The remote work landscape has changed tremendously over the last few years, as the COVID-19 pandemic transformed the professional landscape. Looking at the tax implications of remote work and the digital nomad is more important than ever. Before COVID, digital nomadism wasn’t nearly as common as it is today. In fact, according to the National Council on Compensation Insurance (NCCI), only 6% of working Americans primarily worked from home before the pandemic and roughly 75% hadn’t worked remotely at all.
Today, the U.S. Bureau of Labor Statistics says that 19.5% of American workers do so remotely, an increase of about 325% in less than five years. Despite headline-grabbing “return to office” mandates from major corporations like Amazon, remote work is still on the rise overall. By the end of 2025, experts say that roughly 22% of working Americans will work remotely, which would amount to a year-over-year increase of nearly 13%.
Of course, the term “remote work” refers to much more than just working from home. The last several years have also seen a dramatic rise in digital nomadism, in which people regularly travel throughout the world, working remotely via the internet. This brings up some interesting questions regarding taxation.
Digital Nomad Taxes
Where does a location-independent worker pay their taxes? How does tax residency work, and what are the potential obligations for taxation in foreign jurisdictions? What does a digital nomad need to do to maintain tax compliance? It’s important to answer these questions before starting your digital nomadism journey to ensure you’re paying the right amounts to the appropriate entities.
State-Specific Requirements for Remote Work Within the United States
Many digital nomads stay within the country, bouncing from state to state. This is where state-specific laws can get a bit tricky. As an example, if you’re a remote-working resident of Minnesota and a salaried employee of a Tennessee-based business, you simply pay Minnesota state taxes and don’t need to worry about income taxes in Tennessee.
How about freelancers? In general, freelancers also typically pay income taxes in the state where they live. If you’re a Minnesota-based freelancer, you can usually pay that state’s income tax on your earnings — where your clients are based is irrelevant.
On the other hand, if you’re a freelancer based in Minnesota doing contract work for the same Tennessee company as the above example, you might need to pay Tennessee income taxes if you frequently travel to that state as part of your work. This situation is known as establishing a tax nexus — a threshold of business activity that requires the worker to pay income taxes within the state.
In most states, remote workers establish a tax nexus through activities that trigger a “physical presence,” including the following actions within the state:
● Hiring an employee
● Keeping business inventory or personal property
● Purchasing or leasing an office
● Purchasing or leasing a warehouse or storage facility
● Delivering goods (other than by mail, UPS, FedEx, etc.)
● Soliciting sales through representatives based in the state
Many digital nomads never need to worry about establishing a tax nexus in another state because the nature of their remote work doesn’t require it. For example, if you’re a freelance writer with a home address in Minnesota, you’re unlikely to trigger a tax nexus elsewhere even if you spend most of the year working remotely in other states.
But how does this work when your digital nomadism crosses international borders instead of state lines?
International Tax Residency: Home Country vs. Host Country
If your digital nomadism takes you to other countries, there are some complicating factors at play. First and foremost, you must determine whether you’re legally allowed to work in a foreign country — in many nations, you can’t work within the country if you’re on a tourist visa.
You’ll need to figure out taxation requirements between your home country and host country, and also whether these two nations have tax treaties to prevent double taxation. In addition, the amount of time you spend outside the U.S. plays a role in your tax requirements due to what’s known as the foreign-earned income exclusion.
Home Country Tax Residency
Most Americans working remotely overseas will continue paying U.S. income taxes. American citizens and residents typically pay taxes based on the amount of money they make worldwide throughout the year, no matter where they actually earn that money.
Host Country Tax Residency
In many countries, tax residency gets complicated if you spend at least 183 days in that nation within the year. In other words, if you spend more than half of the year as a digital nomad in a foreign nation, that country may consider you to be a tax resident.
Some countries have different time periods — for instance, Switzerland has a strict 90-day limit before considering a remote worker as a tax resident. In addition, different countries enforce the 183-day rule in various ways, so it’s vital to understand the details of your host country to help ensure compliance.
Tax Treaties
If you do gain tax residency in another country, you open yourself up to the possibility of double taxation, a situation in which both your home country (the United States) and your host country claim the right to tax your income. Thankfully, the U.S. has tax treaties with many nations, helping digital nomads avoid being taxed twice on the same income.
These treaties can exempt the American citizen from tax responsibility in the foreign nation, reduce their rate of taxation, or offset the tax liability through credits. The Internal Revenue Service maintains a list of all active income tax treaties between the U.S. and other countries — simply scroll through until you find the country you’re working in to learn the details.
Foreign-Earned Income Exclusion
If you spend the vast majority of the year — at least 330 days — working outside the U.S. and earn less than $120,000, you may qualify for the U.S. foreign-earned income exclusion, which can provide significant tax savings in the right situation. However, it’s worth noting that this exclusion has some other restrictions depending on which country you’re in.
For instance, you may be ineligible if you’re on a tourist visa, and some nations require you to show some form of residency intention to qualify for the foreign-earned income exclusion. You might need to learn your host country’s language, open a bank account there, or prove that you have lasting social ties within the country. In short, the foreign-earned income exclusion can be an “easier said than done” proposition.
Tax Strategy for Remote Workers
As a digital nomad, you must keep detailed records of your business activities in case you’re ever audited. You should always track your days spent in each country, as well as the specific dates you entered and exited the nation. This will help simplify your taxation filing requirements and avoid accidentally establishing tax residency in a foreign country.
