Being a digital nomad in the United States requires understanding and fulfilling various tax obligations associated with remote work. Taxes for digital nomads in the United States can be complex, but it’s crucial to know which taxes apply to you. Depending on whether you work for a foreign company or as a freelancer with global income, you may be subject to federal, state, and even local taxes.
This article explores the different taxes for digital nomads in the United States, explaining when and how they should be paid, and clarifying what determines your tax status. We provide a detailed overview of key regulations and possible deductions to help you meet your responsibilities without unnecessary complications.
How Do Taxes Work for Digital Nomads in the United States?
For digital nomads, understanding tax obligations in the United States can be challenging due to the complex tax system. Their unique lifestyle adds another layer of complexity. Below are key aspects to consider.
1. Tax Residency and the 183-Day Rule
One of the primary challenges for digital nomads is determining tax residency. In the United States, spending more than 183 days in a tax year may make you a tax resident. This means you are required to pay taxes on your worldwide income, regardless of where it was earned.
The 183-day rule can be complex for nomads, especially those working for foreign companies or earning income from various countries. It’s essential to keep accurate records of your time spent in the U.S. to manage your tax obligations effectively.
2. Double Taxation and Tax Treaties
Another major challenge for digital nomads is double taxation, where you pay taxes in both your home country and the U.S. Fortunately, the U.S. has tax treaties with several countries to help avoid this. However, using these treaties can be complex, requiring a solid understanding of tax regulations in both countries and applying the relevant deductions.
These treaties typically include provisions to avoid double taxation through tax credits or exemptions, but each case is unique. If you’re a digital nomad operating between two or more countries, it’s highly advisable to work with a tax advisor specialized in international taxation.
3. Federal, State, and Local Taxes
In addition to federal taxes, state and local taxes in the U.S. depend on where you work or live. States like California and New York have high income taxes. States like Texas and Florida don’t impose personal income tax. Even if you work remotely for a foreign company, living in a high-tax state may require you to pay state taxes.
4. Self-Employment Tax for Freelancers
If you’re a digital nomad working as a freelancer or self-employed, you’ll be subject to federal, state, and Self-Employment Taxes. This tax, at 15.3% of your net earnings, covers Social Security and Medicare contributions. It can be an additional financial burden many nomads overlook, especially those working independently or without a formal employer.
Types of Taxes Digital Nomads in the United States Must Pay
When temporarily residing in the United States, digital nomads must comply with certain tax obligations. These obligations vary depending on their residency status, the state they are in, and the type of income they generate. Below are the main taxes digital nomads are required to pay in the United States.
1. Federal Income Tax
Federal income tax is one of the primary taxes for digital nomads in the United States that anyone earning income in the country must pay, including digital nomads. This tax applies to all income an individual earns, whether it comes from a U.S.-based or foreign company, or through independent work. The tax rate varies based on income levels, using a progressive system ranging from 10% to 37%.
If a digital nomad becomes a tax resident in the United States (e.g., by meeting the 183-day test), they must declare and pay federal income tax on all their worldwide income, regardless of whether it was earned inside or outside the U.S. If they are not considered a tax resident, they are only required to pay taxes on income generated within the U.S.
2. State Income Tax
In addition to federal income tax, many states in the U.S. impose their own state income tax. Rates vary widely: states like California and New York have relatively high rates (up to 13.3% in California), while others, such as Texas, Florida, and Nevada, impose no personal income tax.
State income tax is one of the most significant and variable taxes across states.
State income tax is one of the most significant and variable taxes across states.
If a digital nomad spends a significant amount of time in a state with income tax, they may be required to pay these state taxes, even if they work for a foreign company. The calculation and payment of state taxes depend on the specific laws of each state and the duration of the nomad’s stay during the fiscal year.
3. Self-Employment Tax
Digital nomads working as freelancers, self-employed individuals, or independent contractors are subject to the Self-Employment Tax. This tax is designed to cover Social Security and Medicare contributions, with a rate of 15.3% on net income. Unlike employees whose employers cover part of these contributions, freelancers are responsible for the full cost.
