How do you go about filing taxes as a digital nomad? With an ever-increasing population of digital nomads taking to the road, this is becoming an increasingly prevalent issue. And it’s not easy to figure out on your own.
Good news! You don’t have to. Learn from experienced digital nomads in this GIANT guide with everything you need to know about filing taxes as a digital nomad.
BIG IMPORTANT NOTE: I am not a tax expert. Although I’ve researched this information as best I can, it is not gospel! No part of this article constitutes legal and/or tax advice. Also, tax regulations vary greatly from country to country, and this information is a general guide only. I highly advise you seek professional counsel with an accountant or tax preparer familiar with the tax regulations in your country of residence.
There. I am absolved. Now enjoy the following guide!
MANAGING TAX DEDUCTIONS, EXPENSES, AND INCOME
Most digital nomads are entrepreneurs or freelancers. Even if you have a telecommuting job, if your employer has hired you as a “contract” employee (ie: without benefits, pension, or other employment standards act requirements), then you’ll be filing taxes as if you’re self-employed.
Although this might seem daunting if you’re new to the self-employment game, the good news is that operating as a self-employed/freelancer means you are able to take advantage of way more tax deductions than you can as a salaried employee.
Tax Deductions for Digital Nomads
Any expense you incur in the name of earning your living is deductible. For most digital nomads, this will include things like:
- Laptop, and all computer-related equipment, including laptop bags and accessories
- “Office Expenses”, like notebooks, pens, and other supplies used in your work
- Internet service
- Phone expenses, including your cell phone, as well as SIM cards and service
- Co-working space membership
- PayPal fees and other banking fees incurred in the process of getting paid
- Legal and accounting expenses
- Professional fees, including licenses or insurance you need to operate in your line of work
- Memberships and subscriptions, including association fees
- Courses or education expenses related to your field
If you have a blog or website as part of your digital nomad career, even more expenses are deductible, such as:
- Website hosting and domain fees (such as Host Gator or for larger websites, managed hosting like Performance Foundry)
- Newsletter programs (like Aweber, click funnels, operating platforms (for selling digital products) and other marketing expenses
- Advertising expenses, including boosting posts on Facebook
- Blogging courses, or any educational expense incurred to help you run your business effectively
- Affiliates you pay to help you sell your products
- Employees or virtual assistants
And if you’re a travel blogger, great news! All your travel expenses are (generally) also tax deductible!
Note: All links in the above section are to services that I have personally used and thus endorse. If you click through these links and make any purchase, I will receive a small commission, which doesn’t affect your purchase price. Thank you in advance for supporting The Professional Hobo in this way!
Tracking Expenses, Managing Receipts
Before you can even consider filing taxes as a digital nomad, it’s important to keep records of everything. This requires organization and attention to detail, as you go. Don’t shove everything in a folder or proverbial shoebox to be dealt with at the end of the year. It will take you exponentially longer to prepare your finances, and filing taxes as a digital nomad will become a much bigger pain in the butt than it needs to be.
Here are a few different ways to manage receipts and expenses:
The Expense Spreadsheet
Me? I’m a dinosaur. Although I could rely a bit more on technology to manage my expenses and receipts, I’m really happy with my little system, and perhaps you will be too. Here’s my process – which you can customize (with as much or as little technology as you wish) to suit your own needs and preferences.
STEP 1: Stuff Tax-Deductible Receipts in Your Wallet
Every time you buy something on the fly that’s tax-deductible, just put that receipt in your wallet. When you’ve collected a few receipts in there, or at whatever pre-ordained juncture you determine (eg: weekly or monthly), pull the receipts out, and….
STEP 2: Log Your Receipts
I open my trusty expense spreadsheet and log my receipts. I log the date of the expense, store/vendor, expense category, amount, and relevant details.
As a digital nomad, it’s also important to log the currency you incurred your expense in; if you’re living the nomadic life, you’ll likely rack up expenses in a variety of different currencies. I also convert these expenses to my home currency to have a base-line understanding of my expenses.
The image below is the template I personally use to log my receipts and track my tax-deductible expenses throughout the year:
You may also incur expenses that don’t have a physical receipt (such as online expenses). In these cases, log the information accordingly in the spreadsheet, and create a folder on your computer to store online receipts.
STEP 3: Store Your Receipts
If you are ever audited, you’ll need to produce original receipts of your expenses. While some countries and tax authorities may accept digital images of paper receipts, I don’t leave anything to chance. Thus, I store all my original receipts as I go, by clipping them together and storing them in a plastic sleeve. At the end of the tax year, I seal my receipts in an envelope, for eventual storage with my previous years’ tax returns in Canada. (I either mail it back to Canada, or if I know I’ll be returning to Canada for a visit, I hang on to it until then).
