Remote Work And International Taxes: Avoid Mistakes And Penalty!

A super important aspect of working offsite is remote work taxes. Remote work and digital nomadism, specifically, are no doubt enjoyable and exhilarating. However, you must always remember that there are usually tax implications for working remotely abroad. As such, to be on the safer side, you need to comprehensively attend to this aspect of your remote work arrangement. But how do you reconcile remote work and international taxes, especially when you have little experience with fiscal matters?

Digital nomad tax affairs can be rather tricky. I’ve been managing mine for close to 8 years, so I know.

That’s why I’ll be sharing all I’ve learned about remote work taxes so far. Hopefully, this will help make your digital nomad journey less stressful.

Disclaimer: I’m not a certified tax consultant, and the information shared in this post is from my personal experience and is based on my opinions. Please do not hesitate to consult an expert tax auditor if you feel lost.

Understanding Remote Work And International Taxes

A remote work arrangement simply refers to an employee working outside the conventional, physical workplace setup. So, strictly speaking, you’re a remote worker if you operate out of a café, a co-working space, or even your home.

Of course, you can take remote work one step further by introducing traveling. This makes you a digital nomad.

No matter what scenario you’re operating under, it’s still vital that you familiarize yourself with how remote work taxes are used.

From residency tax versus citizenship tax to foreign-earned income exclusion concepts, you must truly understand the tax implications of working remotely abroad and at home.

The biggest reason for this is that it’ll prevent any incident of double taxation. Additionally, it helps ensure that you operate within the confines of the law and even leverage tax breaks where available.

For me, I always like keeping things simple. So, I registered for a sole proprietorship company to manage my finances and taxes.

Then, I hired an accountant to balance my taxes and declare my earnings by the end of the financial year. All these are done in my home country – Malaysia, which I had also made as my home base.

I find consolidating all tax records and bookkeeping more manageable under one official work account (sole proprietorship).

Based on my experience, international clients also prefer if you settle your own taxes. Keeps things simpler on their end.

But there are some companies that operate with an umbrella company in the countries in which they’re based. As long as they engage with an umbrella company, this company will help you settle your visa, taxes, and work arrangements if needed. 

Now I’ve explained it to you, I’ll be getting into the specifics of remote work and international taxes.

Most Common Remote Work And International Taxes Mistakes To Avoid

The best place to start understanding digital nomad tax is knowing what NOT to do. With that in mind, I’ve compiled a list of some of the most common mistakes beginner remote workers will likely make when handling their tax affairs on the road. These include:

Not Keeping Accurate Records Of Your Remote Work Taxes

Consider this moment: is it possible to know what tax you must pay if you don’t keep accurate and up-to-date financial records?

How can you possibly file accurate tax records if you don’t keep account of your financial activities?

How can you ensure you abide by all tax compliance laws without good records?

All of the above are significant reasons why you must always keep accurate records of your financial history. This is the only way to effectively avoid negative tax implications, like fines and penalties, when working remotely abroad.

Failing To Properly Classify Yourself

One seemingly unimportant variable that can bite you is neglecting to correctly classify yourself. Even though work is work, tax laws suggest that there’s a difference between regular employees and independent contractors.

As a digital nomad, you can fall into either category, technically speaking. And, because the rules that apply to independent contractors differ from those of employees and vice versa, you could be severely penalized if you don’t assign yourself the appropriate classification.

Not Paying Your Taxes In Due Time

If you aren’t aware, please know that every tax-paying individual is expected to pay this due within a definite period. This is one thing that’s constant even when we’re discussing residency tax versus citizenship tax.

All of this is to say that the law will surely come for you if you don’t honor things like your foreign-earned income tax obligations when due.

Neglecting To Identify And Leverage Tax Incentives

Unlike the other mistakes I’ve mentioned so far, this particular error isn’t going to result in the payment of fines, penalties, or jail time. However, it’s still a mistake worth watching because it’s tantamount to leaving money on the table.

Not knowing whether you qualify for foreign earned income exclusion (for example) can lead to the loss of as much as $ 120,000 a year! See why you’ve got to have a good bead on this now?

Remote Work And Tax Compliance

The first and most important priority of every remote worker on the go should be ensuring their digital nomad tax standing isn’t violating compliance laws. This is one of the best ways to keep your nose clean and avoid trouble with the law.

Now, when trying to ensure compliance with your remote work taxes, there are three crucial variables that you need to attend to. These are:

Reporting Income

Tax residency and many other variables heavily depend on you doing your due diligence and reporting your income to Social Security (for US citizens and PR)

I have to be emphatic in stating that the process of reporting income can be considered a mere formality to an extent. This is because, most times, the authorities are well aware (or at least have a pretty good idea) of what you make.

