Dateline: Yerevan, Armenia There is an undeniably global and growing trend in the remote work industry among digital nomads, freelancers, and solopreneurs. In the United States alone, a 2016 Gallup poll found that 43% of Americans worked remotely in some capacity. Telecommuting has increased 115% over the last ten years and one study projects that nearly three-quarters of the US workforce will work remotely by 2020. As remote work grows, so too do the opportunities for freelancers, solopreneurs, and digital nomads to leave the United States and other high-tax countries to travel and explore the world while enjoying the tax benefits that come with the lifestyle. Today, there are people living everywhere from Chiang Mai to Bangkok to Abud to Medellin to European cities like Berlin, Tbilisi, Belgrade, Budapest, and more. New enclaves are opening up all around the world and people freely travel between them. Whether they are chasing the “endless summer” and enjoying all the music festivals and hitting up the European coast or meditating in an Asian villa in the winters, remote workers can effortlessly move between co-working and even co-living spaces around the world while getting their work done. Those who have embraced this lifestyle are overwhelmingly grateful for the freedom and adventure that it offers. However, the remote work life is not immune to a few complications of its own. The big question people come to me asking is, “Where do I pay tax as a freelancer or solopreneur?” The answer I give these folks is markedly different from the answer that I give business owners looking to move offshore. If you are in business by yourself as a freelancer or solopreneur, the way that you operate will be different from a traditional business… especially when it comes to the tax strategies and structures that you can utilize. In fact, if you are among the growing number of location independent freelancers and solopreneurs, your tax situation is unique enough that we have created this ultimate guide just for you. In this guide we will:
- Clarify the difference between a profession and a business for tax purposes,
- Examine different perspectives that apply when going offshore as a solopreneur,
- Review all five tax questions you should be asking, and
- Analyze specific examples of freelance/solopreneur tax strategies.
Let’s get started.
Profession vs. Business
A solopreneur is an entrepreneur who is engaged in running a business by themselves. Their services could include everything from developing websites to supplying virtual assistance to providing YouTube or SEO marketing to any number of different activities. The key factor is that they work alone. They are the business. For tax purposes, however, this type of operation is technically not considered to be a business. It is a profession. Now, you may be thinking that in your home country you are classified as having a business as a freelancer or solopreneur, and that could very well be true. You may have set up an LLC to protect yourself from liability and people may legitimately view your services as a business. There is no disrespect here about whether or not you provide legitimate business services. I imagine you do. But when it comes to taxes, technicalities matter. And, technically speaking, the differences between a profession and a business create entirely different tax implications, especially if you are living and working overseas. A profession entails self-employment. You own your job. And, in most cases, you are exchanging your time for money. You personally provide a service and are, in turn, paid for that service. If you do not do the work, you do not get paid. A business, on the other hand, has repeatable and scalable processes in place that deliver a given service or product independent of any single individual. Even at the smallest level of what can be considered a business, there is a team of some shape and size. This article is not for these business owners. It does not speak to people who have small teams or who have one person leading the show with administrative support. It’s not for companies that have a couple of Filipinos helping out or for someone running an Amazon FBA business. This article is for people who, without them, their business would basically not exist. Let me illustrate this difference with an example from my personal business experience. I saw an opportunity to start a swimming pool cleaning company in the United States precisely because I could see that everyone else in the pool cleaning industry approached their services as a profession and not a business. There were dozens of self-employed, solopreneur pool cleaners who had 50-70 pools that they cleaned on their own. While they had plenty of work, they were all so busy and overwhelmed that they were very unreliable to even get on the phone. Seeing the opportunity, I decided to start a pool cleaning business. I hired a manager to oversee things because I knew nothing about pools and worked with him to hire a bunch of guys that we trained to actually go out and clean the pools. Everyone else in the pool cleaning industry was a self-employed solopreneur. I was running a business. Even in the hot summer months in Arizona when the pool guys were up and at it at five in the morning, as a night owl I would sometimes sleep in until 10 in the morning, rub my sleepy eyes, look over text messages from my manager about new accounts from people who needed us to clean their pools, and then I would saunter in and check the accounting and talk to some marketing people and put together strategies. I would do it all on my own time. If I chose not to work one day, the business continued because my staff was working for me. Because I had set up a system with a team that could follow repeatable and scalable processes, I got paid no matter what. Obviously, there were things I had to do as the business owner, but I could have hired another manager and even pawned that off. The self-employed solopreneur could not do that. If they didn’t show up, they would not get paid. Whether or not you are self-employed or running a business affects more than just how you get paid, it also impacts how you are taxed. The difference between a profession and a business is the key differentiator for tax. This article is for people who have a profession – solopreneurs and self-employed individuals like freelancers who are their entire business. If you’re running an active business, click here for tax advice more tailored to your situation.
