This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult tax, legal and accounting advisors before engaging in any transaction and/or filling your taxes. Further, this article has been tailored to, and written for, US citizens, taxpayers, and companies.
From Reddit threads to quasi-authoritative blog posts, the legal and tax implications surrounding the digital nomad community are as misunderstood as quantum mechanics. As legal and accounting professionals at WiFi Tribe and Shared Economy Tax, we often look at those blog posts with an equal amount of concern and reservations doctors look at month-long juice cleanses.
The truth is, answers to such unique situations are rarely straightforward; if they were, our tax code wouldn’t be over 2600 pages long. A reason for this lack of simplicity lies in the context-dependency of the matter – one which, in essence, attempts to mirror the situation of the individual itself. For that reason, you should not take the following advice at face value. Instead, think of it as a possible starting point for further research, hopefully, led by trained professionals.
In this article, we will go over the most frequent legal and financial questions we encounter. Given the complexity of this field, we are particularly grateful to Miguel Alexander Centeno, managing partner at Shared Economy Tax, for his invaluable help and contribution.
The first part will regard the legalities of working from a different country (i.e. can I legally work remotely whilst enjoying my morning genmaicha from my penthouse apartment in Poblado).
We will specifically address the following concerns:
- Can I legally pursue my professional activities in another country; and
- Do I need a business visa (does my employer need to issue me a business visa)
The second part will address the various tax implications associated with remote working, and the irresponsible myths surrounding them.
The following matters will be addressed;
- How is my tax liability affected while abroad;
- Is my employer’s corporate tax liability affected by having remote workers; and
- What is the FEIE, and what is it not?
You Can Escape the “9-To-5”; Not the Law
Despite popular belief, Digital Nomads are not transgressing vagabonds who abide by no lands’ rulings, hiding in safe heavens called “co-working spaces”. Whilst our ability to work from different countries has become increasingly simplified, the essence of being a temporary foreign worker is not an entirely new concept.
Indeed, entering a country on a “tourist visa” doesn’t mean that you’re only allowed to hog the left lane on London’s escalators, take inappropriate selfies in front of war memorials, or engrave your name on historical sites. In many cases, you will be allowed to enter a country, for a fixed duration, for “tourism or business purposes.”
However, this does not mean that you can enter any country, carry out whatever activity you want, and do so with whomever you wish. Whilst working remotely from a different country can be perfectly legal, it often comes bundled in a plethora of regulations, so let’s break those down.
Yes, You Can Work Remotely From a Different Country
Yes, in many countries, US citizens will be able to carry out domestic business activities and thus stay in a country for “business purposes” for up to 90 days. For example, those countries include but are not limited to Argentina, Colombia, Portugal, Spain, and South Africa.
In many cases, you will be able to carry out your professional activities as legitimately as you would domestically. This means working on your daily tasks, video conferencing, and even meeting clients face-to-face.
As long as you do not overstay your visa, remain contractually attached to your domestic employer, do not partake in regulated activities (e.g. medicine/law/teaching) and continue to be paid by your domestic employer, you will not be transgressing your “business purpose”.
Therefore, you do not need a business visa to carry out your domestic professional activities while abroad. However, for companies that have a foreign subsidiary in the country where the US employee is performing services, and to the extent that the employee is providing services that are on behalf of that foreign entity, a business visa may be necessary and required.
Things That Will Get You in Trouble
Whilst you can work remotely from a quaint Parisian café, that doesn’t give you the right to start working for that café. As a matter of fact, you’re not even allowed to apply for local jobs, attend local job interviews, or recruit local labor. This means that if you want to work for that cute Parisian café, or any other job, you’ll have to apply from the US.
Similarly, your professional activities while abroad will always be heavily contrived by those of your domestic employers’, or the nature of your freelancing operations. For instance, you will not be allowed to;
- work for a locally based employer (including subsidiaries);
- employ, contract, solicit, or transact in any way, with the domestic workforce;
- sell, supply, contract with, or cater to domestic clients.
In the vast majority of cases, your activities will be subject to many regulations and restrictions. Therefore, please do not enter a country hunky-dory, assuming it’s fine for you to work there. Research what you can do, in what context, for how long, and to what extent.
Things to Lookout For
Stop reading those “How to Stay in Europe for Over 90 days” articles!
Don’t overstay your visa.
Overstaying in Europe by even one day may result in a €1,200 fine and a 5-year ban from the European Union. As Triber Dan Sloan says “It’s 90 out of 180 days. Then you need to GTFO!”.
Secondly, not all countries have the same immigration treaties with the United States. If you were fine working remotely in Japan, that might not be the case in Vietnam, for example. A lot of South-Eastern Asian countries have strict immigration rules – rules that can be incredibly costly should you transgress them.
Tax Implications of Working Remotely
Tax implications associated with remote working are often misunderstood by both the digital nomad community and their employers. On one end of the spectrum we have overzealous HR departments who readily assume that the corporate tax rate of a multinational corporation will be affected by the travels of a single employee, and on the other, employees who think that money earned while abroad is not subject to US taxation.
To debunk some of the myths and perhaps provide some clarity on matters as murky as the Hudson River, we have laid out a few answers to questions we get on a regular basis.
As an Employer
Will our tax liability be affected if our employee works remotely from abroad. If not, in what circumstances will it change?
As long as US rules apply to that employee, and that employee is doing work that benefits the US entity, you can still take a deduction on that employee as a US Company. For companies that have a foreign subsidiary with a permanent establishment in the country where the US employee is performing those services, and to the extent that the employee is providing services for that foreign entity, then complications may arise.
