Tax season is officially here. With the increase of remote work and travel it’s important to understand the implications of the jet set lifestyle. While entrepreneurship may look glamorous on the outside, there are tons of little aspects not to overlook and consider.
Keila Hill-Trawick is the founder of Little Fish Accounting, a firm that specifically caters to the needs of entrepreneurs. Her journey began with a realization during her last full-time role that there was a disconnect between her work and its impact that left her unfulfilled. She desired a more meaningful connection with her work. Simultaneously, she witnessed friends and peers transitioning from traditional employment to entrepreneurship, only to encounter the common challenge of managing accounting and tax responsibilities.
Below Hill-Trawick shares a few tax tips for digital nomads and remote workers who are designing an unconventional career path.
TN: What are some key deductions and credits that travelers/ remote workers should be aware of when preparing their taxes?
Keila Hill-Trawick: The main rule in deductions from the IRS is that the expenses are ordinary and necessary. Ordinary means they are common in your industry; peers who do what you do will incur similar costs. Necessary means that they are helpful to run your business. A few that come to mind are:
- Office expenses and software: Being remote means relying on your technology and tools to complete your work. Everything from meeting software to time tracking to online storage costs is a factor when determining what to deduct.
- Advertising: This includes social media ads, websites, business cards, and printing flyers to hang locally. Expenses incurred to put the word about your business should be deducted.
- Insurance: This includes business operating insurance and health insurance for many self-employed taxpayers.
- Rent or lease for office space: Remote workers often use coworking spaces or leased offices while away from home.
Remember that W2 workers are not [eligible for] these business deductions. You should inquire with your employer about potential reimbursements to offset these costs.
TN: How can travelers and remote workers easily track expenses throughout the year to streamline their tax filing process?
KT: I highly recommend the use of online accounting software like QuickBooks. One of the biggest mistakes I see is that business owners rely on their bank statements to tell them what they spent and where at the end of the year. [This] usually results in missed deductions as they sort through.
Keeping up with your bookkeeping throughout the year ensures that you see everything that comes in and out of your business bank account and categorize it accordingly. Avoid the rush of figuring it out at tax time with the benefit of seeing where your business stands financially in real time.
TN: Are there any specific tax implications for individuals who work remotely for companies based in different states or countries?
KT: As a US citizen, the IRS wants to make sure that you’re paying them their proper taxes when filing each year. [That] means, you will need to file a US tax return. There are times when another country is already taxing you based on your time and/or the type of work you’re doing in that country. In this case, you’ll want to ensure that you (and your accountant) are current on the rules for that country’s treaties with the US and corresponding tax treatment to ensure that you are not overpaying or underpaying taxes. Your home state wants all your money, too, and will tax all income accordingly.
When it comes to states, each state has its own rules on when you are taxed in their jurisdiction based on residency rules. If you know you will be residing away from your home state for an extended period, make sure you understand what will be required of you by the end of the tax year. For many states, taxes paid to another state are offered as a credit on your return. For example, if you spend time living between two states, you ultimately owe a prorated tax for the year based on how long you lived in each.
Various decisions impact where you owe taxes, including where you own property, register vehicles, open bank accounts, or maintain a mailing address.
TN: How can travelers and remote workers handle taxes if they work in multiple states or countries throughout the year?
KT: I would recommend hiring an experienced accountant in remote tax matters, especially if your work involves international travel. It’s a complicated process to navigate without expertise, with potentially costly consequences if you get it wrong. Also, keep track of your income and expenses in each location.
While it can feel tedious, it allows you to easily separate what you earned and spent in each to be properly reflected on your tax forms. Online accounting software makes this easy by allowing you to categorize by location so that as you do your bookkeeping, you capture this automatically.
TN: What are the differences in tax treatment for business travel expenses versus personal travel expenses for remote workers?
KT: Remember that travel expenses are typically deducted in full for business travel. Lodging and transportation costs can reduce your taxable income because the trip was [based on] the business’s travel needs. On the contrary, remote workers traveling for personal reasons and doing work while you’re there do not get the same deductions.
Your living expenses and flights are not necessary for the business and, therefore, don’t qualify for deductions in the same way. Additionally, meals that would be deducted in part on business travel are not allowable just because you have chosen to live somewhere else.
TN: Are there any tax planning strategies travelers/remote workers can implement to minimize their tax liability?
KT: The most important tax planning strategy is to stay organized. Working remotely has many moving parts, and you don’t want the paperwork to be chaotic when settling in. Keep thorough records of what you made and spent, making it easier to apply to the correct locations when it’s time to file.
Next, be aware of the taxation rules in the country you’re going to before you make your decision. Moving somewhere could be a financial wrinkle in your plan because it’s “cheaper.”
Finally, there is a difference between filing a US tax return and owing taxes to the IRS. Benefits like the Foreign Earned Income Exclusion and the Foreign Tax Credit allow you to lower your US tax burden based on how long you lived elsewhere and how much you already paid in foreign taxes. Understanding whether either or both of these apply to you will help you navigate your home country’s income rules more effectively.
TN: Is there anything else you would like to share?
KT: While DIY taxes can be done, remote and digital nomad workers would benefit highly from hiring an accountant. It can be a complicated process that may require pre-work. It’s better to be prepared on the front end than penalized on the back end.
This article has been edited and condensed for length and clarity.
