Tax 101: Tax Guide for Digital Nomads and Location Independent Workers
In 1789, Benjamin Franklin wrote, “In this world, nothing can be said to be certain except death and taxes.”
Fast-forward to 2018 and Franklin’s words still ring true, especially for digital nomads. The lifestyle affords one the convenience to work anywhere and the freedom to travel anytime. But without a definite place of residence, dealing with taxes is tricky.
The whole subject of taxes is complex. But once you’re familiar with its fundamental rules, you should be able to figure out how to stay on top of your taxes wherever you are in the world.
Different tax systems
Different tax systems
In general, most countries have either a residence-based or citizenship-based tax system, or a combination of both.
Under the residence-based system, you need to pay taxes if you stay long enough in a certain country— even when you’re a citizen elsewhere. Most countries in the European Union follow this system.
In contrast, a clear citizenship-based tax system imposes taxes on individuals on their worldwide income no matter where they live. A prime example is the United States. The country requires its citizens whether living stateside or not to pay taxes when they earn $10,000 a year or $400 in self-employment.
There are also countries that set double tax treaties with other jurisdictions ("treaty partners") to avoid double taxation of one's income. These treaties define which taxes are covered on for citizens and tax residents.
For example, a nomad with property in his home country is assessed with real estate tax and continues to pay income tax in the country he is staying in.
If the same tax is payable to both countries, the treaty also states who between the two countries have the right to collect it. Alternatively, digital nomads can avail of tax reliefs where it will be possible to set off the taxes they owe in one country with the taxes they paid in another country or vice versa.
Residency requirements in select countries
Residency requirements in select countries
Although the time period varies per jurisdiction, visitors who stay for more than 183 days or roughly six months in a certain country will be taxed for income earned in that country.
Take a look at the tax and residency requirements of popular nomad destinations:
- Malaysia – A visitor who stays for more than 183 days, is taxed on income earned, whether or not it is in paid in Malaysia. On the other hand, non-residents who stay for less than 183 days are taxed only on income collected in and derived from Malaysia.
- Singapore – Foreigners who work or stay in Singapore for 183 days or more in the previous year of assessment are treated as tax residents.
- Thailand – Non-residents, or those who stay for less than 180 days, are liable only for income sourced in Thailand. Residents earning income online and not paying tax in any other country are required to pay taxes.
- Estonia – Nomads who stay for more than six months within the taxable year are considered tax residents and are taxed on their worldwide income. If you stay for less than six months, you will be taxed based on income earned in Estonia. Estonia is also pioneering a nomad visa, plus an e-Residency system for paying taxes which makes it attractive for digital nomads.
- Spain – Self-employed persons who stay for less than 183 days over a 12-month period are not considered a tax resident and are only taxed on income earned in Spain. However, if you have been living there for at least 183 days, or your business or economic interests are located in Spain, you are required to pay tax on worldwide income earned there.
- Lithuania – Self-employed persons who stay in Lithuania for at least 183 consecutive days must pay tax on worldwide income earned there.
Staying on top of your taxes
Regardless of where you are and how much you earn, there are steps you can take to stay on top of your taxes and avoid the deadline rush or late fees.
1. Develop a system for tracking your expenses.
This can be an expense spreadsheet or an app-based system. Take note of deductible expenses like your laptops, school supplies, mobile phone, co-working space memberships, and the like.
If you run a blog or eCommerce site, you’d want to declare website hosting and domain fees and advertising expenses as part of deductible expenses.
Log these receipts on your spreadsheet and organize them by:
- Store or vendor that issues the receipt
- Details of the expense
If you receive payments in different currencies, include a conversion rate to account for the fluctuations of currency.
Revisit your spreadsheet monthly or quarterly so it’s easier to tally by the end of the year. Keep the original receipts in a safe place if in case your local taxing authority asks for the original copies.
Aside from creating your own spreadsheet, there are apps that can help you file your taxes from your desktop or your mobile phone. Below are some of the best-ranked mobile tax apps according to PC Magazine:
- Intuit Turbotax – Enter your W-2 information by taking a picture of the form in your mobile camera or typing it in yourself. The app will then show you your current tax obligation or refund, and an explanation of how it reached that calculation. It also guides you through supplying the rest of your income and takes into account your health insurance status and additional taxes.
- H&R Block Tax Prep and File – With both a browser-based and mobile version, H&R Block does a good job of guiding users through the various fields they have to fill out to accomplish their tax form. Each tax item has a Q&A section where you can hover to find out more about the field. It also has a robust Help Center where you can search for specific topics.
- Tax Act Online - After you fill up some basic information, the app asks the user questions covering up to 19 situations which could affect your tax liability. The app also offers a step-by-step guide which lists various income topics, and the user can select which topic is applicable to them to ensure they don’t miss anything while filling up the form.
2. Be a tax resident in a country that charges little to no taxes.
You can opt to be a non-tax resident of your home country and choose to be a resident for taxation purposes in another country that charges minimal or even zero taxes on your income.
Below are some countries where this is possible:
- Bahamas – Residents pay zero income tax on worldwide income because their economy is based on tourism. Applying for a temporary residence will cost you $1,000 and is renewable annually.
- Panama – While not officially considered an offshore account destination, low tax rates make this Latin American country a tax haven for digital nomads. It follows a territorial taxation scheme which means income earned outside Panama is tax-free. Income earned within is taxed at a reasonable rate of 7 to 15%.
- Paraguay – Taxes on income from local sources are charged at 8 to 10%, with no taxes imposed on foreign income. Paraguay is also one of the countries in the world known for having an easily accessible second residency program. If you stay for more than 183 days in Paraguay, you have the option to apply for second citizenship without having to renounce your current citizenship.
- Georgia – Foreigners from 94 countries can live and work in Georgia for one year without any visa or residence permit. Nomads who stay there for at least 183 days are taxed only on income derived from Georgia.
- Uruguay – Digital nomads who stay here for 183 days qualify as tax residents and enjoy an exemption on foreign income for the first five years. After five years, the state charges 12% on foreign income. In addition, they have a double taxation rule which exempts one from paying taxes if you have already paid more than 12% in taxes in another country.
3. Keep a bank account in a foreign currency.
One misconception that digital nomads have is that they would not have to pay any taxes at all if they set up an offshore account. As a general rule, you are liable for taxes in the country where you take up residence.
A better approach is to incorporate your freelance business into your tax residence. As soon as the business becomes stable, set up an offshore account. This approach lets you hit the proverbial two birds with one stone: you have proof of payment of income tax while enjoying the benefits of an offshore account. With the tax declarations, you have something to present if you need to make big investments in your tax residence and avoid potential trouble with local taxing authorities. At the same time, you diversify your portfolio and protect your assets from political risks.
4. Get the help of a tax specialist.
If all else fails and you feel lost in the maze that is the taxation system, consider hiring an accountant that specializes in tax planning for digital nomads and expats. Compared to doing it yourself, these specialists are in a better position to advise you about your specific situation and what exemptions you can avail of. Having them file tax returns on your behalf saves you time and effort as well.
Taking care of taxes is rarely a walk in the park. But by keeping your financial life in order, you can avoid the shock of a huge tax bill or late payment fees so you can go out and enjoy your digital nomad life to the fullest.