How do digital nomads pay tax?

digital nomad tax
“Bean counting”, you see.

One of the questions we get asked most often by people struggling to understand our lifestyle is, “What about paying tax?” The suspicion seems to be that we’re slipping through the cracks – keeping our money hidden in PayPal accounts and buying our groceries with Bitcoins.

To be fair, it’s also one of the questions we get asked most by aspiring digital nomads. We’ve been resisting answering publicly because we’ve got very limited knowledge – and, let’s face it, it’s more fun to talk about new business ideas – but as we’re doing our end-of-year accounts today, I thought I’d finally tackle it.

In this post I’ll share what we do, and assume that you’re in the same situation – a lone individual (or couple) who earns money from selling products or services online while you bounce between different countries.

Bear in mind that I don’t know what I’m talking about in the slightest when it comes to international tax law (but then nor do most accountants). I’m just going to talk about what we do, and explain the main issues and options you have.

Why digital nomad tax is so complicated

Actually reporting tax correctly as someone who’s on the move is virtually impossible, because the laws were written before it was feasible to generate income from anywhere – with no physical presence beyond you and your laptop.

Income taxes, for example, are usually supposed to be payable in the place where the activity that generates the income takes place. But if you sell an ebook while you’re in Thailand that you wrote while you were in six other countries, where did “the activity” take place?

Or what about if you agree to do a project for a client while you’re in Spain, work on it on a plane while you cross the airspace of nine other countries, and your virtual assistant in India helps?

The easy option: pay tax in your “home” country

I take the view that as you basically can’t pay tax in exactly the right place, you should just pay tax somewhere and not worry about it too much.

In most cases, it’s going to be easiest to pay tax in the country you’re originally from. That’s because if you don’t want to pay tax in your home country, you’ll need to prove that you’re no longer resident – which isn’t always easy.

In the UK, for example, you need to spend an average of less than 91 days in the country each year. We could save a few quid by trying to become resident elsewhere for tax purposes, but it’s not worth the hassle of counting days and having our movement restricted.

Also, the bureaucratic world isn’t set up for people who don’t have a home. There are many situations where it’s useful to be able to give a home address: if you want to get credit in a few years’ time, for example, it’ll be easier if you’ve appeared on the electoral roll in previous years (even if it’s just a relative’s house and you’ve never been there).

That said, a lot of people take the opposite view and like the idea of being a “sovereign individual” – not having ties to any one country, and living outside the system for tax and privacy reasons. There’s no reason not to look into that option if you want to, but for us it creates more problems than it’d solve at the moment.

The benefits of using a company

We’ve set up a UK-based company to run all our business activities through, and I’d recommend a company structure if you’re earning anything more than a piddling amount of money.

The rules will vary between countries, but in the UK your company can pay you a tax-free wage of around £9,000, and the rest of its profits are only taxed at 20% – lower than even the basic rate of income tax. Then, when you take profits out of the company as dividends, you don’t have to pay any further tax as long as you’re only a basic rate taxpayer.

Not only that, but you can reduce your company’s taxable profits by claiming legitimate expenses. If your business is online, you can reasonably claim internet, computer and telephone costs against tax. If you employ a VA or get work done on Elance, that’s a business expense too.

What about travel? Could a travel blogger put all their travel costs through their business because it’s a crucial part of their work?

Possibly – but the key thing is that you’re able to justify what you’ve done if you get investigated. So if you go to a weekend conference in Miami and stay there for a month, you might be able to claim a few days’ worth of hotel bills and a proportion of your flight costs, but not all of it.

Basing your company elsewhere

A more advanced option is to pay personal taxes in your home country, but base your company in a country where corporate tax rates are lower.

In theory, you could incorporate in the British Virgin Islands any pay no corporate tax, then only get taxed in your home country for the profits you take out of the company personally.

It’s something we know nothing about, and aren’t too interested in looking into – our tax rate as a result of using a company is way lower than it was when we were employed, and any extra savings wouldn’t be worth the time taken to look into everything. After all, however much time you spend on it, you can only get your tax bill down so far…but if you spend your time concentrating on making more money, there’s no limit to what you can do.

Getting the right advice

If you’re going down the route of trying to establish yourself or your business in locations that minimise tax, you should definitely use a specialist accountant – although they’re not easy to find because the demand from anyone other than huge corporations is so new.

Even if you’re just planning on registering a company in your home country, I’d recommend working with an accountant. It removes all the burden of working out what you’re meant to be filing and when, and an accountant will be able to guide you as to what expenses you can and can’t claim.

Whatever you decide to do, good record keeping is essential – and doesn’t have to be difficult. Use a tool like Freshbooks to track your invoices, scan or email all your receipts to Evernote, then at the end of the year you’ll have everything you need ready to either fill in your tax return or just send a spreadsheet to your accountant.

OK…so what do you do?

How do you handle your tax affairs if you earn your income on the move? What aspect of it do you wish could be simpler? Let us know in the comments – and if we’ve got anything factually wrong, please tell us so we can fix it!