Are there any tax savings or increased tax liabilities to be made when having remote workers?
Typically no to both. As an employer, it’s your responsibility to withhold taxes, make the associated payroll tax payments, and allow for the employee to handle exceptions and deductions on their end.
As an Employee And/Or Freelancer
Will my tax liability be affected if I work from outside of the US. If not, in what circumstances will it change?
As far as technical rules are concerned, US taxes still apply unless an exclusion can be claimed. As a practical matter, you may be entitled to certain deductions associated with remote working that can be classified as business expenses. However, before you starting deducting your $12 airport coffee, talk to your accountant about what can be deducted, and to what extent.
Do I need to report to the IRS that I worked remotely from a foreign country? If not, under what circumstances would I have to do so?
You do need to disclose your place of business. If you’re a freelancer and claiming the FEIE, then your business address on your tax return should reflect the foreign location.
Are there any tax savings to be made when working remotely?
If the exclusion can be claimed, yes. If you can correctly track deductions associated with working remotely and traveling, then there can potentially be deductions that create tax savings.
Foreign Earned Income Exclusion “FEIE”
Three little words that hurt me more than anything else is “file for FEIE.”
Yes, if you meet an exhaustive list of requirements, you may qualify for FEIE, and in some rare cases, not pay taxes for that year. However, those cases are incredibly rare mostly because of the strict requirements around “substantial presence”.
There are two specific tests to qualify for FEIE: (1) the Bona Fide resident test and (2) the physical presence test.
To give you a sense of how strict these are, to be a Bona Fide tax resident you need to have an official residence in a foreign country and pay taxes there. To qualify for the physical presence test, you really need to have spent 330 days outside of the US (layovers and flight days count).
Also take into consideration that if your income is sourced from the US, it’s not excludable. Chances are, you don’t qualify. Most people are reading blogs and articles from pre-2019 and readily assume they will de facto qualify because a few things apply to them. Tax rules are a lot more specific than blogs, so be wary. Further, recent tax reforms brought about by the Trump administration have addressed many practical applications of the FEIE.
The top five high-level points we wish most people talking about FEIE understood include:
You Still Have to File Your Taxes!
No matter how persuaded you may be of your ability to pay 0% on your income, the Internal Revenue Service will have the final say on that, and as such, you must report your income.
As a rule of thumb, if you have a US Passport or Green Card, you must file your taxes.
The FEIE is an election that is made on your tax return that requires you to explain your foreign income, the reason for your exclusion, and your travel history during that tax year. The IRS has the ability to check customs records, so you want your Form 2555 (Foreign Earned Income Exclusion) to be pristine.
Your Passive Income Will. Not. Be. Excluded.
This means that your passive activities such as capital gains, stock trading, forex trading, cryptocurrency trading, pension income, IRA distributions, rental income, social security benefits, etc. will be taxed without exception.
Self-Employment Tax Is Not Excluded!
Self-employed individuals can use the FEIE to exclude their first $107,600 (2020) of active income from income tax, but this will not eliminate any self-employment tax (namely, Social Security and Medicare) that they may owe. They must pay self-employment tax on their entire net profit – even the amount they excluded from income tax.
The self-employment tax rate is 15.3% on up to $137,700 in income, and 2.9% on any income above that amount (2020). So, if you earned $100,000 through self-employment during the tax year, you could exclude the full $100,000 through the FEIE for a savings of $24,000 in federal income taxes, but you would still have to pay $15,300 in self-employment tax.
For those who are self-employed, the key to minimizing self-employment tax is to see yourself as a business. The formula is simple; first track, then increase your allowable deductions. Business deductions can include anything used in the conduct of your business that are both “ordinary” and “necessary” to run your business.
Key items include computers and hardware, online subscriptions, contractor expenses, and portions of general expenses such as rents and travel. For a digital nomad, some portion of all their expenses may be related to their business activity. The advantage of business deductions is that they not only limit your federal income taxes, but they reduce your self-employment taxes as well.
State & City Taxes
Most US states will match the FEIE to their State filing requirements.
However, if you’re usually domiciled in California, New York, Colorado, Virginia or South Carolina, you may be subject to State & City tax liability, irrespectively of your FEIE status. California is famous for being a worldwide income tax state (“Taxifornia”), meaning they don’t care where you are or where your income is made, if you have a Californian address, they will tax you. Therefore, if you are domiciled in one of those states, there may be tax planning opportunities associated with moving your state residency.
Most people know about the 330 days rule, but what most people don’t realize is that you overstaying your time in the US will cost you 5 years of tax.
Should you spend 36 days or more in the US, you will no longer be eligible for FEIE, and as such, will have to formally revoke it. Once revoked, you will not be able to reinvoke it for another 5 years without requesting permission from the IRS in a Private Letter Ruling.
Yes: You’re more likely than not to be able to conduct your professional activities legally in a foreign country, as long as it does not interfere with the local economy.
No: You’re probably unlikely to qualify for the FEIE and should in any case file your taxes.
Yes: You should absolutely seek legal or tax advice from trained and qualified professionals!
This article was written in partnership with Miguel Alexander Centeno.
Miguel Alexander Centeno is a partner at Shared Economy Tax (SET), the largest US national tax practice solely focused on the Sharing Economy. SET focuses its practices on providing tax, accounting, and advisory services to freelancers as well as short-term rental operators. Don’t hesitate to check them out for more information.