Some receipts are only ever issued electronically (with online purchases for example); in this case I store these receipts in a folder on my computer.
STEP 4: Organize the Spreadsheet
When the time comes for filing taxes as a digital nomad, I prepare my expense spreadsheet by organizing all the data by category and sub-category. I tend to break the information down quite extensively, so my tax preparer can then massage the data as they wish and input various expenses in whatever tax category works best for my situation.
As you’ll see in the below image, I also break down each expense by currency. Depending on the currency you pay for things in, fluctuations over the course of the year can make a difference. Some tax preparers prefer to record/file expenses in the currency incurred and use an overall conversion rate designated by the tax authorities for that tax year, while others prefer to use the pre-converted figures. I allow my tax preparer to choose by breaking it all down for them.
Alternate Expense-Tracking Methods
You don’t necessarily have to manually log all your tax-deductible expenses into a spreadsheet throughout the year. Lots of digital nomads prefer to track expenses and manage receipts digitally.
There are a variety of mobile scanning apps that utilize your smartphone camera. Other people use programs/apps like Freshbooks, Quicken, Quickbooks, or financial management software. Some sophisticated apps even identify the relevant information from the receipts and convert it to spreadsheet format. However I’m not sure how effective this function would be with foreign receipts, in other languages and currencies.
My favourite expense-tracking app, Trail Wallet, just incorporated the ability to add images to recorded expenses. So, using this app, you can now record every expense in whatever custom categories (and currencies!) you wish on the go with the app, take a photo of the receipt, and later export all your data to a spreadsheet for final preparation and tax filing. (I actually use Trail Wallet to record all my expenses – tax-deductible and otherwise – for my annual expense reports, which is why I keep a separate (manual) log of my tax-deductible expenses).
Note: Although some digital nomads simply throw away their original receipts once they have a digital record of it, you may want to check with your tax preparer to see if the tax authorities in your country would allow digital records in the case of an audit. If they don’t, and if you can’t produce original receipts, you’ll be liable for a whole lot of extra tax payable.
Also: If you choose to store your receipts only digitally, then be sure to back everything up.
Filing taxes as a digital nomad involves more than tracking and managing tax-deductible expenses; you’ve got to track and organize your income as well!
As a self-employed digital nomad blogger and freelance writer, I have income from dozens of different sources, from multiple countries and currencies, organized into about 10 different categories. Most of these income sources don’t send me tax slips, and none withhold taxes. So the responsibility is mine to claim all these worldwide income sources on my tax return.
Caution! Just in case you wanted to get sneaky and omit an income source (or three), remember that some of your clients/income sources file their payments to you as deductions on their own tax returns, and if you filled out a tax form for them at any point (such as a W9 or W8-BEN for U.S. payors), this income can be tracked to you, and you’ll be in trouble if audited.
I manually record the following income information in a spreadsheet:
- Income Category (eg: affiliate payment, website advertising, book sales, freelance writing)
- Date of Payment
- Currency of Payment
I also convert payments to Canadian dollars for ease of understanding how much money I’ve earned.
At the end of the year, I organize all this information in a way that will be easily digestible for my tax preparer. It looks something like this:
FILING TAXES AS A DIGITAL NOMAD FROM ABROAD
If you’re a digital nomad, chances are you won’t be in your home country come tax time. Just in case you thought you could delay filing, learn from my experience:
When I first started traveling full-time, I was away from Canada for two years. With very little income to speak of (and more than enough deductions), I knew I wouldn’t owe any taxes in those years so I planned to wait and file both years’ taxes when I returned to Canada for a visit.
CRA (Canada’s Revenue Agency) didn’t see it this way. 1.5 years in, they sent me a letter demanding I file the prior year’s taxes. I ignored it (knowing I’d file on my return), so they sent me another letter with a filing deadline.
I emailed my tax preparer for advice, saying I’d be back in a few months to file both years’ taxes anyway, and asked if I could ignore the letter. He said that if I didn’t file by their deadline, CRA could seize my bank accounts until I filed, since they were expecting that I owed them money and they wanted it.
Ironically when I did file (using the method below), I ended up getting thousands of dollars back. I figured that would be the end of CRA’s demanding letters so I was late in filing the following year’s tax return, only to get another demanding letter – and another tax refund of thousands when I filed. Now I just file my taxes from abroad anyway, but I’m sure if I delayed I would discover that they still haven’t learned.
