The ability to work from anywhere with a stable internet connection is widely seen as a silver lining for knowledge workers impacted by the pandemic. This newfound capability to work from anywhere as a digital nomad, however, comes with its own set of unique challenges. Taxation and related issues of residency are some of the more substantial and less glamorous hurdles.
The rise of the digital nomad
Experienced digital nomads are accustomed to the plethora of red tape that comes with a constantly changing address and have long found creative and compliant ways to manage the problem of maintaining an official address for administrative purposes. The few people living and working from the road pre-pandemic are now being joined by hundreds of thousands of knowledge workers contemplating their newfound freedom of mobility, and, in many cases, their post-pandemic careers.
While tax regulations vary significantly depending on where you are in the world, there are general guidelines that may be useful for those seeking information on paying tax as a digital nomad.
Who is a digital nomad?
Digital nomads are remote workers who travel to different locations, relying on technology to do their work wherever they want. Many digital nomads work remotely from outside their home country.
Can any remote worker be a digital nomad?
While all digital nomads are, by necessity, remote workers, the term ‘remote worker’ isn’t synonymous with being a digital nomad. The key factor being that digital nomads choose to travel to different locations while working remotely while ‘remote worker’ is also used to describe workers who operate outside of an office.
Whether a remote worker can be a digital nomad is primarily determined by employer policies and custom. Many digital nomads are self-employed or operate as freelance contractors. In most countries, a self-employed individual has substantially more control than a typical salaried employee over not just how, where, and when they work, but also how their taxes are filed.
If you are not self-employed, check with your employer first before you head off into the sunset to fulfill your digital nomadic destiny.
Why do companies prohibit knowledge workers from operating as digital nomads?
Many companies have resolved the complexities of digital nomad taxation and legislation by simply not permitting their employees, remote or otherwise, to live outside the country in which the company who employs them is incorporated. In many cases, employees are also discouraged from moving away from the city in which they were hired. This is usually for tax and labor legislative reasons, but may also be due to a company’s facilities management or HR compensation and retention strategies. As more companies adopt a permanently remote workforce, it is becoming increasingly clear that many of these strategies are insufficient to meet the demands of knowledge workers in the shifting pandemic landscape.
Where do I pay my taxes if I am a digital nomad?
Typically, remote workers file taxes with their country of tax residence as determined by their place of principal residence or usual abode. Digital nomads, however, may encounter different or additional layers of tax residence due to their physical presence in other countries during a tax year. State/province/territory and local taxes may also apply.
How is my country of tax residence determined?
While regulations vary from country to country, from province to province, and even sometimes from city to city, most individuals have a permanent physical address for taxation and legal administrative purposes, including voting. Your official country of residence is the country in which your permanent physical address is located. A person may also have dual or multiple residency. Some countries consider other factors in determining official country of residency, such as where you maintain your bank account/s. In addition, other considerations apply to visa-holders, many of whom are only permitted to stay in a certain country for a certain length of time.
Although a person may be a resident of a country, they may not be a tax resident there as many jurisdictions require a person to live at a physical address for 183 or more days per year to be considered a tax resident. Each country subject to the 183-day rule has its own additional criteria for considering someone a tax resident. In a few cases, a person may be a tax resident in their country of citizenship without having a physical presence or address there.
It is crucial to the digital nomadic lifestyle to understand the qualifications for tax residency in any country you choose to travel. Knowledge workers are advised to know the rules for the country in which they have an official residence address filed with government authorities, as well as regulations associated with the country or region where they spent the most time during the tax year, including visa requirements.
What is a digital nomad visa?
This is not an official term, however the concept of a digital nomad visa refers to a document or program that gives someone the right to work remotely while residing away from their country of permanent residence. Countries that offer such programs today include the Cayman Islands, Mexico, Costa Rica, Norway, Germany, the Czech Republic, Portugal, Estonia and Georgia, just to name a few.
What do I need to do as a digital nomad to file my taxes correctly?
Regardless of country of residency and employment status, conventional wisdom on how to properly file your taxes still applies:
- Keep track of your income.
- Keep track of your business expenses. Most countries require original receipts (beyond digital copies) to claim tax deductions, so it literally pays to be organized.
- Read up. Take some time to look at the tax laws, regulations, tax forms, revenue agencies websites or tax blogs.
- Don’t procrastinate. Don’t expect that you will receive an extension just because you happen to be out of your country of residence when taxes are due.
- If it’s complicated, use an accountant or tax preparer familiar with tax legislation and custom in your official country of residence. If you work from outside your country of official residence, try to find one specializing in the fast-growing field of expat taxation services.
Stay compliant with Oyster’s global HR software
Considering becoming a digital nomad but worried about legal complications? Oyster makes it easy for employers to find new team members anywhere in the world and comply with local rules and regulations. Take a closer look at how Oyster can help digital nomads to get hired anywhere in the world.
Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.
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