Digital Nomad Taxes: How to Work Anywhere Without Tax Nightmares

As a digital nomad, the world is your office—but that doesn’t mean your taxes get to travel as freely as you do. If you’re a U.S. citizen living abroad, you’re still required to pay taxes on your income, even if you’re working from a beach in Bali or a café in Paris.

Understanding digital nomad taxes (aka U.S. tax obligations) is crucial to avoid double taxation and ensure you’re staying compliant with the IRS while minimizing your tax liability. Staying on top of your taxes lets you keep more of your hard-earned cash for those beach views—and less for the IRS.

Are you required to file U.S. taxes as a digital nomad?

If you’re a U.S. citizen or green card holder, filing a tax return each year isn’t optional—even if you haven’t been stateside in years. The IRS expects you to report your worldwide income every year on a calendar-year basis (January 1 to December 31), no matter where you live, work, or travel.

Here’s how the rules apply depending on how you earn:

• Self-employed digital nomads: If you earn $400 or more from freelancing, consulting, or running your own business, you must file a U.S. tax return. You’ll likely owe self-employment tax (for Social Security and Medicare) in addition to federal income tax.
• Employed by a U.S. company: You’re still on the hook for U.S. taxes. Some employers may withhold taxes from your paycheck, but it’s up to you to ensure everything is reported properly. You may be able to reduce your tax bill using the Foreign Earned Income Exclusion (FEIE).
• Employed by a foreign company: Even if you’re paid by a non-U.S. employer, you still need to report that income. You may be exempt from U.S. Social Security tax, depending on whether your host country has a totalization agreement with the U.S.

Wherever your income comes from—and wherever you roam—your U.S. tax obligations follow you. The good news? With the right strategy, you can often lower your tax liability and avoid double taxation entirely.

How federal income tax applies to digital nomads

Even when you’re living abroad, federal income tax still applies—because U.S. tax law is based on citizenship, not residency. That means digital nomads must report their worldwide income, including foreign salaries, freelance income, capital gains, and self-employment earnings.

But what actually gets taxed—and how much—depends on several factors:

• Type of income (earned vs. passive)
• Where it was earned (U.S. or foreign-source)
• Whether you qualify for exclusions or credits
• Your filing status and income level

For example, income earned while working remotely for a foreign company may still be considered U.S.-taxable unless you meet the physical presence test or bona fide residence test. And while you can reduce your tax liability using tools like the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC), you’re still required to file and calculate what’s owed.

Understanding self-employment taxes and business structures

If you’re self-employed while living abroad—whether as a freelancer, consultant, or running your own business—you’re still on the hook for self-employment tax in the U.S. That’s 15.3% to cover your share of Social Security and Medicare, even if you’re not using U.S. infrastructure or services day-to-day.

The good news? Totalization agreements can sometimes reduce or eliminate that obligation if you’re paying into a foreign system—though these agreements vary by country, and not all countries have one.

Choosing the right business structure also affects how much tax you pay:

• Sole proprietorship: Easy to set up, but you’ll pay self-employment tax on all net income.
• LLC: Offers legal protection, but taxed the same as a sole proprietorship unless you elect S Corp status.
• S Corp: Can reduce self-employment tax with proper salary/dividend split—but comes with more complexity.
• C Corp: Rarely ideal for solo nomads due to double taxation, but useful in certain growth situations.

Your structure impacts your pricing strategy, how you invoice clients, and whether you can open a U.S. business bank account from abroad (yes, it’s possible—but documentation and a U.S. address usually help).

Payroll and employment for remote U.S. workers abroad

If you’re a U.S. employee working remotely from another country, your tax obligations go beyond your W-2. While your employer still withholds federal income tax and reports your wages to the IRS, your host country may also expect a piece of the pie.

