Digital nomads and location-independent business owners are not working the typical 9-5 office jobs and therefore, do not always have the typical form of income.
Therefore, the digital nomad income tax is slightly different than traditional jobs.
Income for your business may be received in unordinary ways and might be confusing you when considering if you should be claiming it as income.
The short answer will be yes, you always have to claim income in all forms earned and received.
Table of Contents
- Digital Nomad Income Tax – Overview
- Do Payment Methods Change What You Have to Pay?
- What is Considered Income as a Digital Nomad?
- When to Pay Digital Nomad Income Tax?
- Deductions for Digital Nomads
- Conclusion – Digital Nomad Income Tax
Digital Nomad Income Tax – Overview
Let’s start this digital nomad income tax guide with some questions I often receive, such as double taxation, deductions, and more.
How is Income Tax Determined for digital Nomads Across Countries?
For digital nomads, income tax is primarily determined by each country’s tax laws where they work or reside.
Many countries tax individuals based on residency status or the source of income. Digital nomads often need to consider tax obligations both in their country of citizenship and where they live.
Understanding each country’s tax residency rules, which often involve the number of days spent there, is crucial for accurate tax determination.
Can Digital Nomads be Tax Residents in More Than One Country?
Yes, digital nomads can be tax residents in more than one country, depending on each country’s tax residency rules.
This situation often occurs when nomads spend significant time in multiple countries, meeting the residency criteria for each.
It’s important for digital nomads to understand the specific residency rules in each country they reside in to avoid issues with taxes.
What are the Common Tax Exemptions or Deductions for Digital Nomads?
Common tax exemptions or deductions for digital nomads may include business expenses like travel costs, equipment purchases, and home office expenses.
Some countries offer specific deductions for remote workers or self-employed individuals.
However, eligibility for these deductions varies by country and requires maintaining detailed records and receipts to substantiate the expenses.
How do Digital Nomads Handle Double Taxation?
Another important topic about digital nomad income tax is double taxation.
Digital nomads handle double taxation by leveraging tax treaties between countries, which prevent the same income from being taxed twice.
They must declare their income in all relevant countries and can often claim a tax credit or exemption in one country for taxes paid in another.
Understanding the tax treaty provisions and working with a tax professional familiar with international tax laws is crucial for effectively managing double taxation issues.
Do Payment Methods Change What You Have to Pay?
As untypical as the digital nomad’s form of income may be, the way they receive it may be different as well.
There are companies available to these remote businesses such as PayPal and Stripe that allow payments to be made from all around the world.
The common misconception is that these payments do not always count as income as they are not always directly in the bank.
Unfortunately, all income derived, regardless of what platform it is paid on, will need to be included as taxable income.
These platforms offer convenience for the remote worker but no benefit to the taxpayer.
Additionally, it is crucial to understand that if you use the money you received for your business or personal expenses it does not cancel out the fact that you have received it as income.
Income is not the money left over as profits in your account, but ANY amount received in a transaction for your business.
What is Considered Income as a Digital Nomad?
It is likely, even as a digital nomad, that you have an income of some sort even if it might not be what you would consider as ‘typical’. There is a multitude of ways in which you can receive income besides the ordinary salary and wage.
Income can include tips, gratuities, allowances for things like car, travel, clothing and even sometimes gifts.
Income may not always be in the form of money – in some situations goods and services may be treated as income. With that in mind, there are two main forms of common taxable income: active income and passive income.
Digital Nomad Income Tax on Active Income
Active income is what you would normally consider to be the “earned’ income.
This is income you are actively working towards earning, whether it is from wages at a job, self-employment income you receive while working abroad, a salary you are paid by an employer or your own business, or consulting and freelance services.
For example, a digital nomad may not be working in office hours but instead being a photographer, videographer, web developer, graphic designer, writer, or social media marketer.
This is normally considered your consistent income. Whatever position you are actively earning your stream of income on during your adventures would likely be considered the role of your active income.
Digital Nomad Income Tax on Passive Income
Passive income, on the other hand, is the most idyllic form for the digital nomads. It is the income you are receiving with the least amount of effort put forward.
This can be from Interest Earned from Investments, rental income, and Online Course Sales and Info Products.
Whether you are sleeping, on vacation, or watching tv, you can still be making passive income.
Even though you have left the country you are paying your taxes to, the income that you are still receiving (wherever you are) still needs to be considered as income.
Whether it is passive or active income you are accepting, the important thing is it is all taxable.
With other forms of income such as products or gifts, you need to consider the connection of you or your business to what you are receiving. This will make it easier to decide if it needs to be considered as income or not.
For example, if you are receiving products to post on social media as advertising, and this is a common occurrence for you, then it would be considered part of your income.
Foreign Earned Income Exclusion
Remote workers should know what type of income they have as there are sometimes benefits to consider such as Foreign Earned Income Exclusion (FEIE).
Under the FEIE, the US doesn’t ask you to prove where your new tax residence is as long as you spend enough time outside of the United States to prove that it is no longer your home.
That doesn’t necessarily mean that you’re going to pay zero tax, there are other things involved, but you can still live nomadically and qualify for the exclusion.
Unfortunately, there still is no way to get out of completely filing your taxes in the US but these benefits can change your tax experience while you are abroad.
When to Pay Digital Nomad Income Tax?
One thing all countries can agree on- your taxable income is the income you have to pay tax on.
It is the term used for the amount left after you have deducted all the expenses you are allowed to claim from your assessable income.
Regardless of whether your income is active or passive, you will still need to include both in your money earned.
As previously stated, the method in which any of the income is received, will not alter what should be taxed.
Deductions for Digital Nomads
Even though your income received, regardless of delivery, must be claimed; there are tax deductions available to help offset some of those costs.
A digital nomad will have a variety of deductions available to them if they are ordinary and necessary for business purposes.
This is the tax area remote workers and businesses should consider being the most beneficial when outweighing their income.
It has a balanced effect to ensure that what you are spending on your business is being considered before they look at what you have received in turn.
Conclusion – Digital Nomad Income Tax
I hope the above explanations have helped you understand that whatever income you make through whatever platform, can be considered as taxable income.
It doesn’t matter whether you get paid into a traditional bank account or whether you get paid into Paypal, Strip or Transferwise.
If it forms part of how you make a living, then it will be considered as taxable income and you’ll have to declare it in your taxes and pay personal income taxes on that income.
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NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.