International Tax Considerations for Digital Nomads & Remote Workers

1. Understanding Global Tax Residency Rules

Living and working abroad introduces dual tax residency challenges. Most countries use days-of-presence tests (often around 183 days), permanent home ties, or "center of vital interests" criteria to determine tax residency. If you qualify as a tax resident in a foreign country, you may owe local income tax on worldwide income.

At the same time, U.S. citizens and residents are subject to U.S. federal taxation on their global income regardless of their physical location. This creates potential for double taxation unless mitigated through credits or exclusions.

2. Avoiding Double Taxation: Key U.S. Mechanisms

  • Foreign Earned Income Exclusion (FEIE): Allows eligible U.S. taxpayers to exclude up to $120,000 (2023) in foreign earned income if they pass the bona fide residence test or physical presence test.

  • Housing Exclusion/Deduction: Offers additional exclusions for foreign housing costs incurred abroad.

  • Foreign Tax Credit (FTC): Provides a dollar-for-dollar credit on U.S. taxes for foreign income taxes paid. This is crucial when working in higher-tax jurisdictions.

  • Totalization Agreements: These bilateral agreements can exempt remote workers from U.S. self-employment tax (Social Security and Medicare) if they are covered by the host country’s system. Without an agreement, U.S. self-employment tax generally still applies.

3. Employer Implications: Permanent Establishment & VAT

Remote work in a foreign country can trigger Permanent Establishment (PE) risk for the employer. This means:

  • If an employee engages in core business activities abroad, the employer might become subject to corporate taxation and compliance requirements in that country.

  • VAT or local indirect taxes may apply even without physical presence, particularly when offering digital or professional services to clients in foreign jurisdictions.

Employers should assess:

  • Whether foreign presence through employees constitutes a taxable nexus.

  • Local obligations around withholding, payroll registration, and business licensing.

4. Compliance and Reporting Obligations

For Individuals:

  • Estimated Tax Payments: Required quarterly if tax liability exceeds $1,000.

  • Foreign Bank Account Reporting (FBAR): Must be filed if the total value of foreign accounts exceeds $10,000 at any point during the year (FinCEN Form 114).

  • FATCA (Form 8938): Required if specified foreign assets exceed reporting thresholds (e.g., $200,000 if living abroad).

For Employers:

  • Must track where services are rendered, not just where employees reside.

  • May need to register and withhold foreign taxes or contribute to local social security systems.

  • Should consult with local experts to avoid triggering unintended liabilities.

5. Best Practices for Digital Nomads

  • Track Work Locations: Accurately document your travel and working days in each country to determine tax residency and treaty eligibility.

  • Maintain Documentation: Keep proof of tax payments, employment arrangements, foreign housing costs, and account balances.

  • Seek Local Advice: Tax rules vary widely between jurisdictions. Work with local professionals in each country where you spend significant time.

Conclusion

Digital nomads and their employers face a complex international tax landscape. From dual tax residency to permanent establishment risks and information reporting requirements, compliance involves navigating both U.S. and foreign laws.

Proactive planning—combined with location tracking, professional tax guidance, and treaty analysis—can help remote workers stay compliant while minimizing tax burdens.

For more details on how to apply these to your situation, check the IRS guidelines or click Contact to schedule a call with a cross-border tax specialist.