Does this describe you?
- You make a living while traveling and working from different countries
- You work online or locally in other countries
- You work for yourself, not employed at a company
- You don’t make a ton of money but enough to enjoy your location-independent lifestyle
- You are a US citizen
Do you need to file a US tax return?
The short answer is Yes! You do need to file your tax return back in the US.
Even if you don’t make much money. Even if you earn your income while you are in foreign countries.
Many numbers and tax concepts, like foreign income exclusion, get thrown around that make it sound like you don’t need to file. But the devil is in how these numbers and concepts apply.
Let’s have a look.
Income limits for taxes
You may have heard someone say that is your income is less than about $10,000 a year, you don’t need to file. While this is correct for many people, the rules for self-employment are different.
Income from a job
If you are employed at a company and your income is very low, $10,150 in 2014 for singles, double that for married couples (the upper limit is $11,700 if you’re over 65 years old), then you don’t have to file.
Freelancer, independent contractor, other form of self-employed
The bar for self-employment is much lower. If your net earnings from self-employment are over $400 a year (2014), you have to file. I think that covers about every nomad out there, even if you live on a shoestring budget in a low-cost country in SEA.
Tax for self-employed nomads
If you work for yourself the IRS considers you to be self-employed. Duh.
It doesn’t matter if you do that with or without any legal US-based business structure, such as an LLC. It also doesn’t matter if you work full or part-time.
If you are US American, you’re on the hook for US taxes as a freelancer or independent contractor or business owner.
The only way out is to have your business incorporated outside the US and follow some specific rules. I’m not an expert in this and it’s beyond the scope of this post, so I’ll focus on the regular folks without tax-optimized foreign-based businesses.
What taxes do nomads have to pay?
There are two main tax categories :
Income tax
You may not have to pay income tax if you can use the Foreign Earned Income Exclusion. I know, Foreign Earned Income Exclusion (FEIE) is a mouthful, but the FEIE is a very important tool for Americans working abroad.
Self-employment tax
You must pay Self-Employment Tax if you work for yourself. This tax covers Social Security and Medicare. If you work for a company in the US, the Social Security and Medicare taxes are automatically taken out of your paycheck. As an independent contractor, you have to pay those directly yourself. The FEIE does not get you out of this.
The skinny on self-employment tax
Now that you know that you have to pay SE tax, let’s look at how that works.
The self-employment tax rate for 2015 is 15.3% for the first $118,500 of net income, and 2.9% on income above that. For self-employment tax, you cannot exclude any income you earn while abroad.
I know 15% may sound like a lot. But look at it his way. You will probably eventually come back to the US to live here and eventually use those programs. Even if you think those institutions will run out of money by the time you retire, your parents will likely benefit before then. So do your part. Not only because it is the law. (End of sermon)
How to go about your self-employment tax
1. Figure out your net earnings
Add up all your (expected) income for the year and then subtract all your business expenses. That gives you your estimated net income.
Here is where some accounting software or at least a simple spreadsheet comes in handy to keep track of all income and expenses.
2. Estimate you taxes and pay quarterly estimated taxes
Take your estimated net income for the year, multiply it by 0.15 for the total tax, and then divide by 4 to get the quarterly payments.
If during the year you realize that you will likely make more than you estimated, you need to adjust your quarterly payments. Of course you should also adjust if you think you’ll make less than expected. No reason to give the IRS more money than needed.
Quarterly payments are due on April 15, June 15, September 15, and January 15.
3. File a tax return
When the year is over and you know how much you really made, you can calculate the actual tax you needed to pay. If you overpaid your estimated taxes, you will get a refund.
Does the IRS even know about your income?
It’s tempting to think that the IRS doesn’t know about your online income. Or about income you make in other countries. But I wouldn’t count on that.
Remember when you signed up for an affiliate marketing site, or for a freelancer platform? You probably had to fill out a tax form as part of the sign-up process.
Or when you send an invoice to your client? You give them payment instructions, maybe via PayPal, and receive money there.
There are electronic “paper trails” for most income transactions, and some already have your social security number or other tax info linked to it.
In addition, many foreign banks share data with the IRS.
Sure, there are probably some income streams that are harder to track. For example if you barter your services and get other services or stuff in return. Or you get paid cash, let say for teaching private English classes. Technically, you need to include that into your earnings but no one will know if you don’t. (Not that I am advocating that. Everyone has to make their own decisions.)
Where to get help with your nomad tax return?
If you are not really good with numbers and IRS forms scare you or put you to sleep, it is best to find a tax professional. Ideally one with experience doing taxes for expats.
For going the DYI route, you can find more info at the links below. Just remember that they usually focus on self-employed people in the US, not the perpetual traveler or expat.
https://www.irs.gov/Individuals/Self-Employed
http://taxhelp.org/resources/self-employed/
In case you didn’t know, not filing a tax return when you should have is tax evasion and a criminal offense. So get organized now, make sure you track your income and business expenses. Estimate your taxes and pay each quarter if you don’t want to get hit by a late-payment penalty at the end of the year.
And if writing the check hurts too much, think warmly about your parents as beneficiaries.
If you find this helpful, please share with your nomadic US friends. And don’t forget to check out the Quick Guide to US Taxes for Nomads – In Plain English, that I just published.
