Covid has changed the way we live in numerous ways, including our working habits, as millions of previously office-based workers around the world have transitioned to working remotely.
They and their employers have not only adapted, but also learned to embrace the benefits of remote working, such as increased productivity, and reduced costs.
These benefits have led many employers to offer their employees the option of continuing to work remotely long-term. In this respect, arguably the pandemic has just accelerated the inevitable.
Given this option, many workers are now either moving out of cities, or considering becoming Digital Nomads, working remotely from abroad post-pandemic.
To take advantage of this and the fact that vaccinations are set to facilitate a pent-up demand for international travel, many countries have begun offering Digital Nomad visas to encourage remote workers to relocate there.
For employees, the many benefits of working remotely while traveling abroad include the ability to visit and explore new places without taking time off work, and often spending less on living and saving more of their wages.
In this article, we’ll take a look at US tax requirements and benefits for Americans who decide to work remotely from abroad.
US tax filing and benefits of working remotely abroad
US law requires all American citizens to file US taxes every year, reporting their worldwide income. This includes Americans living abroad, regardless of where they are or whether there’s an international tax treaty with the country where they live.
To mitigate the risk of double taxation (i.e. being taxed by a foreign country where an American might be living and by the US on the same income), when Americans file from abroad, they can claim special IRS provisions to reduce their US tax bill (most often to zero).
Which provision is best to claim depends on each remote worker’s circumstances.
“With much of the professionalworld shifting to remote work and widespread acceptance of the concept among previously skeptical corporate management, the traditional idea of work-life balance is being pushed in new directions, including a concept of remote work-life-tourism never before imagined.” – CNBC
For example, if you move to a country where you qualify to pay income taxes by virtue of being a resident there, when you file your US taxes you can file Form 1116 to claim the Foreign Tax Credit, which lets you reduce your US tax bill by the value of the foreign taxes you’ve paid.
Many young, single Americans working remotely abroad prefer to work while traveling from country to country though, so they don’t become a resident in any one foreign country and so qualify to pay foreign taxes. These Americans can instead file Form 2555 to claim the Foreign Earned Income Exclusion, which lets them simply exclude up to around $110,000 of their earned income each year (the exact figure rises a little each year).
So Americans who don’t have to pay foreign income taxes and who earn under the Foreign Earned Income Exclusion threshold will pay no income tax at all on their earnings.
Note also that Americans living abroad have an automatic two month extension to file their US tax return, or they can request a longer extension until October 15.
Social security taxes
Americans working abroad for an American employer, or working abroad as a self-employed freelancer, still have to pay US social security taxes, and the provisions mentioned above don’t reduce or affect this obligation.
The only exceptions are if you are living and paying foreign taxes in one of 27 other countries that have an agreement called a Totalization Agreement with the US.
These treaties state that Americans will only pay either foreign or US social security tax.
Some self-employed expats living abroad set up a company to invoice through, and become employees of the foreign company, which can help avoid US social security tax, although there are US reporting obligations relating to foreign companies to consider too.
If you’re thinking about working remotely abroad, firstly, understand that you will still have US tax filing responsibilities after you move, and secondly, to ensure you fulfill your responsibilities and minimize your US tax bill, seek advice from a US expat tax specialist.