Different Perspectives When Going Offshore
When you go where you’re treated best and you are no longer in a high-tax country like the US, Canada, Australia, etc., there are legal ways to reduce or even eliminate your taxes depending on your situation. But going offshore not only gives you the opportunity to reduce your taxes, it also changes how you must view your tax situation as a whole. Going offshore requires different perspectives than you may have grown accustomed to living at home, tied to one location. If you’re a digital nomad living in Chiang Mai in the winter and Budapest in the summer and traveling around from there, then you will no doubt be able to reduce your taxes in one way or another. But to really understand the full implications of your choice of lifestyle on your tax strategy, you have to view it from two separate perspectives.
1. The Personal Perspective
There are all kinds of different tax strategies you can use when you’re a freelancer in your home country. If you’re in the United States, for example, you might set up an LLC and be classified as an official “business” even though what you do does not fit the definition of a business that we covered above. US LLC law allows even solopreneurs to register as a business to protect their liability. Doing so will also grant you access to the enhanced deductions made available through the Trump tax reform to people who run their own business. However, when you go offshore, you have to clear your mind of the idea that you are “running a business” and replace it with the understanding that you are self-employed – you have a profession, not a business. One of the biggest reasons for this mindset shift is that how and what you can deduct changes once you go offshore. If you spend enough time in foreign countries, you will qualify for the Foreign Earned Income Exclusion, which will become the bedrock of your offshore tax strategy. This means you can leave behind the mindset you developed in your home country that obsesses over chasing deductions, looking for ways to write off your phone bill, renewing networking memberships and SaaS subscriptions every December, jamming as many expenses into the current tax year as possible, and calculating the biggest square footage for your home office so you can write off as much of your mortgage or rent as you can. You can also stop worrying so much about the changing tax trends and wondering if the IRS will flag your return if you’ve taken too much in one area or the other. For instance, my CPA in the US once told me that while I was pretty conservative with my home office deduction, the IRS often red-flagged people who took too big of a home office deduction. In the end, it can all turn into a big guessing game that can leave you on edge, chasing every deduction while fearing what will happen if the IRS decides you’re too good at the game. And, even if you are successful at stuffing every available deduction into your return without backlash from the IRS, all you are really managing to do is to kick the can down the road indefinitely. When you go offshore, you stop all that. There’s no more kicking the can down the road. You pay your own bills because, potentially, you pay zero tax. The need to chase deductions disappears. While I work more with high-level active business owners than freelancers and solopreneurs, I have helped solopreneurs in the past who told me that they did $200,000 in billings in the US and, even though their profit margin was essentially 90%, they only showed a profit of $100,000 because they found $80,000 in expenses that they could deduct. They just had to jump through 80 different hoops to make that happen. When you go offshore, you stop playing that game because it no longer matters. You can stop wasting your time trying to find stuff to deduct.
2. The Client Perspective
The second perspective you have to take into account is that of your clients. Going offshore may not only change your tax situation, it may change theirs. This is due to the fact that where you work can subject you (and even your clients) to different tax laws in different countries. For example, while people generally don’t worry too much about the tax laws of Thailand, if you’re living in Thailand full-time, you’re generally supposed to get a work permit that may entail certain tax provisions, even though they may be minor. Historically, countries like Thailand and Malaysia have taken the position (and, in some cases, they have literally told me) that they don’t really care what you do as long as you’re not taking their jobs. If you don’t steal local work, you can live there as a tourist all you want. Still, if you’re spending all of your time working in Thailand, you should technically have a work permit. And Thailand has been cracking down on this a bit more lately, which is why it’s always good to comply with laws, even if the country isn’t big into enforcement. In that vein, Bali (Indonesia) is another place where you should be paying tax if you live there full-time. However, if you live as a perpetual tourist and you’re constantly moving between these emerging countries, they are generally happy to have you there as a tourist and won’t bother to tax you if you choose to work during your stay. Where you choose to work really begins to matter for both you and your client if you choose to spend significant time in developed countries. In the US, for example, a non-US corporation can still be considered a US trade or business liable to pay US taxes if certain conditions apply:
- They have at least one employee or dependent agent in the United States, and
- That individual provides substantial services to advance their business in the United States (versus simple administrative tasks).