However, neglecting to formally report your earnings to the Social Security Administration can be misconstrued as an attempt at tax evasion, a grave crime. This will naturally attract penalties and other forms of punishment.

So, it’s just best to do your income reporting promptly and accurately.

Tax Deductions

Tax deductions are certain types of expenses that the law allows you to subtract from your taxable income. The result of this is that you will owe less money in taxes.

Leveraging this unique provision when you operate a remote work arrangement is strongly influenced by how familiar you are with the laws governing tax deductions in your resident country.

In saying this, it’s important to stress that the principles guiding tax deductions vary from country to country. So, don’t assume that because you know how it works in Country A, you can apply those rules verbatim in Country B. That’s certain to get you in trouble fast!

Tax Filing

Your tax filing status tells you which tax return form you must fill out when paying your taxes. Several elements affect your tax filing and tax filing status. Arguably, the strongest of these is your marital status.

To that end, it pays to ensure that you fully understand not just the type of tax form you must fill out but also every relevant detail you have to input. That way, you’re far less likely to make any grievous blunders.

4 Crucial Tax Implications Every International Remote Worker Should Know

There are several important tax implications for working remotely abroad. Admittedly, these elements do much to make digital nomad tax an even more complex affair.

Still, they are an essential part of remote work and international taxes and so have to be addressed accordingly. I’ll cover the most critical things you need to know about remote work taxes.

The most relevant things to keep in mind on this front include:

One – There’s The Possibility Of Double Taxation

In the simplest terms, double taxation is used to describe any situation where a digital nomad is required to pay taxes on their income both in their native country and their current resident country. America is a great example in this case.

The unique nature of double taxation is one of the many things that often seeps into the residency tax versus citizenship tax conflict.

Beyond that, it’s worth noting that there are ways that these situations can be managed.

For instance, you could benefit from something known as a tax treaty. A tax treaty happens when two nations agree to ensure their citizens aren’t double-taxed. Examples of countries that already have this measure in place include China, Canada, Egypt, Denmark, and the United Kingdom.

Double taxation is preventable if you check whether or not your home country has a tax treaty.

So if you’re an American working abroad, you need to pay taxes to the US and your tax residence (wherever you’re working in unless stated otherwise)

But if you’re a non-American working and living in America, you have to pay taxes to the US (as a tax resident). And if your home base has a tax treaty, say you’re British, you pay only once to your tax residence (America), no matter where you choose to set up your nomadic home.

Two – You May Be Able To Leverage Reciprocity Agreements

Suppose double taxation treaties ensure you don’t have to pay taxes to two countries simultaneously. In that case, reciprocity agreements facilitate the same benefits at the state level.

You might find yourself obligated to pay taxes to two different states for various reasons. You would often have to pay these particular remote work taxes, too! The biggest reason for this is that, on average, most states fight with all they’ve got to ensure they secure your income tax.

A few states have found a favorable workaround to this challenge in the form of reciprocity agreements. When there’s a reciprocity agreement in place, you won’t need to pay two different taxes if, for example, you and your employer are situated in other states.

Three – You Might Find Yourself In A Tax-Aggressive Region

Taxes are no doubt an essential component for the continued existence of the modern-day country. As these dues are the most heavily leveraged resources for executing most social projects, it isn’t easy to see why many nations take it so seriously.

However, there are countries that levy especially high personal income taxes, and this is something that you should consider carefully before you set up shop there. Countries like Ivory Coast, Sweden, Austria, Denmark, and Japan levy more than 50% in taxes. So, you must be 100% positive about what you want before entering.

Four – You Have To Consider The Possibility Of Home Office Deductions

This last bit can be convoluted to grasp. One possible reason may be that it doesn’t automatically apply to remote workers.

The very concept of the work environment is evolving, and there’s no greater proof of this than the digital nomad. However, this development has had a somewhat confusing effect on remote work taxes.

A classic example of what I mean here is what qualifies as home office deductions now.

In the past, most people who worked offsite typically qualified for one form of home office deductions. However, that’s no longer the case. Now, whether or not you can claim this deductible is directly tied to the specific nature of your remote work arrangement.

However, independent contractor remote workers are more likely to qualify for this benefit than employee offsite workers. Your unique condition is what determines which way you go here.

Best Tips For Making Remote Work And International Taxes A Simple Affair

Between figuring out my digital nomad tax residency, estimating my foreign earned income exclusion, and ensuring I made the correct report, I was overwhelmed at the beginning.

But over time, I’ve established a rhyme and reason for my remote work and international tax affairs by first figuring out my tax residency where I will be based. This is one of the reasons I would still maintain Malaysia as my home base, even though I spent 90% of my time abroad. Having a home base has its advantages, and tax reporting is one of them. 

Here are my top tips for remote workers who wish to do the same. You should:

Consider The Taxable Presence Factor

Establishing a remote work arrangement in a foreign country can be intricate. But to simplify things extensively, please note that, typically, certain employee activities trigger a taxable presence in these regions.

