An Employer’s Guide on How to Tax Your Digital Nomads

Hiring digital nomads can give your business access to outstanding talent while also providing your employees with the attractive benefit of highly flexible work. However, taxing and paying your digital nomads compliantly can be a challenge.

As an employer, you need to understand your obligations when employees are living the nomadic lifestyle and ensure that the proper taxes are being remitted to the correct authorities. Here, we introduce you to everything you should know about remaining compliant while taxing your digital nomads.

What Is a Digital Nomad?

Generally speaking, a digital nomad is a person who performs their work remotely while traveling. They often stay in a location for just a brief period of time before heading elsewhere–hence the “nomad” moniker. While locations like Bali are famous for being popular nomadic destinations, digital nomads often travel within their own countries. Regardless of where a digital nomad is from or where they’re currently living, taxes can become complicated quickly.

Do Digital Nomads Pay Taxes?

Yes, despite their country-hopping tendencies, the vast majority of digital nomads have to pay taxes. The specifics of how much they pay in taxes and to whom will largely depend on factors like their country of origin and where they were when the money was earned.

Taxes for digital nomads can also vary depending on what type of worker they are. The tax implications for your business can vary depending on whether the nomad is an employee, a freelancer, or an independent contractor.

Some taxes that your digital nomads might pay include things like income taxes and social security payments. In many countries, digital nomads have to pay income taxes after 183 days of living and working in the jurisdiction, but social security payments don’t always follow such a simple rule.

Where Do Digital Nomads Pay Taxes?

Digital nomads often have to file taxes in their country of origin. However, in some cases, the jurisdiction the employee is working in may also impose taxes on the worker. This often depends on how long the person is living and working in that jurisdiction. Digital nomads who travel voraciously may end up avoiding certain taxes by avoiding stays in any country long enough to trigger tax liability.

Additionally, some countries have agreements in place which help employees avoid being taxed twice while allowing the host country to claim the appropriate taxes. For example, U.S. citizens who are working in the U.K. may be able to pay into the U.K.’s National Insurance rather than the U.S.’s Social Security.

To remain compliant while employing digital nomads, it’s important to understand the nuances of what taxes need to be withheld and where those taxes should go.

How to Tax Your Digital Nomads

Before you start hiring digital nomads, make sure you know how to tax them to remain compliant.

Mapping Tax Requirements

It’s critical to understand the jurisdiction where the work is being completed and the laws in those areas. If a company hires a digital nomad who works in another country or even in a different state or region, there may be varying provisions on what taxes are collected.

Make sure that you know what taxes need to be withheld from your employee’s pay to ensure your international payroll processing is done accurately and compliantly.

Required Tax Forms

Businesses that employ digital nomads should be aware of the forms that their employees will need to file to remain compliant. Depending on the country, the number of forms needed will vary, so it’s essential to do ample research before diving in and running payroll with digital nomads.

In the U.K., employees will need to file:

• Form SA100, which is the UK’s main self-assessment tax form.
• Certificate of Residence (CoR), which may allow digital nomads to claim tax relief in countries they’ve worked in if there’s a tax agreement between those countries.

The forms your digital nomad is responsible for filing will vary by country and, often,  according to where their citizenship lies.

It’s important to understand the tax requirements for your employees, as ensuring your business’ payroll tax withholding requirements are being fulfilled is critical for compliance.

Foreign Tax Credits

Many countries offer tax credits that help digital nomads and remote workers to reduce the taxes they have to pay. For example, individuals who have to pay taxes to the foreign country where they’re currently living and working may be able to deduct those payments from their tax obligations in their home country.

If your employees are working remotely abroad and they’re claiming foreign tax credits, account for that when you run payroll will ensure compliance and accuracy.

Digital Nomad Taxes FAQs

Taxes for digital nomads can be complex. Here, we answer some additional tax questions to help you stay compliant while managing your digital nomads.

Do Digital Nomads Pay Taxes in Foreign Countries?

It depends. Digital nomads may have to pay taxes in other countries, but it depends on where they work, live, and for how long they’re there. In many situations, there are taxes that the foreign country will require the nomad or your business to pay, so it’s critical your business has an understanding of your obligations when it comes to foreign payroll taxes.

What Is the Physical Presence Test?

The physical presence test is an assessment that several countries use to determine if a person is obligated to remit taxes to the country. The amount of time that a nomad has to spend in a country before they’re considered a tax resident differs from country to country.

In many countries, digital nomads must begin to pay income taxes after spending 183 days there. However, while 183 days (or six months) is a common metric, it’s not universal. South Africa, for example, imposes taxes after 91 days, and Switzerland does so after just 30 days.

Often, digital nomads will move on to their next destination well before these tax requirements take hold.

What Tax Exemptions Are Available for Digital Nomads?

There are several potential exemptions that a digital nomad may be able to take in order to reduce the amount of taxes they have to pay each year, depending on the countries they spend time in.

Barbados, for example, has introduced a 12-month “welcome stamp” - a kind of digital nomad visa that allows remote workers to work there without having to pay local income taxes during their stay. Similar programs are now available in several other countries worldwide.