Taxes for Digital Nomads: US Filing Obligations

The digital nomad lifestyle of location-independent work carries tax implications for U.S. citizens and resident aliens due to citizenship-based taxation. This principle dictates that you are taxed on your worldwide income, regardless of where you live or earn it. This obligation exists whether you are employed by a foreign company, a U.S. company, or are self-employed. The U.S. tax system requires you to report all income from every source on a federal tax return, provided you meet the minimum income filing thresholds for your filing status.

Understanding US Federal Tax Obligations Abroad

The practice of taxing worldwide income creates a potential for double taxation. To address this, the tax code provides two mechanisms: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). The FEIE allows qualifying individuals to exclude a portion of their foreign-earned income from U.S. income tax, capped at $130,000 for the 2025 tax year. This amount is adjusted annually for inflation.

To claim the FEIE, you must have a tax home in a foreign country and meet either the Bona Fide Residence Test or the Physical Presence Test. The choice depends on your travel patterns and long-term intentions. The FEIE applies only to earned income, such as salary and self-employment earnings, not to passive income like interest, dividends, or capital gains.

Bona Fide Residence Test

The Bona Fide Residence Test is qualitative and centers on your intentions. To meet this test, a U.S. citizen must establish residency in a foreign country for an uninterrupted period that includes a full calendar year. The IRS examines factors to determine your intent, such as the nature of your stay and whether you have integrated into the local community.

Establishing bona fide residence involves actions like securing a long-term visa, renting a home, and setting up local accounts. Your “residence” for this test is not the same as your “domicile,” which is your permanent home you intend to return to.

Physical Presence Test

The Physical Presence Test is a quantitative measure based on time spent outside the U.S. To qualify, you must be physically present in a foreign country or countries for at least 330 full days during any consecutive 12-month period. The 330 days do not need to be consecutive, and the 12-month period can begin on any day of the month.

A “full day” is a continuous 24-hour period starting at midnight. Time spent traveling over international waters or days spent traveling to or from the U.S. do not count toward the 330 days. Precise record-keeping of travel dates is required to substantiate a claim under this test.

Foreign Tax Credit

The Foreign Tax Credit (FTC) provides a dollar-for-dollar credit for income taxes you have paid or accrued to a foreign government, which directly reduces your U.S. income tax liability. The FTC can be applied to both earned and unearned income. To be creditable, the foreign tax must be an income tax, not a sales or value-added tax. The credit is calculated on Form 1116 and is advantageous for nomads in countries with income tax rates similar to or higher than U.S. rates.

Comparing FEIE and FTC

The choice between the FEIE and FTC depends on your circumstances. The FEIE is beneficial if you are in a country with low or no income taxes, as there are no foreign taxes to credit. The FTC is the better choice when you are in a high-tax foreign country, as the credit can offset your U.S. tax liability. It is possible to use the FEIE to exclude income up to the annual limit and then use the FTC on any income earned above that threshold.

State Tax Residency Considerations

State tax obligations are a separate challenge, as your connection to a state does not end when you leave the country. States use two concepts to determine their right to tax your income: residency and domicile. A person can have multiple residences but only one domicile, which is your legal, permanent home you intend to return to.

Residency is based on where you live and is often defined by spending more than 183 days in the state. A state may consider you a domiciliary and tax your worldwide income even if you have not been physically present for years.

Breaking State Domicile

Severing your domicile with a state is an active process that requires clear steps to prove your intent to abandon it. The burden of proof is on you to show you have left permanently by cutting as many ties as possible.

To effectively break domicile, you must take concrete actions such as:

• Selling your primary residence or terminating a lease
• Registering to vote in your new location
• Obtaining a new driver’s license
• Moving your significant personal belongings
• Closing local bank accounts
• Updating your mailing address on all financial and legal documents

Some nomads establish domicile in a state with no income tax before traveling internationally. This can simplify state tax matters, but still requires severing ties with the previous state.

Business Structure and Self-Employment Tax

Digital nomads who are freelancers or independent contractors must understand self-employment tax, which covers Social Security and Medicare contributions. This tax is a distinct obligation from federal income tax and is often due even if your foreign earnings are excluded by the FEIE. If you have net self-employment earnings of $400 or more, you must file Schedule SE and pay the tax.

The rate is 15.3% on net earnings, consisting of 12.4% for Social Security on earnings up to $176,100 in 2025, and 2.9% for Medicare with no income limit.

Totalization Agreements

To prevent double taxation of social security taxes, the U.S. has Totalization Agreements with many countries. These agreements coordinate social security coverage so that you pay into only one country’s system. If you are working in a country with such an agreement, you may be exempt from U.S. self-employment tax. To claim this exemption, you must obtain a Certificate of Coverage from the foreign country’s social security agency as proof of your contributions to their system.

Business Entities

Your business structure impacts your tax situation. A sole proprietorship is simple, but all net business income is subject to self-employment tax. A Limited Liability Company (LLC) provides liability protection but is taxed like a sole proprietorship by default, offering no change to the self-employment tax burden.

An S-Corporation can reduce self-employment taxes. With an S-Corp, you pay yourself a reasonable salary, which is subject to payroll taxes. Remaining profits can be taken as distributions, which are not subject to self-employment tax, but you must adhere to IRS rules on what constitutes a reasonable salary.

Foreign Account Reporting Requirements

U.S. citizens abroad must comply with foreign account reporting regulations, which are for information disclosure, not taxation. The two requirements are the Report of Foreign Bank and Financial Accounts (FBAR) and the Foreign Account Tax Compliance Act (FATCA). Failure to comply can result in significant penalties, even if no tax is owed.

These obligations are triggered when the value of your foreign financial assets exceeds certain thresholds. You must track the value of your foreign accounts to determine if you need to file.

FBAR (Report of Foreign Bank and Financial Accounts)

You must file FinCEN Form 114, the FBAR, if the total value of all your foreign financial accounts exceeds $10,000 at any point during the year. This threshold applies to the combined value of all accounts, which can include bank accounts and brokerage accounts. The FBAR is not filed with the IRS but is submitted electronically to the Financial Crimes Enforcement Network (FinCEN). The deadline is automatically extended to October 15.

FATCA (Foreign Account Tax Compliance Act)

The Foreign Account Tax Compliance Act (FATCA) requires you to report specified foreign financial assets on Form 8938, filed with your IRS tax return. FATCA filing thresholds are higher than for the FBAR and vary by filing status and residency. For a single individual living abroad, the threshold is met if specified assets are more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year. It is common to have a filing requirement for both the FBAR and FATCA, which are separate obligations.

Filing and Paying Your US Taxes

A U.S. tax return for a digital nomad is more complex than a standard domestic one. It involves several forms attached to the main Form 1040, such as those for reporting self-employment income, claiming the FEIE or FTC, and meeting FATCA requirements.

Making Tax Payments

As a self-employed digital nomad, you are required to make estimated tax payments throughout the year to cover your income and self-employment tax liabilities. These payments are due quarterly to avoid underpayment penalties. The IRS provides several methods for making payments from abroad, including IRS Direct Pay, the Electronic Federal Tax Payment System (EFTPS), and wire transfers.

Post-Filing

Once you have filed your tax return and FBAR, you should receive and keep electronic confirmations for your records.