Step 1: Find an Accountant/Tax Preparer in Your Home Country
This is best accomplished before you embark on your life and career as a digital nomad, but just in case you didn’t do this, not to worry. With digital nomads and expats forming an ever-growing demographic all their own, more and more tax preparers and accountants are becoming experts in tax planning for digital nomads and expats.
Further down in this guide, you’ll find a few suggestions depending on your country of residency, but if you want to find one yourself, simply search for something like accountant+ digital nomad + [your country of residence]. This will likely result in a list of tax firms, accountants, resource articles, and forum results where you can find recommendations.
I have a tax preparer that I’ve worked with for many years, so we have a good system going. I simply email him my spreadsheet (from wherever I am in the world at that moment), and he goes to town with it. To reach this level of understanding, we had an initial consultation where he told me how best to organize my information to enable him to do the most effective job on my taxes. I highly recommend you do the same. In the consultation, you may also need to sign paperwork in advance to give them the ability to communicate with your country’s revenue agency on your behalf (for example, to access income slips or in the event of an audit).
What is the Difference Between a Tax Preparer and an Accountant?
I’m generally avoiding the use of the world “accountant” in this guide because you may not need a formal qualified accountant to satisfy your tax preparation needs. Accountants offer a higher level of expertise, along with much higher fees. If your taxes are relatively simple, perhaps you can get away with using a tax preparer who still has sufficient expertise in filing taxes as a digital nomad, without being a fully-qualified accountant. My guy has been filing taxes his entire career and is awesome at what he does; but he’s not an official accountant.
Step 2A: Send Your Tax Preparer Your Income Information
Some accountants and tax preparers can (with your permission) access your income slips automatically through your country’s online tax system. These slips include not only certain employment income and payments from clients/employers in your home country, but also investment income like interest and capital gains.
If your tax preparer doesn’t have automatic access to all these slips, then you’ll need to collect and forward them. Most institutions are able to generate these forms electronically, so you can likely accomplish this from abroad.
You’ll also need to send along the spreadsheet of other non-reported income and sources, as per “Tracking Income” above.
Step 2B: Send Your Tax Preparer your Expense Records
Remember that spreadsheet you laboured over all year, and then further organized in preparation for filing your taxes? Time to send that along as well. The cleaner the records you keep, and the more clearly you itemize and break down your information, the better the chance your tax preparer will be able to kick some butt on your tax return.
Step 3: Pay Tax / Receive Your Refund
Once your tax preparer has your return ready for filing, they’ll advise you of the refund you’ll be receiving (which can be direct deposited to your bank account), or the amount of tax you’ll owe. Most banking institutions allow you to make your tax payments online.
To Incorporate or Not to Incorporate?
Lots of digital nomads choose to incorporate their online businesses, depending on the type of business they have and income it generates. Reasons for incorporation can include limitation of liability, sheltering of income from personal taxation, types/number of customers and employees, location of the business, and even company image.
Incorporating is costly and complicated to both establish and maintain; you’ll likely need the services of an accountant and a lawyer. To determine if incorporation is a good move for you and your business, consult with a qualified accountant with expertise in your field as well as expat/digital nomad tax legislation.
THE NITTY GRITTY FOR U.S. DIGITAL NOMADS
As a former Certified Financial Planner, I get a lot of questions about filing taxes as a digital nomad. Unfortunately for many of my readers (specifically those who are based in the U.S.), I’m not familiar enough with tax legislation to advise on anything beyond the most basic of details.
So I’ve asked Ines Zemelman to fill in the blanks. She’s the founder of Taxes for Expats (TFX), a specialty tax firm that helps overseas Americans file their taxes.
When I saw that she had published a variety of easy-to-understand tax guides such as the U.S. Tax Guide for Digital Nomads and the U.S. Tax Guide for Retirees, I knew she’d be able to help out. Here’s what Ines had to say.
Ines, do American Digital Nomads need to file tax returns, even if they’re not located in the U.S.?
As a U.S. citizen or Green Card holder, residing anywhere in the world, you still have to file U.S. tax returns declaring your worldwide income.
What kind of taxes do Digital Nomads need to pay if they’re living and working abroad?
If you work for a foreign employer you are not required to pay U.S. self-employment taxes (Social security and Medicare). If you work for a U.S. employer, they will automatically deduct this from your salary.
However, many digital nomads are self-employed, and may be liable for SECA (Self-Employed Contributions Act) tax. Choose your destination country wisely — some countries have signed a ‘Totalization Agreement’. If you reside in a country that has signed this agreement, you are exempt from SECA tax and instead pay Social Security taxes in the country where you live.
