An Employer’s Guide on How To Tax Your Digital Nomads

An Employer’s Guide on How To Tax Your Digital Nomads

Introduction

Digital nomads are widely regarded as the 'firstborns' of the remote work culture. And in the last three years, the nomadic family has mushroomed considerably worldwide. In the U.S. alone, there were 15.5 million digital nomads in 2021.

This figure is good news for companies globally, as they have a vast talent pipeline to source new hires. However, depending on the countries, your remote employees are operating from, hiring digital nomads can attract extra tax responsibilities for your company.

You need to know how digital nomad taxes work so you and your employees remain tax compliant under the pertinent tax laws across all the countries where your digital nomads reside. And this is a huge undertaking, given the complexity of international tax laws.  

But you’re in good company because we have prepared this in-depth guide on how to tax your digital nomads, so read on.

What is a digital nomad?

Essentially, digital nomads are professionals who work remotely from different locations, mostly when touring the world. These professionals travel as they work without being tethered to one workstation or home office. If you hire digital nomads, they may work from different cities, states, or countries — whichever location is next on their bucket list.

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The tax implications of a digital nomad lifestyle

While a location-free work culture gives digital nomads the much-desired working-time autonomy and a better work-life balance, taxes remain an evolving dilemma. Working from multiple countries or states subjects digital nomads to different tax laws and policies, which affects their tax reporting.

It may also affect your corporate tax obligations, as your company may be required to pay social and employment taxes in multiple countries. Your tax obligations may also vary depending on how you’ve classified your nomads. Are they employees, freelancers, or independent contractors?

Where should digital nomads pay taxes?

Most digital nomads identify as self-employed entrepreneurs and are responsible for their tax reporting. However, you should ensure that what your nomads know about taxes abroad is sufficient to avoid tax issues that may attract heavy fines and penalties in different countries.

For the most part, two factors determine taxes for digital nomads:

  1. The taxation system of their country of origin (the nationality of a digital nomad)
  2. The taxation system of their country of residence (the countries where digital nomads work from)

To get a deeper perspective, let’s discuss the main types of tax systems globally and how they affect how digital nomads pay their taxes.

Citizenship-based taxation

Countries following this taxation system tax their citizens’ worldwide income. This means that citizens pay income tax regardless of where they earn their income. Citizenship-based taxation is rare and one of the most complex systems used only in the U.S. and Eritrea.

As such, American and Eritrean digital nomads must pay taxes to their motherland no matter where they work or live. It gets knottier for U.S. digital nomads because they also sometimes have to pay state taxes. For instance, digital nomads from California, Virginia, South Carolina, and New Mexico may be liable for state taxes on top of self-employment tax.

Residence-based taxation

Countries using a residence-based taxation system tax their non-residents on the income they earn in that country and not their worldwide income. This means digital nomads will only pay tax in that country when they become tax residents. In that case, how a country’s tax laws define a tax resident would be an essential detail for digital nomads.

In most countries, foreigners acquire resident status after living in that country for at least six months (more than 183 days) in a calendar year. These countries include Denmark, New Zealand, Norway, Spain, Brazil, Poland, and Uruguay.

It’s a digital nomad’s responsibility to understand the taxation systems in the countries they work from to avoid serious tax implications. Fortunately, most EU countries use a residence-based taxation system, which is less complex than a citizen-based system.  

U.S. digital nomads must be aware of the tax laws in a resident country to avoid double taxation. Here’s a case in point:

Say Chris — an American digital nomad — is working in Brazil. If Chris stays in Brazil for more than 183 days, he’ll pay taxes in Brazil and the U.S. (double taxation). But if he works in Brazil for less than six months, he’ll not be considered a tax resident, exempting him from paying taxes in Brazil. In such a case, Chris will only pay taxes to the U.S.

Territorial tax system

A few countries, such as Panama, Portugal, and Costa Rica, tax individuals on the income they earn within their territory. And this is a very advantageous taxation system for digital nomads because they can earn income in foreign countries without paying taxes in their resident country.

How to tax your digital nomads

There’s no common international law governing digital nomad taxes. This leaves many gray areas when taxing digital nomads. At best, you should consider the employment and taxation laws in the resident countries of your digital nomads.

Fortunately, many countries require employers to withhold the personal income tax of their employees. Only a handful of countries, like the United Arab Emirates, Bahamas, Monaco, and Bermuda, don’t charge personal income taxes. This means you may have a tax obligation to submit payments to the resident countries of your nomads as per their taxation laws.

Factors that companies should consider when taxing digital nomads  

For starters, you must establish the correct international worker classification of your nomads per each country’s laws. This will substantially affect your tax reporting obligations in each country since employment laws vary internationally.

Secondly, you must also consider the deviating economic and tax setups between countries that may lead to significant net pay variances for your digital nomads earning an equal gross salary. This happens because countries have varying tax rates, tax credits, deductions, and benefits.

Thus, two digital nomads in different countries earning the same gross salary may receive uneven net pay after taxes, and sometimes the difference is enormous. In such cases, you may consider increasing the gross income for some of your digital nomads to make up for the difference.

The significant tax obligation variances between countries play a crucial role in determining how much your digital nomads make. While it’s not mandatory, balancing your nomads’ gross pay to cover the tax variances in countries is a good practice that your nomads will appreciate.

Lastly, you must know the appropriate tax forms your digital nomads should fill out and submit to the relevant tax authorities. This helps you streamline payroll tax withholding obligations, keeping you tax-compliant across all your digital nomad locations.

Can digital nomads avoid taxes entirely?

Globetrotting nomads may avoid paying taxes in their resident countries by leveraging loopholes in a country’s tax laws. For instance, in countries where foreigners become tax residents after six months, savvy nomads can time their stay and leave that country before acquiring resident status. Alternatively, nomads can work from a no-income-tax country like Bermuda or the United Arab Emirates.

However, it’s almost impossible for digital nomads to avoid paying taxes in their country of origin — unless they’re willing to give up their citizenship. U.S. digital nomads arguably face the most far-reaching tax consequences because of America’s citizenship-based taxation. American digital nomads must pay income taxes unless they renounce their U.S. citizenship.

But instead of dodging taxes and facing strict penalties in the future or renouncing their citizenship, digital nomads can capitalize on tax credits that reduce the amount of income tax owed. For instance, American digital nomads can leverage the existing Totalization Agreements that exempt U.S. citizens from paying social security taxes to the U.S. if they’re also paying social tax in their resident country.

How Skuad can help you tax your digital nomads accurately

Digital nomad taxes are complex, particularly if you manage a vast distributed team in multiple locations worldwide. Even if you have the time to research the employment tax laws in all the countries your nomads reside in, you may lack the accounting skills to incorporate them into your global payroll system.

Also, it doesn’t help that your nomads may live in multiple countries or states within a single financial year. Indeed, taxing your digital nomads can feel like a never-ending rabbit hole that leaves you with a migraine every time you think about it. Worse still, there’s no substantial universal tax law regulating digital nomad taxation, so you must do extensive legwork just to get a country’s tax laws right.

But the good news is you don’t have to manage your nomads’ taxes alone. Instead, you can trust Skuad to handle all the tax and legal complexities with digital nomad taxes. With Skuad as your global employment and payroll platform, you’ll rest assured all your digital nomads are correctly taxed and compliant in all relevant jurisdictions.

Request a demo today and start your journey to a stress-free global hiring and tax reporting routine.

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