The Self-Employment Tax is mandatory for any digital nomad earning more than $400 annually through independent work in the U.S. These taxes must be paid quarterly to avoid penalties, and digital nomads can deduct certain expenses related to their professional activities to lower their taxable income.
4. Sales and Use Taxes
Although not a direct tax on income, sales and use taxes apply to goods and services purchased and consumed in the United States. Digital nomads making purchases during their stay in the country must pay sales tax, which varies from 0% to 10%, depending on the state and city.
While this tax doesn’t directly affect digital nomads’ earnings, it is a cost to consider when living and working in the U.S. Additionally, some states impose a Use Tax, which applies to goods purchased out of state but used within the state.
5. Value-Added Tax (VAT)
The United States does not have a federal Value-Added Tax (VAT) like many European or Latin American countries. However, state and local sales taxes function similarly to a VAT.
These taxes apply to commercial transactions and vary by region. In most cases, they do not directly impact the income digital nomads earn but instead apply to purchases made while living in the U.S.
6. Capital Gains Tax
If a digital nomad earns income through investments such as stocks, cryptocurrencies, or real estate, they are subject to capital gains tax. This tax applies to profits made from selling assets and depends on whether the gain is short-term or long-term.
Capital gains tax rates in the United States range from 0% to 20%, depending on how long the asset was held and the digital nomad’s income level.
How to Calculate Taxes for Digital Nomads in the United States
Calculating the taxes for digital nomads in the United States must pay can be a complex process due to the combination of federal, state and local taxes, in addition to the differences in the types of income generated. To avoid mistakes and comply with tax regulations, it is crucial to follow a clear process and, if possible, rely on specialized tools that facilitate the calculation.
Step 1: Determine your tax residency status
The first step in calculating the taxes a digital nomad must pay in the United States is to establish whether you are considered a tax resident. As we mentioned earlier, if you spend more than 183 days in the United States during a tax year, the government will likely consider you a resident for tax purposes, which means you will be subject to paying taxes on all of your income, regardless of where it was generated.
If you do not meet this threshold, you may only be taxed on income generated within the country. Understanding your status is key, as it directly affects what taxes and in what proportion you will be liable to pay.
Step 2: Identify your taxable income
The next step is to identify what types of income are taxable. If you work as a freelancer or remote employee, you will need to report income earned from your work in the United States or for clients within the country. In addition, if you generate income from investments, rentals, or even cryptocurrencies, these may also be taxable.
For freelancers, it is crucial to calculate the Self-Employment Tax (15.3%) and factor it into the total taxes due. This tax is on your net income, i.e. after deducting expenses related to your professional activity. Therefore, you should be sure to keep good records of deductible expenses, such as work equipment, software, work-related travel and other eligible expenses.
Step 3: Calculate federal and state taxes
Once you determine your taxable income, you will need to apply the appropriate federal income tax rate. The United States uses a progressive tax system, where the tax rate increases as your income does. Federal tax rates for 2024 range from 10% to 37%, depending on your income level.
In addition, if you reside in a state with state income taxes, you must apply the appropriate rate to income generated in that state. These rates vary widely: states such as California or New York have high taxes, while others, such as Florida or Texas, do not charge personal income taxes.
To calculate your total federal and state taxes, you can use annual tax tables provided by the IRS and state tax offices. However, this process can be tedious without the use of tools.
Step 4: Use Tax Calculation Tools and Software
To simplify tax calculation, there are a number of specialized tools and software that allow digital nomads to calculate their tax obligations accurately and easily. Some of the most popular include:
- TurboTax. One of the most widely used tools in the United States, TurboTax allows freelancers to calculate their federal and state taxes easily. The platform guides the filing process step-by-step and suggests deductions based on reported income and expenses.
- H&R Block. This software offers a practical approach to tax filing and helps digital nomads calculate both federal and state income taxes. It also offers a personalized help desk to resolve complex tax questions.
