The digital nomad trend all around the globe is on the rise. People are tired of their obsolete and mundane routine of office and want to work from home or from remote places where they can work flexibly from. The statistics in the United States and the United Kingdom show that the number of people in the country who work remotely has increased drastically in the last couple of years.
Digital nomads have a location independent lifestyle which means they work from the location of their choice and convenience and carry their portable office everywhere they go. This gives them a chance to work at their own pace and enjoy the surroundings too. Earning and saving is the primary aim of everyone who works. Since digital nomads are already paying in the name of traveling and accommodation many seem to avoid taxes in their home country to save up more which is legally not a correct thing to do. You can’t just avoid taxes to save up big and leaving your country does not mean you have no more tax obligations.
If you need to save on your taxes then you must resort to legal ways of doing so. Here we will discuss a few ways through which a typical American backpacker can save up on taxes.
SIGN UP FOR FOREIGN EARNED INCOME EXCLUSION
In the United States, there is a Foreign Earned Income Exclusion (FEIE) program that allows an individual to legally exempt their income from any taxes. USA tax system works around citizenship which means no matter where in the world you are, if you happen to be USA passport holder then you have tax obligations. To avoid this, digital nomads try to sign up for the FEIE program which comes in effect from the time you clear either the Physical Presence Test or the Bona Fide Residence Test. Both of these tests prove that you stay out of the country for the entire year almost only then your foreign income can be exempted from tax liabilities.
However, this does not apply to any income gain from the capital in the country, rental income or revenue earned through interests or in the form of dividends. This allows an entrepreneur to reduce their tax bracket but it does not eliminate you from it. Similarly, there are other programs in different countries that allow their residents or citizen to file for exemption of income tax to reduce the tax burden on them.
The Foreign Earned Income Exclusion (FEIE) program does not reduce the income and self-employment tax which is why S-corps election is introduced to save up on taxes. If a business registers itself as a Limited Liability Company then they choose to be an S-Corp and this way the owner can make a monetary distribution to himself and the rest can be taken as distribution on which self-employment tax is exempted if you are S-Corps LLC.
If a Limited Liability company chooses to be taxed as S-Corps then they should get ready to incur a heavy administrative expense and be prepared to deal with difficult situations in the accounts.
AWARENESS ON TAX DEDUCTIONS
To reduce your taxable income through deductions you must know book-keeping and keep a check on likely deductions so that they do not overpay in the name of taxes. They should keep a check on the deductions such as depreciation on fixed assets; any deduction to be made for office space, dispersal costs incurred which include miles driven by the car and meals planned. if these deductions are checked in the record, then it can make a huge difference in the amount you pay as a digital nomad for taxes.
Digital nomads and entrepreneurs should always keep a thorough check on book-keeping and record all the details as they occur and if possible an accounting platform should be used to keep all the records intact so when it is time for taxes you don’t have to rummage through books and have expenses and receipts ready.
ESTABLISH A TAX HOME
Since digital nomads are on-the-go and move from location to location in a short time they are most likely to incur travel expense which, if not deducted from their taxable income, will increase the amount paid in tax. To take advantage of this, a digital nomad must have a tax home or a permanent place where they carry out business activities.
Establishing a permanent residence is vital if you want to legally save up amount paid in taxes because if you don’t have one, you are considered as an iterant and are not eligible to file for any expense incurred in the name of a business. Digital nomads establish a tax home before they move around so when their taxable income is calculated the travel expense is deducted from it and they again save up on taxes.
AVOID PENALTIES ON LATE PAYMENTS
To avoid any money getting tied up in penalties you must properly file your tax returns and do so on time. If you fail to do so, you will be liable to pay penalty on late filing. Keep a check of your taxes and as a self-employed individual, you should be paying your taxes quarterly, that is all year round. If you possess property and assets outside of your home country then you should be prepared to submit a FACTA declaring your foreign assets to the state.
It does not matter what you are earning as a digital nomad, if you hold a passport of any country and are considered a citizen or resident then you are obligated under law to pay the taxes due on you. However, showing vigilance and thoroughly keeping a check on your records will help you legally avoid few taxes that can help you save up more money in your bank accounts. You may use the saved up amount to take your travel journey to the next level.
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