IMPORTANT NOTE: This is not legal advice. Seek professional counsel with an accountant or tax expert about specific regulations in your country of residence. The information is based largely on nomads from the US.
In light of the upcoming Running Remote Conference and workshop from FlagTheory we chose to cover a much requested topic for the location independent. Taxes are complicated as it is and being a remote worker it can get a little confusing as to how to reduce the burden of taxes in a county you no longer live in. Here’s a guide on how to save big while you travel the world as a Digital Nomad.
The Foreign Earned Income Exclusion (FEIA)
The Foreign Earned Income Exclusion or FEIA simply allows US citizens to receive a salary of up to $100,000 completely free of US tax. Be careful however because when you own a business directly in your own name, there are some rules that reduce the effectiveness of the FEIE. So, for these reasons, it’s best for a digital nomad with a business to operate through a non-US corporation structure.
How Do I Qualify?
This requires that you are out of the country 330 of 365 days of the year with the start and end days occurring at any point during the year.
This requires that you are outside of the USA for a full calendar year from January 1st to December 31st.
But remember the FEIE does not include passive income like capital gains, dividends, interest, and most rent. Also remember you must file your regular taxes as well as adding the form for the FEIE.
NOT SO FAST
Although the FEIE is a tremendous benefit you may still be liable for some US taxes especially if you are self employed or are utilizing a traditional LLC.
Here are some thing to consider:
- ECommerce, Amazon FBA are under the “30% rule” meaning they can only deduct part of their income under FEIE.
- Also the “scaleback rule” a situation where your gross income is much higher than your net income can exclude you from the FEIE.
So What Should I Do?
Consider AN S-CORP
As an LLC you do have a choice of being considered a “disregarded entity” or an S-Corp. When you chose an S-Corp you have a higher chance of lowering your income and self employment taxes that the FEIE does not address. You can also pay yourself salary that is not subject to self employment taxes but remember you must still pay yourself a “reasonable salary.”
One of the ways that Digital Nomads may be missing out is on deductions. More specifically these areas:
- Computer equipment
- Coworking space fees
- Driving mileage for business
- Meals during business meetings
- Relocation Expenses
- Internet and wifi
- Paypal or bank fees while collecting payments
- Website maintenance fees
- Web hosting fees
- Travel expenses (especially for bloggers)
The issue with this lies more in tracking everything than knowing that these are things we should do. Start tracking everything on a spreadsheet or utilize software to make it easier.
Get A Tax Home
You need to establish a “tax home” This doesn’t necessarily mean you live in this place of business or reside there. Choosing this designation can allow you to avoid you being classified as an “itinerant” by the IRS which would eliminate you from deducting business travel expenses.
Avoid Healthcare Costs.
No this does not mean not having insurance for your health at all! Depending on when you read this the penalty for not signing up for the Affordable Care Act (ACA) requirement for every American may no longer be in effect. In this case choose a travel insurance service or agency that allows you to still be insured when you re enter your home country, some on a month to month subscription basis. There are several out there. We recommend a google search.
For all things Digital Nomad, we recommend The Running Remote Conference June 29–30, 2019 in Bali, Indonesia to learn from people who are already running successful remote businesses and sharing their tips for nomads like you. We’ve secured a special discount code “greenbacktaxservices” for 20% off.
Here’s to sipping Pina Coladas on beaches across the world.