In an age where all you need is a laptop to do your job, people are increasingly embracing the digital nomad lifestyle. However, while there are many benefits that come with working from the road, such as better work-life balance and the freedom to travel, there are also some challenges. Finances and taxes, in particular, can get tricky for digital nomads, especially if you frequently travel between different countries.
This article will take a closer look at financial and tax requirements for digital nomads in addition to offering insights and tips to help you better manage your books while traveling from place to place.
Why Bookkeeping is Important For Digital Nomads
Effective bookkeeping is important for many reasons, primarily of which is ensuring compliance with federal laws. Businesses, including those who are self-employed or freelance, must follow strict reporting guidelines to ensure compliance with federal organizations, such as the IRS. Failing to keep track of profits and report them accurately can result in serious legal consequences, such as fines, penalties, and even jail time.
If that isn’t reason enough, there’s also the matter of financial loss and losing your business. If you don’t track your expenses and pay close attention to your spending, you could run out of the money you need to continue supporting your business or even go bankrupt.
To avoid these serious consequences, maintaining accurate records, updating them regularly, and properly reporting them is essential.
Things to Keep in Mind as a Digital Nomad
Living the digital nomad life can be exciting, but there are some things you should know about working from the road before you pack your things and set sail.
Digital security can be challenging when you travel around. Digital nomads often rely on places where they can get free internet to stop and do their work. Unfortunately, these places don’t typically have secure networks, meaning someone can more easily hack into your computer and compromise your sensitive data.
To avoid this, you’ll want to use a virtual private network (VPN) when connecting to public Wi-Fi. You should also adopt safer security practices, such as using multi-factor authentication systems, complex passwords, and using software with enhanced security protections.
Finally, you will need to thoroughly understand the tax requirements if you intend to work remotely while traveling.
Tax Requirements for Digital Nomads
Like anyone else, digital nomads still have to pay taxes. Just because you are traveling and don’t live in one set location doesn’t mean you can get out of paying taxes. The US uses a citizen-based tax system, meaning you pay taxes based on your citizenship status, not where you currently live.
Wages, interest, dividends, and rental income are sources of income that you must file a tax return for, even if you earned that money while outside of the United States.
What about state taxes?
You may or may not have to file state taxes if you travel abroad during your journey. This typically depends on what state you lived in prior to hitting the road as a digital nomad. Each state has different rules and some are more strict than others. To be safe, make sure you check the local laws for the state where you last resided to be sure.
How do self-employment taxes work?
Even if you travel abroad, you will still be required to pay U.S. self-employment taxes as a digital nomad if you are considered self-employed. The current tax rate for self-employment is 15.3%, which breaks down to 2.9% for Medicare and 12.4% for Social Security. You will need to pay this in addition to any state or federal taxes that are not automatically withheld from your paychecks.
That said, there are some exclusions when U.S. citizens earn foreign income. To see if you will be excluded from paying dual Social Security taxes as a digital nomad, you can check the list of countries that participate on the Social Security website.
Do I have to pay foreign taxes?
In addition to filing a U.S. tax return, you may or may not have to file taxes for the foreign country you are living in. This will depend on the country’s tax policies.
There are two primary types of tax systems that will determine whether or not you need to pay foreign taxes in the country where you currently reside as a digital nomad:
Citizen-based tax system: This system requires you to pay taxes for the country where you are a citizen, no matter where else you reside and regardless of where the income was earned.
Residence-based tax system: This system requires all residents who live within the country to pay taxes on all income.
As a digital nomad, you will only have to pay foreign taxes if you earned income that was sourced within a country that uses the residence-based system while you are living there. Territorial-based systems are a third type of system that may also require you to pay foreign taxes if the money you earned was sourced within the borders of that country, even if you are not residing there. You can find a full list of countries and their tax systems on Wikipedia’s international taxation page.
Tips for Managing Your Finances and Taxes as a Digital Nomad
Below are some tips and insights to help you manage your finances and taxes:
To make doing your taxes easy, you can look into tax software with services that help digital nomads and those who are self-employed, such as Quickbooks, TurboTax, and H&R Block.
If you are dealing with different currencies, look into accounting software that helps you manage and convert money based on current exchange rates. Some examples include Quickbooks, Xero, Tipalti, and NetSuite.
Wrapping Up
One of the many reasons people choose the digital nomad life is the freedom and flexibility it offers. So if you don’t want to be weighed down and distracted by record keeping, it’s important to automate your processes as much as possible and/or hire a professional to help. If you’re good at keeping organized, you can do it yourself, but outsourcing your bookkeeping can help you breathe a little easier knowing that everything will be taken care of for you.