There are countless benefits to being a digital nomad (aka, a self-employed remote worker who frequently travels from one place to another), but come April 18, this year’s oft-dreaded US federal annual income tax deadline, you may be fantasizing about W-2s and traditional employment. Filing can be complicated if you make money across state lines, so we’re here to make it a little easier on you. That’s why we’ve enlisted the help of tax experts at H&R Block so you can learn how to keep track of your finances and get your taxes done while living out of a suitcase.
First, you’ll want to plan. It’s never too late to start, and each year of filing as a digital nomad should get easier as your organization methods become routine. Ahead, we’re breaking down everything you need to know to get started.
Know your write-offs
One major benefit to self- or solo-employment is the potential tax write-offs! Expenses from that conference you needed to attend? Write-off! The new camera you use to shoot promotional material? Write it off! Subscriptions to business tools like cloud storage, newspapers to stay updated on your field or other relevant monthly charges could also fall in the write off category, according to Kevin Martin, a tax expert from H&R Block.
Just starting out on your own? That’s fine! Before you are profitable, you can deduct start-up expenses, even if you don't have income in the first year of entrepreneurship, says Martin. Potential deductions would be business supplies, web domains, social media advertising costs, a course to understand your business, licenses and more. Keep track of everything you spend on your business, because it may be a write-off. Even an iPad you use partially for business and partially for personal use may help knock a few dollars off your taxes. If you’re paying for in-flight Wi-Fi, VPNs, a cell phone, etc. you may be able to deduct those, too. The MyBlock app from H&R Block helps you easily upload and organize your receipts year-round so you are ready for tax time.
Another major tax savings can be found in the qualified business income (QBI) deduction, which allows you to deduct up to 20% of your QBI when you file your annual return. Look into opening a self-employment pension, which can also help off-set your tax bill. And don’t forget you may be able to deduct the health insurance premiums you pay for the year.
If you’re more of a side-hustle nomad, your taxes may be a little more complex: you may have to file multiple Schedule Cs and additional paperwork. Consider opening separate bank accounts for each income stream (i.e. one for your online craft business and another for the dog walking gigs you pick up when craft sales are slow), to help with organization and deductions.
Stay organized before it’s time to file
That scramble to find deductions and analyze every purchase over the last 365 days is not worth it. Give yourself a gift by keeping good, up-to-date records of your expenses. That means snapping a picture of every receipt and organizing your finances regularly, in a spreadsheet or software to help you and your tax professional see a clear financial picture come tax time.
“If you’re not sure if an expense is deductible or not, track it,” Martin advises. Buy a client coffee? Keep that receipt or screenshot your Starbucks app. Meet with a mentor to discuss your goals? Keep a short record of the conversation, not just for your own mind, but for tax legitimacy.
And to keep you on track, don’t forget that self-employed folks are expected to pay estimated quarterly taxes in the U.S. That is, you pay an estimated income tax based on your quarterly income, and when you file at the end of the year, you won’t owe as much – or even potentially receive a rebate. Underpaying your quarterly taxes may lead to a penalty fine at the end of the tax year, so make sure you file every three months. You’ll save money and time, and not be shocked by an immense tax bill at the end of the year. Goodbye, annual filing anxiety.
What state do you file in if you travel all over?
You may not be able to see state lines, but state tax authorities certainly can. The basic rule is that you report your income to your resident state, Martin advises. That’s the last state you lived in before you left until you establish permanent residency somewhere else. The state you’re registered to vote in or where your driver’s license is issued is likely your resident state.
Some nomads file in non-resident states if they do business in that state, at an office or elsewhere with customers or employees. For example, if your home state is California but you sell most of your goods in Oregon, conduct business from a coworking space there or register an LLC in the neighboring state, that may be the state where you file. Many self-employed people prefer to separate their personal life from their business and may happen to register their business in a state with lower tax rates than the state where they have permanent residency.
How do digital nomads find a tax professional?
A big part of venturing out on your own is knowing when to ask for help, whether that’s for a recommendation of a hostel with solid Wi-Fi or a legit expert to do your taxes for you. Luckily, some tax experts work via phone, video call, or email.
“For a digital nomad, taxes can become complicated very fast, with so many different potential tax laws that can affect you. You might want to consider the help of an expert to look more closely and understand the different types of benefits or expenses,” Martin says. Finances can certainly feel hyper-personal, so it ultimately depends on your level of comfort with whom you want to share your typically private money diaries with.
“It’s very important to find a tax professional you're comfortable with,” Martin says. “You'll want to go back to someone with a good grasp of your finances.” Tax pros at H&R Block offer a wide variety of experience and knowledge about self-employment, foreign income, side hustles and more.