Ordinarily, when you work a job, let’s say in Asheville, North Carolina, you most likely live in North Carolina as well. When you receive your pay, you have taxes removed for the federal government and North Carolina as well.
When a professional sports player plays a game in a state that is not their home state, they will have to pay state income taxes for the amount of their income that was earned while in that state. In leagues with two dozen teams, that could be a lot of state tax returns. The Jacksonville Jaguars play one game each year in London, which comes with even more tax difficulties for them, on top of their usual difficulties in finding the goal line.
To be sure you file these returns correctly, make sure you keep detailed logs of when you enter, and exit, any state and what work was completed while there, if any. If you come back to that state, make another log entry.
When it comes time for you to file your tax returns, make sure you reference your list of states you visited, how long you were there, and what work you completed. Then research the individual states and verify their non-resident tax return filing requirements. Some states may say you do not have to file a state return if you were only in the state for an extremely short time period. Even if you qualify to not file, make sure you keep the record of your time in each state with your tax documents in case a state’s department of revenue audits you.
Also, some states have reciprocal tax agreements. Like, if your tax home is in one state and you did work in an adjoining state, you might be able to avoid paying taxes in the second state. State taxes are deductible on your federal tax return, so in several instances, you can avoid double taxation.
Keeping track of your incoming and outgoing expenses is made easy with a program like QuickBooks. This can be easily transferred to a tax preparation software like Turbotax. Filing electronically is a lot easier than filing a dozen paper returns. The electronic tax preparation software will be able to alert you of any special tax considerations that you may not have considered or be able to tell you if you actually qualify to file a return or not.
Of course, like any other self-employed worker, other tax benefits and deductions are available if you qualify.
However, there are other ways to pay less on taxes as a location independent entrepreneur
Become an S-Corporation. An S-Corporation is a corporation. One of the ways you can cut down on the amount of taxes you pay is that if your company earns $150,000, you can pay yourself a reasonable salary and pay taxes on that and then pay yourself a distribution, which is not taxed at self-employed levels.
Deduct your deductions. There are a lot of expenses a freelancer or other location independent entrepreneurs can deduct, such as travel meals, depreciating assets, business expenses.
Create a tax home. A tax home is your “home base” – where your residence is. It would be best to have one that does not have state income taxes. In order to be able to deduct travel meals and miles, you have to have a location you’re traveling from.
Pay your quarterly payments. You could have a penalty from the IRS if you do not pay your quarterly estimated tax payments.
If you are planning on taking your location independent business overseas and traveling the world, remember that the United States still expects your tax returns promptly on April 15th. However, the Foreign Earned Income Exclusion allows you to exclude some of your foreign earned income from taxation. The available tax breaks come in the shape of relatively simple exclusions and deductions which can be claimed on Internal Revenue Service Form 2555.
Even when overseas, all of the same rules apply as if you were in the United States. When filling out your tax documents, your earned income must be in US dollars. If you are paid in a foreign currency, you have to make sure to log the exchange rate on the day you received it. This could be a long document if you receive pay multiple times per year while being a location independent entrepreneur.
If you mail your tax return into the IRS, you have to mail it to the Austin, Texas processing center.
You can exclude up to $100,000 of foreign earned income.
Further, to qualify for the FEIE, you must meet one of two criteria:
- Live and work outside the US for at least 330 days out of 365. This is the Physical Presence Test.
- Live and work in a foreign country (not international waters) from January 1 to December 31, an entire calendar year. This is the Bonafide Residence Test.
Generally the Physical presence test works for the first year abroad, and then the bonafide residence test takes over.
While figuring how much income to deduct for the FEIE, remember that it only works on income earned while inside a foreign country. If you were to come back to the United States to speak at a lecture, the income you make from that will be US-based income, which could not be excluded as it would not be foreign earned income. However, if you performed your lecture via Skype, that income would be excludable as you earned it while inside the foreign country.
You may have to pay taxes to the country you happen to be in. In order to avoid a double taxation scenario, these foreign taxes are deductible in your US tax return.
All of this may sound difficult to understand, and it can be, so if you have any questions or concerns, it would be best to seek out a tax expert on these matters. It would be unfortunate to find yourself in the middle of an audit while you’re on a bus traveling across the French countryside.
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