Here is a current list of the countries that have a Totalization Agreement with the United States:
Europe: Italy, Germany, Switzerland, Belgium, UK, Sweden, Spain, France, Austria, Finland, Ireland, Luxembourg, Denmark, Slovak Republic, Norway, Greece, Czech Republic, Portugal, Netherlands, Poland
North/Central/South America: Chile, Canada
Asia/Australasia: Japan, South Korea, Australia
If the only source of income is self-employment in a country with a Totalization Agreement, please be aware that the IRS may request a Certificate of Coverage from the resident country Social Security administration.
If you are not covered in the resident country then U.S. SECA tax cannot be exempt. If you are self-employed and live in a country without a Totalization Agreement, then U.S. SECA tax must be paid, even if you paid into the Social Security system of the non-U.S. country. However, you may still utilize this amount as ‘Foreign Tax Paid’ and use it for calculation of the foreign tax credit. If you choose to reside in a low-tax country like Hong Kong or Singapore, this is especially important.
What is the Foreign Earned Income Exclusion (FEIE)? Does it mean Digital Nomads who earn under $100k while abroad don’t need to file taxes?
This is often misunderstood. The Foreign Earned Income Exclusion (FEIE) is the amount you can deduct from your taxable income, during the course of filing your tax return, to reduce the tax you may owe. I.e. – if you make $75k USD, you likely don’t owe tax, but you still have to file. Until you file and properly utilize the FEIE, it is not granted to you.
If I set up a virtual address through a Virtual Mailing Service, does it make a difference which state I create my address in?
Yes! It makes a difference. You can avoid huge potential problems with the IRS and State tax authorities by choosing your state address carefully. You’ll find extensive information about this in our post: Virtual Mailbox and Why You Should Have One.
How do the Recent Tax Reform Changes Affect Digital Nomads?
The biggest changes particular to digital nomads are the corporate tax changes, which inadvertently also require individuals, who own foreign corporations, to repatriate deferred untaxed income.
We’ve written quite a bit about the recent tax reform here: Tax Reform & Expats – Winners and Losers.
One of your specialties is helping Digital Nomads and expats file their taxes from abroad. What happens if they want to use your services?
Step 1: Create an account here.
Step 2: Once you sign up you will receive access to your personal documents as well as our Tax Questionnaire. Your answers to the questionnaire will provide us with an overview of your situation and be used to prepare your return.
Step 3: You can schedule your Free Intro 30-min Consultation!
And as a special offer to readers of The Professional Hobo, Taxes For Expats is giving new signups a $25 credit! Simply enter the code Prof_hobo when signing up.
DIY TAX TIPS FOR U.S. DIGITAL NOMADS
I’m a big fan of using the services of an expert tax preparer. One year I decided to test my ability to file a decent return (I was a Certified Financial Planner after all….it should have been easy); when my tax preparer got me an extra $3,000 back compared to my own return, I gave up ever preparing my tax return alone again.
But, for U.S. Digital Nomads who are keen to DIY their tax returns, here are some tips:
Foreign Earned Income Exclusion (FEIE) – As Ines said above, this income exclusion doesn’t preclude you from filing your taxes if your income is under $100k, but it does provide a lovely tax credit which will reduce/eliminate the federal tax you owe. File Form 2555 with your federal return.
Physical Presence Test / Bona Fide Residence Test – Before you can claim the FEIE you have to prove that you’re living abroad.
The Physical Presence Test involves proving that you’ve been abroad (in one or more foreign countries) for 330+ days in a year. As long as some part of that year overlaps with the tax year, you’re good.
The Bona Fide Residence Test involves proving that you’re an official resident of another country. Most Digital Nomads will fall into the former category.
Foreign Tax Credit – If you’re paying tax in another country, you get to deduct that from any U.S. taxes payable. This would be above and beyond any applicable FEIE deductions. Use Form 1116.
Foreign Account Tax Compliance Act (FATCA) – If you have more than $200k in foreign assets (not including a home in your name), then you need to declare them on your return. Use Form 8938.
Foreign Bank Account Report (FBAR) – Not to be confused with “FUBAR”, FBAR requires you to declare assets in all foreign accounts (checking, savings, pensions, etc) if it all totals more than $10k. Use Form FinCEN 114.
Exclude Your Spouse – If you’re married to a foreigner, don’t drag them and their income into the U.S. tax system. Instead, file as “married, filing separately”.
