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Small Business and Self-Employed

How Do Digital Nomads Pay Tax?

The digital nomad lifestyle is on the rise due to a combination of various trends. The COVID-19 pandemic accelerated the shift to remote work, and many companies are now embracing the concept of a remote workforce. 

The pandemic and other lifestyle changes have also led many people to shift their priorities and adopt a more adventurous lifestyle. Many countries worldwide now welcome digital nomads, creating special visas to facilitate the movement of people. The increasing accessibility of cheap tech and the internet, alongside the rise of the gig economy and readily available freelance work, make the digital nomad lifestyle both an enticing prospect and an attainable reality. 

But, there is still the complication of taxes. How do digital nomads pay taxes? Where do they pay taxes? What help exists for digital nomad tax issues? Let’s explore.

Digital Nomad Tax

When paying tax as a digital nomad, you have various options at your disposal. There is some flexibility depending on where you are, where you work, and where you are from. What is essential, of course, is that you stay legally compliant.

The Worldwide Personal Tax and Immigration guide from Ernst & Young is a great place to start researching tax systems in respective countries. 

Personal Vs Corporation Tax

It's important to distinguish between personal taxes, which individuals pay on their earnings in their resident country, and corporation taxes, which businesses pay on their profits after operating costs in the country where the business is registered. It's possible to pay personal tax in one country under one set of rules and corporation tax in another under different rules.

While some digital nomads avoid taxes altogether by becoming non-residents and moving around to avoid being a resident of a foreign country, this is a legal gray area. Most digital nomads pay taxes at home or in countries where they're temporary residents, if only to avoid difficult questions from tax authorities if they eventually return home.

Non-Resident Status

To qualify as a non-resident, most countries require you to be overseas for a significant period, ranging from 183 days to 349 days in any given year (check your home country's laws). You should notify tax authorities of your non-resident status, as it will make it easier to reintegrate if you return home to work in the future.

So, for example, if you want to claim non-resident status from the US, you will need to be away from the country and not live in the US for at least half the year. 

Becoming Legally Resident in Another Country

Some high earners avoid taxes by legally residing in another country with a low-tax or tax-free regime. While this is ethically questionable, some tax havens offer temporary residency for a fee or have residency schemes where you're not taxed on money earned outside the country. Having an accountant with offshore expertise is essential if you decide to go down this route.

However, over the last few years, there’s been an increase in digital nomad visas, which makes temporary residency in another country more accessible.

Digital Nomad Visas

Digital nomad visas can have varying effects on tax, depending on the specific details of the visa and the country in question. A digital nomad visa may allow individuals to work remotely from a foreign country for a fixed period without incurring tax liabilities in that country. 

However, in other cases, the visa may require the individual to register as a tax resident and pay taxes (usually relatively lenient) in the host country.

Additionally, digital nomads may need to consider their tax obligations in their home country and any other countries where they earn income, as well as any potential tax treaties between those countries. For instance, US citizens, wherever they are in the world, always have to file taxes back in their home country. Researching your specific circumstances is vital here so that you don’t break the law regarding your earnings.

Registering a Company

Setting up a company can help reduce your tax bill as countries tax businesses and employees differently. You can pay yourself a salary or dividend through the company, and the business will be liable for corporation tax only on profits after running costs. 

Your wage or dividends will be liable for personal or dividend tax rates, but earnings may be tax-free if they fall below a certain threshold. 

Alternatively, you can set up as a sole trader, pay tax on profits, and have the business running costs tax-deductible. 

However, personal and company finances are intertwined, and you'll be personally liable if your business falls into debt or goes bust. Registering your company name and submitting annual accounts are typically required. Under Estonia's E-Residency scheme, non-residents can register a business with an associated local bank account and only pay corporate tax on distributed profits.

As a sole trader or employee of your own company, you'll be liable for personal income tax in the country where you are legally resident. You may not be liable for personal income tax anywhere if you're not a legal resident anywhere. Even if you become legally resident in a particular country, you may be able to avoid paying tax on income earned outside the country if you stay for less than 183 days.

Managing Your Taxes

It’s clear from the advice above that you need to consider where you are traveling for your job, your home country, and your visa status to determine what taxes you need to pay where and what digital nomad tax deductions you may be entitled to.

Each person’s individual context will affect your best move to be financially better off while always remaining compliant. 

However, one thing all digital nomads need is help managing finances in preparation for paying taxes.

That’s where QuickBooks can help. 

QuickBooks can be a powerful ally when it comes to managing your finances and taxes efficiently and effectively while traveling. Automated tracking of incomings and expenses, sophisticated reporting at the click of a button, and professional invoicing will all help your business run smoother.

When it comes to tax filing, QuickBooks can track GST/VAT, calculate taxes owed and file tax returns automatically based on the information you share. This can save you time and hassle and help you avoid costly mistakes.

Find out more about QuickBooks today. 

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