credit: a tax deduction designed to prevent expats and digital nomads from being taxed twice on the same income. This credit can only be claimed for foreign taxes imposed on you by a foreign country or U.S. possession.
Digital Nomads Tax Penalties
The responsibility of filing your taxes likely isn’t at the forefront of your mind when you’re a digital nomad working thousands of miles away from home. Nevertheless, we guarantee that the IRS will not go easy on you should you opt to skip out on your duty to file taxes because you’ve chosen to live off the coast of Greece. Not filing taxes or failing to pay your taxes as a digital nomad can result in a range of tax penalties and fines and can lead to the revocation of your passport or even jail time for serious evaders. When working abroad, there’s always a chance that tax issues may arise, so the best way to avoid tax penalties is to understand your filing requirements and file your U.S. taxes each year, even if you’re a digital nomad. Speak with your tax advisor and utilize Ineo’s Q&A Tax Subscription service to help you understand your filing requirements and remain compliant.
Digital nomad tax pro-tips from tax professionals
Taxes are rarely simple for most, and being a digital nomad can make filing even more complex. Luckily, Ineo’s global mobility tax services can provide you with the expertise required for pre-move tax considerations, multi-state compliance, global mobility tax education, and more. Whether you are a digital nomad on the move or an employer seeking solutions for digital nomad tax compliance, Ineo has you covered. Contact Ineo today to get started and learn how our complete mobility tax services can help keep you and your digital nomad employees in compliance.
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