Taxes as a Digital Nomad – Arm yourself with knowledge
Unless you’ve somehow pulled an Armageddon type deal with the government by blowing up an astroid, good old Uncle Sam (I’m talking to you Americans) expects you to pay taxes – digital nomads included. Are taxes for digital nomads different than for cubicle stationary types? Possibly. Filing taxes as a digital nomad can bring a new level of complexity to the table. While I am not a CPA nor am I an expert on American tax law, I am a small business owner, am abroad more than I’m “home,” and I’ve done my homework. This article is meant to give you some tips to get you started. Some of these I had to learn the hard way. I hope that it saves you some time.
Digital Nomad topics to discuss with your accountant
- Inform your accountant of the dates that you were out of the country. And don’t just photocopy your passport – make it easy for her. The information she is looking for is exactly how many days you were inside the United States during the calendar year. There is a subset of tax rules that may apply to you called the Foreign Earned Income Exclusion (FEIE). The FEIE allows you to not pay taxes on your first $100,000.00 you make overseas IF you reside outside of the US for more than 330 days. However, there are conditions upon conditions, it is better to ask your accountant. You can read more about it here.
- Are you a lucky duck? If you are an employee of an American company and you are allowed to work remotely, your company is darn cool, you are a lucky duck, and your taxes will probably continue as normal. That being said, you should still discuss your location status with your accountant.
- Foreign Income. Are you working overseas for a company while on a work visa? If so, many will raise an eyebrow to your “nomadic-ness”, but your taxes will still be slightly different. If you paid tax in another country for work completed there, report it to your accountant. Many countries have an agreement with the United States that prevents double taxation.
- Living the American Dream overseas. Most digital nomads own a business and have it registered in the United States. If your digital skills allow you to sell services, products, or content then you have a business. Congratulations. You are an entrepreneur. You’re living the American Dream….abroad. Like Mitt Romney once said, “companies are people too my friend,” which means that your business pays taxes. Just. Like. You. My. Friend.
Business tax questions for your Accountant
To put it bluntly, how and where you choose to set up your business will affect your taxes drastically. Digital Nomads need to understand their business’ current and future needs. One big decision is to decide whether the company will be US based. If you decide to keep in all in the family and base your business in the US, here are some basics to get you thinking about business tax.
- Sole Prop, LLC, C-Corp, S-Corp. Small Business Tax Law is different depending on the structure of your business. Most digital nomads have a sole proprietorship at the onset of their business which means the company and all revenue is recorded under the SSN of that nomad. This is fine. BUT. If you have written your own golden ticket and business is booming, you will want to consider forming your business as either an LLC or a Corp. If the words “angel investor” have entered into your business conversations then you will need to scrutinize your structure – like yesterday. Each structure type has its own set of rules, governing laws, and of course, tax regulations. Discuss this with your accountant. There are advantages and disadvantages to each of these structures. While it is possible to change the business structure while the business is up and running, depending on the state you are registered, amendments or conversions can be costly.
- Business expenses. Exactly like if you opened a brick and mortar store back home, you better be keeping track of all of your business expenses. These can be deductible! Did you get a new laptop? Buy a second monitor for your computer? Attend a conference? These deductions go against your declared revenue that could lessen the overall tax amount you owe.
- Business Revenue. If you are billing clients, you need to be able to prove it. If you are in the habit of making handshake deals, break that habit now. Just like tracking your expenses, you need to be able to show your income. A good rule of thumb, is to keep these documents for as long as the government can audit your business – seven years. Thank goodness for the cloud.
- File for an extension. Chances are that you have your funds invested in the market. If you are expecting to pay taxes, why pay it in April when you could wait until September? While there is a penalty for extending the deadline, it may be the case that the benefits outweigh the cost. You might make a few more dollars by leaving those funds in the market for an extra five months. Business extensions must be approved and can be denied. Your accountant will advise you on which avenue she thinks best.
- Set up a Business Bank Account. This might seem basic, but if you are mingling your personal and business finances you will be in for a world of hurt when it comes time to separate them at the end of the year. Make your life easier and separate those funds.
How to get the ball rolling
- Get an accountant. This is still one of the professions in which personal referrals mean a lot. Make sure that they have other clients that are working overseas as well. Don’t be the Beta test.
- Talk to your accountant early. Ideally, do this before you leave the country. If that ship has sailed, no worries, set up a video chat to discuss your situation. You want to let them know your business structure, your anticipated earnings (ballpark), and your best guess as to how long you will be abroad. Then, ask him/her what you should be monitoring. Maybe your business structure isn’t the right one for you. What expenses can be deducted?
- Move to Texas or Florida. If you are still in your planning stages or you currently work from home. Move to one of these states one to two years in advance of moving overseas. Why? No state taxes. Let me repeat. No state taxes. Likewise, move your business to Delaware. There is a reason why many companies incorporate there.
You’ve filed your taxes. Now what?
- The tax code changes every year. Some years the changes are huge. It is best to ask your accountant each year if there are any new tax provisions that affect you.
- Think about how your prep went this year. Did you have to do a last minute scramble to find receipts or documents that your accountant needed? Think about your organizational system for your taxes and take the hour of time needed to fix what needs fixing. Don’t wait and suffer through that pain again.
- Hustle. Like you aren’t already, I know, but the year goes by quickly. Soon enough, the process starts all over again! Or, go find yourself an asteroid careening towards the earth and destroy it. Up to you.
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