- QuickBooks Self-Employed. Specially designed for freelancers, QuickBooks allows you to record income and expenses throughout the year and facilitates the calculation of estimated taxes, including quarterly Self-Employment Tax payments. The platform also synchronizes bank accounts and helps organize deductions.
- TaxSlayer. Another reliable option, TaxSlayer offers a cheaper service than the previous ones, but equally efficient for calculating a digital nomad’s federal and state taxes. It also allows you to import W-2 or 1099 documents for those who need them, and automatically calculates estimated taxes.
- IRS Tax Withholding Estimator. For those who want a quick estimate, the IRS offers a free tool on its website that allows you to roughly estimate the federal taxes you will owe, based on your current income and residency status.
Step 5: Make Quarterly Tax Payments
Taxes for digital nomads in the United States must be paid on a quarterly basis according to their estimated income. This is because freelancers do not have an employer withholding taxes from their payments. Which means they must calculate and pay taxes on their own four times a year.
Using tools like QuickBooks or TurboTax allows you to set reminders and make accurate estimated tax calculations, avoiding penalties for underpayments or late payments.
Step 6: Consider the help of a tax advisor
Since U.S. tax laws can be complex and vary by state, it is advisable for digital nomads spending considerable time in the U.S. to consider hiring a tax advisor who specializes in expatriate or international taxation. A tax advisor can help you maximize your deductions, take advantage of international tax treaties and avoid double taxation. Ensuring you meet all your tax obligations without paying more than necessary.
U.S. tax forms, forms or formats
To comply with tax obligations in the United States, digital nomads must file several tax forms depending on their situation. The most common form is Form 1040, which is used to file federal income tax returns. Within this form, nomads must report all of their global income if they are considered tax residents. If they work as freelancers or self-employed, they must also complete Form Schedule C to detail income and expenses related to their business.
For those who are subject to Self-Employment Tax, it is necessary to attach Form Schedule SE. This form calculates contributions for Social Security and Medicare. In addition, if the digital nomad has to make quarterly estimated tax payments, Form 1040-ES must be used.
- Form 1040
- Form Schedule C
- Schedule SE Form
- Form 1040-ES
It is important to file these forms by the April 15 deadline, unless an extension is requested.
Penalties for Failure to Pay U.S. Taxes for Digital Nomads in the United States
The U.S. government imposes severe penalties for failure to pay taxes on time or to file tax returns correctly. If a digital nomad fails to pay their taxes in the United States by the deadline, they could face a late payment penalty. Which is equal to 0.5% of the unpaid tax for each month of delay, up to a maximum of 25% of the total balance due.
In addition, if you fail to file your tax return by the due date, you could face an additional late filing penalty, which amounts to 5% of the unpaid tax balance for each month of delay, also up to a maximum of 25%. In serious cases of tax evasion, the IRS may even impose criminal penalties, which can include substantial fines and even jail time.
To avoid penalties, it is critical that digital nomads not only file their tax forms on time, but also make estimated tax payments if they are self-employed.
Example of a digital nomad’s taxes in the United States.
Let’s imagine a case of a digital nomad named Sofia, who works as a freelance graphic designer for international clients, mainly in Europe. Sofia spends 7 months a year living in New York, which makes her a U.S. tax resident. Her annual income amounts to $80,000, coming from various projects.
- Federal Tax: According to the federal tax brackets for 2024. Sofia would be in the second bracket, paying a 22% tax rate on part of her income. After deducting business expenses such as design software and equipment worth $15,000, her taxable income would be $65,000. Approximately, Sofia would pay $14,300 in federal taxes.
- New York State Tax: Sofia must also pay state taxes, and New York has a progressive rate of up to 6.85%. For her net income of $65,000, she would pay about $4,452 in state taxes.
- Self-Employment Tax: In addition, as a freelancer, Sofia is subject to Self-Employment Tax of 15.3% on her net income. This results in approximately $9,945 additional to cover Social Security and Medicare.
Total Tax. Sofia, overall, would have to pay a total of approximately $28,697 in taxes, which includes federal, state and Self-Employment Tax.
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