So, when you want to seriously attend to your remote work taxes, ask yourself questions like:

Can my activities even lead to establishing a taxable presence?

What portion of my income is my profit?

Are there any tax treaties in place?

What are the tax reporting obligations imposed by my home country?

Answering these questions will help you get your bearing when managing your digital nomad tax.

Understand The Various Relevant Tax Distinctions

Are you operating in your resident country as an employee?

Or are you there as an independent contractor?

Alternatively, could your services be construed as those of a consultant?

And, most importantly, why are all the above questions even necessary?

Well, the capacity in which you’re operating in your resident country is what often determines which digital nomad tax distinctions will apply to you.

So, in establishing a taxable presence in your resident country, you need to know where you fall so you can file your taxes accordingly.

It is worth noting that a few countries don’t place any distinctions between independent contractors and employees.

Look At The Possibility Of Withholding Taxes

Another thing you could benefit greatly here is looking into withholding taxes and if that element will be coming into play.

In a nutshell, withholding taxes occurs when your employer opts to hold on to your tax (because you’re not in your home country) and instead pays that tax on your behalf to the appropriate taxing authority.

Naturally, if withholding taxes are in play, you yourself don’t have to worry about paying these dues. You can instead just focus on keeping accurate records.

Evaluate All Transfer Pricing Implications In Your Region

Do you actively work for more than one company as a digital nomad?

If your answer to that question is “Yes,” then one possible concern you might have here is transfer pricing implications. The concept of transfer pricing is relatively new. However, many countries have begun to focus extensively on the issue, meaning you must carefully wade through these waters.

Always Obey U.S. Reporting Requirements

Where applicable, please ensure that you strictly adhere to U.S. reporting requirements especially if you’re a US citizen or nonresident working in the States.

Depending on the specifics of your classification as a digital nomad, you may be required to file numerous information returns with Social Security and other taxing authorities. Failure to do this is branded non-compliance and can attract considerable penalties and fees.

Consider Hiring An Umbrella Company For Easy Processing

Ultimately, navigating elements like tax residency, double taxation, and foreign-earned income exclusion isn’t for everyone and that’s perfectly fine. Still, it has to be done.

One way around this challenge is to get an agency certified in remote work tax management to oversee the finer aspects for you.

This method of handling digital nomad tax is generally more convenient and considerably safer.

Some of my go-to platforms for this are Contractor Taxation and Xolo if you want someone to handle everything from end to end. Since my business is small, I’d prefer to manage my taxes as it’s more straightforward and legally binding to my tax residence in Malaysia.

Stay On Top Of Your Remote Work And International Taxes Responsibilities

Ensuring you don’t get caught short in remote work and international taxes involves avoiding slipups like not keeping records and neglecting to pay your taxes on time.

While you’re at this, it’s essential that you also keep an eye out for tax implications working remotely abroad, such as double taxation and reciprocity agreements.

Finally, you should see to the finer aspects of your remote work taxes by confirming that you establish a taxable presence, know your tax distinctions, and comply with U.S. reporting requirements on all fronts.

I’m sure sorting your digital nomad tax will be easier this way!

FAQs About Remote Work And International Taxes

Are Tax Implications Working Remotely Abroad Very Important To Consider?

Yes, the tax implications of working remotely abroad are significant. One primary reason for this is that tax implications like double taxation can have a prominent effect on how much of your total income you get to keep at the end of the day.

Does Working Remotely Abroad Affect My Taxes?

Yes, working abroad affects your remote work taxes. Digital nomad tax exists because the tax laws that apply when you work as a conventional employee can’t entirely cover the scope of your operation when you travel. Everything from what you must pay to who you must pay it to can change significantly.

This is why remote work has such a visible effect on your taxes.

Is It Possible To Be A Digital Nomad And Not Have Tax Implications?

No, you can’t be a digital nomad and not experience tax implications in one form or another. Fundamentally, even basic employee tax laws aren’t straightforward. This water becomes even more muddled when another country enters the mix. It also makes it challenging to pay taxes and not consider other variables.

What Is Foreign Earned Income Exclusion And Why Does It Matter?

Foreign-earned income exclusion is a policy allowing digital nomads to exclude a portion of their income from getting taxed. The amount of your income that you can exempt from taxation this way is reviewed on an annual basis.

Foreign-earned income exclusion is essential because it can prove critical in helping you keep more of what you make. This can help you increase your quality of life on the road.

What Determines The Tax Considerations For a U.S.-Based Company Operating Abroad?

Several things determine the tax considerations for a U.S.-based company operating abroad. Some of these things include whether their employees on foreign soil establish a taxable presence, the tax distinctions of their employees, transfer pricing implications, and the possibility of withholding taxes.