Professionals around the world want to work remotely, and it’s easy to understand why. From saving on a commute to becoming more productive in a personalized workspace, going remote offers flexibility and the ability to control how and where you work.
If you’re based in a traditional office, going remote could mean leaving the cubicle behind for good. If you’re already working remotely, your company may allow you to work from anywhere, including another country of your choice.
However, working abroad is a huge benefit that comes with even bigger tax concerns. This guide answers common questions about taxation abroad, as well as how to stay compliant with local tax rules and regulations, as well as your remote work policy guidelines.
Traveling to another country and working for an extended amount of time seems like a simple process, but it requires some planning and almost always a visa.
While traveling on a tourist visa is legal for shorter stays, most countries require a work visa to conduct business overseas. Some countries offer a special work visa, typically referred to as a digital nomad visa, to help remote professionals extend stays for up to a year or more. The type of visa you travel with will determine your remote tax responsibilities, length of stay restrictions, and the type of work you’re allowed to perform.
Ultimately, the key to living in one country and working remotely in another is traveling with the correct visa and understanding the visa’s limitations and regulations.
Yes. Most countries have tax-residency rules that dictate how long you can stay in their country before becoming a tax resident. In most cases, you must file as a tax resident and pay income tax if you stay for more than six consecutive months in a year.
Tax residency rules also apply to contractors and part-time workers, especially in regard to reporting taxes. For instance, in the United States, foreign contractors must file a Form 1042 with the IRS, also known as the “Annual Withholding Tax Return for U.S. Source of Income of Foreign Persons.”
Consider a scenario where a contractor for a company in India is sent to the U.S. to work remotely for eight months, then returns home to continue working from his home office. To ensure there is no tax violation, the contractor would need to submit a Form 1042 to the IRS and declare all income made while working in the U.S.
Below are some additional scenarios regarding tax residency:
Australian Employee Working and Traveling in Mexico for 3 Months
A tech employee from Australia decides to work remotely while visiting Mexico. To do this, they get a Temporary Visitor Visa with an attached work permit that allows them to stay for six months and participate in paid activities. Fortunately, Mexico only collects tax on income sourced within the country, meaning this employee will save in foreign taxes.
Spanish Citizen Working as a Contractor in Various Countries
A contractor from Spain is working short contract jobs across the European Union within a period of three months. Because the contractor is traveling and working in various countries within a shorter, three-month time frame, they won’t need to report their income or pay foreign income taxes outside of Spain.
British Citizen Working in Germany for One Year on a Remote Work Visa
In the United Kingdom, an IT specialist is assigned to Germany for one year to help establish a satellite office. To do this, the employee must get a German Employment Visa which will declare them as a tax resident. Even if the employee returns to the U.K., they will be required to pay taxes in Germany on the income acquired during their assignment.
If you do not declare the right tax-residency status by reporting your income earned in another country, you may face severe consequences. Here are some common risks and issues that arise from not paying taxes:
- Fee, fines, and penalties. Depending on the country you're staying in and the severity of your missing tax amount, you may be charged penalty interest fines or late fees on what you owe.
- Barrier to entry. Some countries may bar you from entering for a certain amount of time until you resolve your tax issues.
- Risk of double-taxation. Without defining your tax residency status or reporting income, double taxation (getting taxed by both your work and home country) can happen.
- Criminal charges. Although this is more commonly seen with large businesses instead of individuals, failure to adhere to foreign tax rules or pay back penalties could result in prison time for tax evasion or fraud.
Fortunately, this is where tax treaties and different types of tax relief can come into play, especially for U.S. and U.K. citizens and residents.
Both the U.S. and the U.K. have worked to enter mutual and reciprocal agreements with more than 140 countries, including China and Russia. These tax treaties create exemptions that help professionals living abroad avoid double taxation and pay fewer taxes. In the U.S., for example, the Foreign Earned Income Exclusion gives citizens and residents the opportunity to exclude up to $112,000 in income earned overseas.
While remote work taxes are overwhelming to understand, there are global HR solutions that streamline the employment and tax process overseas.
Working with a global partner like Velocity Global that is well-versed in international tax law allows you to travel abroad and stay compliant in multiple countries.
Our Global Employer of Record (EoR) solution gives remote professionals the opportunity to work from over 185 countries. Seamlessly use our cloud-based Global Work Platform™ to sign contracts, manage invoices, submit timesheets, and get paid from anywhere in the world.
Simplify your remote work experience by contacting us today.