How do digital nomads pay tax?

Digital nomads often end up being “global citizens” and not permanently living in any one place which raises a lot of questions about taxes. I was really worried about taxes when I became a digital nomad because of the potential consequences of getting them wrong, so I spent the time to do some research and here’s what I’ve found over the years.

Digital nomads need to pay tax just like everyone else but have more flexibility in where they pay them by becoming tax resident in a country of their choice. Because of this, they have the opportunity to pay lower income tax rates than they would in their home country.

Let’s take a deeper dive into what this means and evaluate the ways to lower our taxes as digital nomads.

What does tax resident mean?

Being tax resident somewhere means you are obliged to pay income tax there.

Income tax is what people typically think of when talking about taxes. It’s the tax you pay on the money you personally earn. Keep in mind that this is different to corporate tax, which is the tax that companies pay.

For example, in the UK the first £12,500 is taxed at 0%, the next £37,500 at 20%, the next £100,000 at 40%, and anything after that at 45%.

Western countries generally have high taxes, with the highest tax brackets routinely exceeding 40% with some, for example in Sweden, being over 50%!

Most people’s tax residence is the country of their citizenship - they live and work there so also pay taxes there. For digital nomads who travel a lot, that isn’t always the case.

Where are digital nomads tax resident?

It’s good to first understand how you become tax resident somewhere. Rules differ by country but a rule of thumb is that once you spend a certain number of days (usually 183) in a year inside a country, you become tax resident and will be required to start paying tax.

With that in mind, you may immediately think: What if I don’t spend enough days in any country?

This is where confusion can creep in for digital nomads who think they could quite easily avoid being tax resident anywhere because of frequent travel.

While technically true - you don’t spend enough time anywhere to be tax resident - in most cases you’ll fall back to being tax resident in the country you have strongest ties to (probably your home country) or wherever you have citizenship.

Even if somehow you aren’t tax resident anywhere, it doesn’t mean you don’t need to pay any taxes. In some countries, like Thailand, you are expected to pay taxes on all income made while in the country if you aren’t paying tax on it elsewhere.

If you still manage to not pay any taxes, you could end up in trouble when asked to provide tax returns once you eventually decide to settle somewhere - this is usually to check that you didn’t move there earlier than you claim.

Without the tax returns, it will be difficult for you to prove your status as a nomad without lots of paperwork and maybe even time in court. If it turns out you should have been paying taxes all along, you’ll be made to pay tax on all income made while travelling!

For this reason, I strongly encourage you to pay taxes somewhere, even if you constantly travel and don’t live anywhere in particular.

If you are from the USA, you are always tax resident by virtue of your citizenship, so you have to pay taxes regardless.

How to minimize taxes

Although you probably can’t avoid a tax residency, there are still ways to reduce the amount of tax you need to pay when you are a digital nomad.

Even if you can’t get as low as zero tax, you can be significantly better off by (legally!) paying less taxes, especially if back at home you’d be paying the 40% or 50% tax rates I mentioned before.

Open a company

One way to pay less tax is to pay corporate tax instead of income tax - it’s often much lower.

For example, UK corporate tax is a flat 19%. (Lower than the income tax rate after just £12,500!)

Don’t get too excited though. Not everyone should, or can, get paid via a company.

When you want to use the money for personal stuff, you’ll have to pay yourself a wage and pay personal income tax on that. (Though you wouldn’t be paying tax twice since it would count as a business expense and would be tax deductible.)

Because of that, you’ll need to keep most of the money you make in the company accounts (or reinvest it back into the company) to see any meaningful reduction in taxes.

If you work for yourself without any employees, which I’m sure many digital nomads do, the purpose of a company is questionable. When the purpose is to pay less tax, authorities sure won’t be happy and can force you to pay income tax as a self employed person instead.

For people that are running a business with employees, incorporating is a good option. Don’t be too eager to incorporate in a low tax jurisdiction though. People on the internet make it sound easier than it is. Nevertheless if you are determined to try, it’s best to get professional advice to save yourself some headaches.

Live in a low tax country

Living in a low tax country is ultimately the most reliable way to pay less income tax as a self employed digital nomad. It’s not as glamorous as setting up companies abroad but this way you won’t run into any trouble down the line.

You can abuse the fact that you don’t need to live in a country all the time to be considered tax resident by staying there for some of the year while travelling for the rest.

As long as you pay taxes in that country, you’ll be safe from future harassment about taxes. (Unless you are from the USA in which case you may need to pay additional taxes because of your citizenship.)

My advice is to not tunnel-vision on lowering your tax rate though. At the end of the day your happiness and wellbeing are more important than saving some money - don’t choose a place to live purely because it has zero or very low tax.

Get advice from a professional

You’ll often see people online talk about elaborate schemes to pay zero tax but many are out of date, wouldn’t apply to you, or are outright false. By the time you are making enough money for the ones that work to be worth it (or even viable at all) you can hire a professional to do it for you.

Don’t skip out on professional advice because you read what somebody had to say online! Remember that getting taxes wrong can get you in big trouble.

I hope you can walk away from this article with a better understanding of how digital nomads need to pay tax. If you are still unsure where you fall, your safest bet is to pay taxes in your home country.