Avoid the State Tax Trap – Like Ines said above, choose your state of “residence” carefully. If your mailing address is in California, South Carolina, New Mexico, or Virginia, then even if you don’t officially live there any more, you have to pay state taxes, until you actually prove that you’ll never return there again. Consider a Virtual Mailing Service to have your address in a tax-favorable state.
Seriously. Just Get Help. – Are you overwhelmed yet? I am. Don’t leave yourself liable to an incorrect filing and subsequent penalty. Investing in a tax preparer with an expertise in expat and Digital Nomad tax situations will save you a bundle (of money, and aggravation) in the end.
FILING TAXES FOR CANADIAN DIGITAL NOMADS
As a Canadian, your residence status makes all the difference in terms of what your tax return is going to look like. Depending on how long you are traveling for, you could be considered a factual resident, a non-resident, an emigrant, or just plain Canadian resident. This depends on a number of mind-numbing factors, which you can read about on the CRA Website here.
Me? I’m a “factual resident”, which means I’m maintaining my Canadian residency, despite having been abroad for a dozen or so years. It means I claim every penny of my worldwide income on my Canadian tax return. Luckily because most of my expenses are also deductions, I don’t actually pay much/any tax.
However, some Canadian accountants recommend becoming a non-resident. It involves a special application and many (many) forms and sometimes even a “departure tax”; becoming a non-resident of Canada gets even more complicated if you own property/investments or have dependents in Canada. However, the advantage of being a non-resident of Canada is that you don’t have to file Canadian taxes any more! You can now set up residency in another country (if you wish), and if you’re smart, you’ll do it in a country with a zero/low income tax rate.
I highly recommend consulting with an account who specializes in such matters before applying for non-residency, as it is a complicated procedure that may have consequences if you ever plan on returning to Canada.
If you remain a resident (or factual resident) of Canada for tax purposes and you’re a DIY-er, you can file your taxes from anywhere yourself using NetFile.
Unfortunately, I can’t tell you about all the tricks and loopholes for filing Canadian taxes effectively. Why? Because I believe in outsourcing this stuff to people who do it every day. They will surely do a better job than you or I will.
But that’s just me. If you’re a DIY-er at heart, then you’ll surely be able to dig up all the information you need. Me? I’m about done with this guide. I’m going for a walk.
Canadian Tax Preparers
I’d recommend my tax preparer, but he’s trying to retire and doesn’t want any new clients.
So, here are a few Canadian tax preparers and accountants who position themselves as experts in International Tax regulations. Note: I don’t have any experience with the below firms; I advise contacting a few to see if they can help you out given your situation.
FILING TAXES FOR UK DIGITAL NOMADS
Erin and Simon of NeverEndingVoyage are from the UK and have been on the road since 2010 (they’re also the creators of Trail Wallet, as mentioned above)! I asked them about filing taxes as a digital nomad from the UK. Here’s what they do:
We have to pay tax somewhere so we choose to do so in the UK as it’s our home country (and we have stayed officially resident there) and it keeps things simpler.
We are registered as self employed in the UK which is easy to do. We also set up a partnership (again, a simple process) for the two of us which covers all our business activities. Each year we fill out a tax return online and pay any taxes (and National Insurance contributions) owed by bank transfer.
We do our own tax returns—as we keep track of income and expenses each month and log it in a spreadsheet it’s easy to do at the end of the tax year. The HMRC online form does the calculation for us and tells us how much we owe.
As travel bloggers we keep our receipts for travel expenses (we take photos of them and store them in our Trail Wallet app) for any portions of our travels where the main purpose is to research and write about the place. If we are just living somewhere for a few months or visiting friends and not writing much about the place then it doesn’t count as a work trip. This is the advice we were given by an accountant but it’s always good to get advice for your own situation.
We also tax deduct the business expenses that you list here in this post.
FILING TAXES FOR AUSTRALIAN DIGITAL NOMADS
Jess and Hai are the Australian travelers behind Notes of Nomads; they have been on the road since 2006, and have spent the last few years based in Tokyo Japan. This means they’re on the hook to file taxes in both countries, but luckily Australia’s online tax system now makes it relatively easy.
You can select the sections that apply to you at the start and skip sections that aren’t applicable. There is help documentation you can click on along the way for clarification and you can also chat with someone directly for assistance during certain times. That’s very helpful when your situation is not so black and white, as is the case for many digital nomads.
This guide is an evolving entity, that continues to be updated according to tax reforms, regulations, and information/opportunities available.
Did I miss something? Please let me know in the comments, or contact me privately. Let’s all help each other out.
Happy tax filing!