You might also want to look at countries that provide digital nomad visas to remote workers, allowing individuals to stay for an extended period without establishing tax residency. In our post-COVID society — where remote work is increasingly seen as the norm — digital nomad visas have exploded in popularity. In 2021, there were only 21 countries offering this type of visa. Today, there are 58, and that number continues to grow as more nations see the benefit of attracting digital nomads.
There’s a tremendous amount of variance from country to country regarding how digital nomad visas work. Some are free, while others have application fees. Some have one-year limits, while others allow digital nomads to establish permanent residency. Some require you to prove that you’re at least a mid-level earner, while others have very low income requirements — some don’t even require proof of income at all (like Uruguay and Saint Lucia).
You can find the full list of digital nomad visas online and choose one that suits your requirements. That said, you should be aware of one common misconception: While many people think digital nomad visas provide tax relief, they usually don’t. Only a select handful of countries provide tax incentives through their digital nomad visas — most of them simply allow you to work in that country, which a traditional tourist visa does not.
Case Scenario: Tax Implications for a Remote Worker with Income in Two States
Jessica is a software engineer who works remotely for a tech company based in California. During the year, Jessica decided to split her time working from two locations: her home in Oregon for eight months and a rental apartment in Washington for the remaining four months. Her employer continued to withhold California state taxes from her paycheck, but Jessica did not physically work in California during the tax year. Additionally, Jessica earns freelance income from clients in both Oregon and Washington.
Tax Implications
State Residency and Income Tax Obligations
- California: Even though Jessica’s employer withheld California state taxes, she does not meet California’s residency requirements because she did not physically work or reside in California during the year. She may be eligible to file for a refund of the taxes withheld if she can prove her absence and non-residency.
- Oregon: Jessica is considered a resident of Oregon for the eight months she lived there. As an Oregon resident, she is taxed on all income earned during that time, regardless of its source, including her freelance income and wages from her employer.
- Washington: Washington has no state income tax, but Jessica still needs to account for her residency there during the four months and report her freelance income to ensure compliance with local tax laws, such as the Washington Business and Occupation (B&O) tax, which applies to certain types of business income.
Wage Allocation
- Jessica’s wages from her employer must be allocated based on where the work was performed:
- For the eight months in Oregon, her wages are subject to Oregon state income tax.
- For the four months in Washington, her wages are not subject to state income tax, but her employer may need to adjust withholding to reflect this.
Freelance Income
- The income Jessica earned from Oregon-based clients is fully taxable in Oregon during the months she lived there.
- For income earned from Washington-based clients during her time in Washington, there is no state income tax, but she must evaluate whether it is subject to Washington’s B&O tax.
Potential Double Taxation
Since Jessica is primarily taxed as an Oregon resident for part of the year and earned income in Washington, she needs to carefully ensure that Oregon does not double-tax income already allocated to Washington. To avoid this, Jessica must properly allocate and report income on her state returns.
Why Digital Nomads Face IRS Audits
Digital nomads often have complex tax situations involving multiple income sources, foreign bank accounts, and varying residency requirements. These factors can raise red flags with the IRS. Common triggers for audits include:
- Failure to report foreign income: U.S. citizens are required to report worldwide income, regardless of where they live or earn. Omitting foreign income or misreporting it can attract IRS attention.
- Improper use of the Foreign Earned Income Exclusion (FEIE): While the FEIE allows digital nomads to exclude a portion of their foreign income from U.S. taxes, failure to meet the residency or physical presence tests can lead to disqualification.
- Unreported foreign assets: Digital nomads with foreign bank accounts exceeding $10,000 must file an FBAR (Foreign Bank Account Report). Neglecting this requirement can result in severe penalties.
- Self-employment tax errors: Freelancers and entrepreneurs often underpay their self-employment taxes or make mistakes when deducting business expenses.
How to Defend Against an IRS Audit
Facing an IRS audit can be daunting, but with the right preparation and guidance, it’s manageable. Here’s what you need to do:
1. Stay Organized
Good record-keeping is your first line of defense. Maintain detailed records of income, expenses, travel dates, residency status, and foreign financial accounts. Documentation is critical to proving your eligibility for tax benefits like the FEIE and avoiding penalties.
2. Understand the FEIE Requirements
To claim the FEIE, as discussed above, you must pass either the physical presence test or the bona fide residence test. The physical presence test requires that you spend at least 330 days in a foreign country during a 12-month period. The bona fide residence test involves establishing a tax home in a foreign country for an entire tax year. Failure to meet these criteria can invalidate your claim.
3. Comply with Reporting Requirements
Ensure that you file all necessary forms, including:
- FBAR (FinCEN Form 114) for foreign bank accounts.
- Form 8938 for reporting foreign financial assets.
- Schedule SE for self-employment tax obligations.
Non-compliance with these forms is a common reason digital nomads are audited.
Tax Attorney for Remote Work
As you now know, remote work can have some complicated requirements when it comes to taxation. If you have any questions about the tax implications of digital nomadism, you should contact a tax attorney for remote workers who can help you navigate international tax laws.
Delia Law offers free consultations. Our experienced and knowledgeable tax attorneys can help you determine how your digital nomadism affects your tax responsibilities.
It’s important to consult with a reputable tax attorney before embarking on your remote work journey, as it’s much easier to avoid taxation issues before they arise than it is to resolve them once they’re on file. Get in touch with the attorneys at Delia Law today and let us help you determine your taxation responsibilities, no matter where you work!