Here’s what you (and your employer) need to consider:

• Local labor laws may require your U.S. employer to register in your host country—even if you’re the only employee abroad.
• Foreign tax withholding could apply if you’re considered a tax resident locally, especially after 183 days.
• Double taxation is a risk if your income is taxed in both countries without proper coordination.
• Social Security contributions may still go to the U.S.—but totalization agreements determine where you pay and whether you can avoid paying into both systems.

For remote workers, tax compliance depends on where you live, how long you stay, and whether your employer is prepared for international payroll. If not? It’s time for a conversation—with them, and possibly a tax advisor.

What tax forms will you need (and why a CPA helps)

Once you cross a certain income threshold—and especially if you’re earning abroad—your tax return gets a whole lot more complicated than just a Form 1040.

Here are some of the forms digital nomads commonly need to file:

• Form 1040: Your main U.S. income tax return
• Schedule C: Required if you’re self-employed or running a solo business
• Form 2555: Used to claim the Foreign Earned Income Exclusion (FEIE)
• Form 1116: For the Foreign Tax Credit, if you’ve paid income tax to another country
• FBAR (FinCEN Form 114): Must be filed if you held $10,000+ across all foreign bank accounts at any point in the tax year
• Form 8938: Required under FATCA for reporting certain foreign financial assets (thresholds vary by filing status)

You might also need to report foreign pensions, income from overseas properties, or any foreign assets held for tax purposes.

If you’re thinking this sounds like a lot, you’re not wrong. A CPA who specializes in expat tax can help you figure out which forms apply, ensure you’re compliant with both international tax law and IRS rules, and catch anything you might’ve missed—before the IRS does.

When you’re juggling income from multiple sources and navigating different countries’ tax systems, this isn’t the time to guess. It’s the time to get it right.

State income taxes: The “sticky state” problem

Federal tax obligations follow you abroad—but in some states, so do state income taxes.

States like California, New York, and South Carolina are notoriously “sticky,” meaning they may still consider you a resident for tax purposes even after you’ve moved overseas. Why? Because in their eyes, if you maintain ties—like a driver’s license, bank account, property, or voter registration—you’re still in their tax net.

To officially cut ties, you’ll need to:

• Cancel leases or sell your primary residence
• Update your driver’s license and voter registration
• Close local bank accounts and switch your mailing address
• File a final part-year or non-resident return, if required

On the flip side, some expats establish connections to no-income-tax states (like Florida, Texas, or Wyoming) before leaving the country to minimize future tax liability. Just make sure the move is legitimate and documented—state tax authorities are known to challenge vague or partial exits.

If you’re unsure whether you still owe state tax, it’s wise to consult a professional. Getting it wrong can mean paying taxes in two places for no good reason.

What taxes will you owe in your host country?

Living abroad doesn’t mean you only need to think about the IRS. Many foreign countries have their own tax residency rules—and you might be subject to local taxes depending on how long you stay and how you earn.

You’re typically considered a tax resident in another country if you:

• Spend more than 183 days there in a calendar year
• Have a permanent home or significant personal ties there
• Meet additional residency tests defined by local tax laws

Countries like Canada, Spain, and Australia apply residence-based taxation, meaning if you live there long enough, you’re expected to pay local income tax—even if your earnings come from the U.S.

That’s where things can get tricky. If you qualify for the physical presence test or bona fide residence test, you may be able to reduce your U.S. tax liability through exclusions—but that doesn’t exempt you from local obligations. You might owe income tax in both places.

How to avoid double taxation

Once you’re on the hook for taxes in two countries, it’s time to get strategic. The U.S. tax system offers a few key tools to help digital nomads avoid getting taxed twice on the same income.

