It’s no secret that doing taxes is a boring, confusing, frustrating task. Plus, doing your taxes as a digital nomad or freelancer makes things even more puzzling. With the tax deadline coming up for US citizens, we want to help those of you who are trying to figure out how to file their taxes, deal with expenses, and more. Here’s how to deal with tax season when you’re a digital nomad, including pointers from tax experts at TaxSmart.
Do digital nomads have to pay tax?
In short, yes.
Since the United States has a citizenship based tax system, you have to pay taxes, even if you’re a remote worker and have spent most of your time traveling out of state or out of the country...unless you spend 330 days or more of the year outside of the US.
Our friends at TaxSmart told us, “Nomads who are US citizens may be eligible for the Foreign Earned Income Exclusion. Basically, if you work remotely and travel out of the country for more than 330 days within a 12 month period, you may be able to avoid paying income tax on the first $109,500 (2019) you earn. To claim the Foreign Earned Income Exclusion you need to meet either the physical presence test (ie. be out of the US for 330 days or more) or prove that you are a bona fide resident of a foreign country."
Travel more and avoid paying taxes? Count us in! You can learn more about the criteria for this exclusion on the IRS website here.
Important Dates for Digital Nomads during Tax Season
When is the Tax Filing Deadline?
On Saturday, March 21, 2020, the IRS announced that taxpayers will now have until July 15, 2020, to file their tax returns. That means you now have until 15 July 2020 to file and make payments of any tax due for 2019, or if you need more time, submit an application for a 90-day extension (Form 4868).
When is the Tax Extension Deadline?
The deadline in general is April 15th, but if you need more time (and honestly...who doesn’t) you can easily file for an extension through the IRS which will give you 6 more months to file. However, you will have to file for an extension before the tax filing deadline of April 15th. You can easily file online with the IRS here.
TaxSmart says, "April 15th is the deadline to file and pay. If you file for an extension, you still need to pay any balance by April 15th or you’ll be penalized for late paying. If you live overseas full time you automatically have until June 15th to file and pay your taxes (See IRS Pub 509)."
TL;DR: File your taxes by April 15th, or file for an extension by April 15th to have 6 more months to file.
How to deal with tax and expenses as a digital nomad
Spoiler alert: Keeping track of your expenses in an organized way throughout the year will make things a lot easier for you when it comes time to file your taxes. Knowing what to expense can help you save big with taxes.
According to the IRS, “Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business operates to make a profit.” As for what kind of expenses they deem as deductible, they say, “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.”
So...what does that even mean? TaxSmart has some helpful guidelines for what you can deduct as a business expense as a digital nomad:
What is a business expense for tax purposes?
- Devices (computers, phones, computer and phone accessories)
- Software you use for your business (for example, Photoshop if you’re in a creative field)
- Office supplies (notebooks, ink for printers, etc.)
- Internet (for your computer and phone, so yes, your SIM card costs and the like can be expensed)
- Coworking space membership fees
- Home office (a percentage of your total rent)
- Travel expenses related to business
- Banking fees
- Legal fees (licensing fees for your business, for example)
- Accounting services or software
- Marketing costs (consultant fees, web hosting, advertising costs)
- Membership fees for professional associations
- Courses or education related to your work
- Books or magazines related to your work
- Conferences or events related to your work
Wondering if your Outsite stays can be expensed? TaxSmart says, “Business related travel is usually deductible, depending on your tax residency status. Most US nomads have a state residency, so if you go to meet a client or attend a convention away from your tax home, you’ll be able to claim accommodation costs, like your Outsite stay. Some rules apply in certain situations, so it’s always best to speak with a tax advisor who understands the situation for remote workers. There are hefty fines for incorrect filing!”
When it comes to airfare, you can't just expense any old flight. "It’s important to remember that travel can only be deducted if it’s for business purposes. If you’re a web designer who can work from anywhere and you happen to travel around, your travel will probably not be deductible. If however, you’re a travel blogger who makes money by traveling and writing about it, then yes, the travel would be deductible," says TaxSmart.
As for what can’t be expensed, TaxSmart says a common mistake is expensing clothing. They say, “Be careful with clothing. If you need a uniform or certain types of footwear to do your job, you may be able to claim that as a deduction. You just need to be able to prove that wearing that piece of clothing is a requirement of your job description. Unfortunately for most of us, that means the expensive suit you bought for your big presentation probably can’t be deducted!”
Some other expenses that the IRS doesn’t allow as deductions are commuting expenses and entertainment expenses. You can get more information about expenses on the IRS site here.
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What to do if you have employees
Do you have your own company, complete with employees working for you? You’ll have some extra work to do during tax season.
"Employee filing requirements depend on their individual employment status. If you have 'employees' and a proper payroll, your company should withhold taxes and issue a W-2 form. If you hire freelance contractors, you should pay them without withholding taxes and issue a 1099 form to anyone paid more than $600 at the end of the year." says TaxSmart.
You’ll also want to take note of any state specific laws. For example, according to TaxSmart, “California just changed the rules for independent contractors. You’ll need to ensure they pass the ABC test rules to qualify as contractors and not employees.”
It’s especially worth it to have a tax professional help out if you have employees, so you can make sure all state and federal laws are being followed and that you’re filing properly to avoid fines.
If your business is registered as a company, such as an LLC, whether or not you have employees, some things will be done differently in the tax process. For example, you might qualify for tax credits or other benefits. It will depend on your business. You can learn more on the U.S. Small Business Association’s website here.
"US citizens or resident aliens are required to file a personal return. If you have a company (not a corporation) your business income and loss should be reported on Sch C in most cases. If you are an S-Corp or C-Corp, a separate return will need to be filed," says TaxSmart.