• Foreign Earned Income Exclusion (FEIE): If you qualify, you can exclude up to $130,000 of foreign-earned income (2025) from your U.S. tax return. To do this, you’ll need to pass either the:
  Physical Presence Test (you’ve spent 330+ full days outside the U.S. in a 12-month window), or
  Bona Fide Residence Test (you’ve settled in another country for a full tax year and established it as your primary home).
• Foreign Tax Credit (FTC): Instead of excluding income, the FTC lets you apply taxes paid to your host country as a credit against your U.S. tax bill. This is especially helpful if you live in a country with higher income tax rates than the U.S., or if your income doesn’t qualify for the FEIE.
• Tax Treaties: The U.S. has tax treaties with many countries, but they rarely eliminate U.S. tax entirely. Thanks to the saving clause, the U.S. retains the right to tax its citizens—even when a treaty seems to say otherwise.

Understanding which strategy (or combination) to use depends on how much you earn, where you live, and how long you stay. With the right mix of exclusions, credits, and treaty awareness, you can often reduce your U.S. tax liability significantly—even to zero.

Should you register a U.S. business while abroad?

If you’re freelancing or running a business from abroad, registering a U.S. business can simplify your tax life—or complicate it—depending on where and how you set it up.

Here’s what to consider:

• Entity type matters: Sole proprietorships are the easiest to set up, but offer no liability protection. LLCs are flexible and common among digital nomads, while S Corps and C Corps come with more formalities and distinct tax treatments.
• Where you register counts: Some states (like Wyoming or Delaware) offer low or no state income tax and business-friendly laws. Others (looking at you, California) may still consider you a resident and expect a piece of your business income. Your state of incorporation can affect both your federal and state-level tax burden.
• Managing U.S. compliance from abroad: Even if you’re running your business from a beach café, you’ll still need a U.S. business bank account, registered agent, and a clear plan for meeting federal tax and state compliance requirements. Keeping clean records is essential.
• U.S. vs. foreign incorporation: Some nomads explore registering a business in their host country—but be careful. Foreign registration can trigger complex tax laws, double reporting, and often higher pricing for tax prep and legal maintenance. For most Americans, U.S. incorporation is the simpler choice unless they’re fully settled abroad.

In short: There’s no one-size-fits-all answer. But the right business structure, registered in the right state, can help you save on taxes and stay compliant—wherever in the world you happen to be working.

Best countries for digital nomads in 2025 (tax-wise)

Not all digital nomad visas are created equal—especially when it comes to taxes. Some countries roll out the welcome mat with generous exemptions, while others quietly treat you as a tax resident after a few months of sunshine and tapas.

Here’s a quick look at popular destinations and their tax implications:

• Spain: Offers a digital nomad visa and special tax regime (Beckham Law), but long stays can trigger tax residency and worldwide income tax.
• Mexico: No dedicated digital nomad visa, but remote workers are welcome. Staying more than 183 days may make you a tax resident—with full local tax obligations.
• Malta: The Nomad Residence Permit lets you stay tax-free on foreign income not brought into the country. Local tax is only due on remitted income.
• Thailand: The Long-Term Resident visa offers a flat 17% corporate tax rate for qualifying professionals. Tax residency begins after 180 days, so watch the calendar.
• Croatia: Digital nomads can stay for up to a year with an exemption on foreign-earned income—but local freelancing can complicate your tax status.

Always understand what triggers tax residency and how that interacts with U.S. filing rules. A little tax advice upfront can save a lot of hassle down the road—especially if you’re planning to juggle multiple countries, currencies, and client bases while living the digital nomad lifestyle.

You can live anywhere—but you can’t hide from taxes

No matter where you hang your (temporary) hat, U.S. tax rules still apply. And for digital nomads juggling income across borders, personal tax obligations can get complicated fast—especially when you’re dealing with self-employment, remote work, or bank accounts in multiple countries.

Bright!Tax helps digital nomads stay compliant without the stress. Whether you need help understanding your home country ties, navigating foreign tax systems, or filing a flawless U.S. return from abroad, our team of expat-focused tax professionals is here to guide you—every business day of the year.Ready to make your remote lifestyle tax-smart? Get started with Bright!Tax today.

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