We won’t go into all the complications here, but suffice it to say that foreign companies could become subject to US tax because they are “engaged in a trade or business in the United States” if they have an employee or dependent agent providing important services to them while in the United States or while a tax resident there. If you’re a Canadian and you spend six months of the year on the beach in Miami or Los Angeles, then you’re going to have a US tax liability. And the fact that you have this US tax liability means that some of your clients – depending on your relationship with them – may also have a US tax liability now because you are there working for them. The more clients you have, the less likely this will be an issue for any one of them. If you provide a very small amount of services to one client – perhaps just a one-time deal – that may be less of an issue. But the fewer clients you have and the more time you spend focused on one client and the more involved you are in their business and the longer the engagement and permanency of the engagement, the greater the chance that there may be a tax issue. Similar rules apply in other high-tax developed countries as well. This article is not meant as tax advice, but if you are going to be spending any kind of substantial time in developed countries – especially in the United States – it’s really worth it for you to get this assessed because you may have a tax issue and you may be creating a tax issue for your clients.
The Five Questions
Once you have taken into account these two new perspectives as a freelancer or solopreneur operating offshore, setting up your tax strategy boils down to five important questions.
1. Are you a US citizen?
US citizens are subject to tax on their worldwide income. However, US citizens living abroad who meet the requirements for the Foreign Earned Income Exclusion (FEIE) are able to exclude $104,100 of their income (in 2018) from tax. For many freelancers and solopreneurs, that’s enough. But if you make more than the FEIE limit, there is no way to avoid paying tax on anything you make above $104,100. Up until the Trump tax reform (i.e., The Tax Cuts and Jobs Act of 2017), owners of active businesses – not solopreneurs or freelancers — could take a salary at or below the FEIE limit and retain the rest of their earnings in the business and pay zero tax. However, the rules for active businesses have become more difficult under the Trump tax reform. It is no longer a picnic for these folks either. They still have some options to reduce their tax overall, but there is no longer a way to reduce the bill to zero. The bad news is that the rules for solopreneurs were never that flexible to begin with. Because you are providing your time as a profession, what you do is not considered a business and you cannot take advantage of the business loopholes of going offshore. While many of those loopholes have now gone away, as a solopreneur you cannot take advantage of the ones that still exist. This also means that US solopreneurs and freelancers will not benefit from having a foreign company. However, there is always the option of turning your solopreneur business into a legitimate active business. To do so, you will need to follow the rules set out by the IRS that stipulate how much of the work you can do within the business and what percentage of the work other people need to be doing for you. I hesitate to suggest an option like this because I don’t want anyone to get the wrong idea. Don’t expect to just hire some bonehead somewhere, put them in a closet and never have them do any work as you continue being a solopreneur. That’s not the purpose. However, if you have a legitimate need to have somebody doing work for you, you could turn your solopreneur/freelance gig into an active business that will qualify you for tax benefits. This does not mean that you have to turn your profession into a big business. Hiring a personal assistant to help you with administrative tasks may or may not be enough. In some cases, you could have a team of freelancers helping you who could qualify as employees that share your workload. If you’re not ready or willing to turn your profession into an active business, you can continue as a freelancer or solopreneur and still get that $104,100 exclusion. But if you are legitimately doing all the work yourself to provide a service and get paid for your time (i.e., if you don’t work, you don’t eat), that’s the only tax break you’re going to get. I encourage you to read our ultimate guide to the Foreign Earned Income Exclusion for full details on how the exclusion works but suffice it to say, if you’re a US citizen, there’s really no way out of the tax trap like there is in other countries.
2. Where are you a tax resident?
I’ve talked a lot about what I call the nomad tax trap and freelancers and solopreneurs are often the first to fall into this trap because they are some of the biggest violators of the rules involved with establishing tax residence. They tend to think that as long as they don’t spend 183 days in their home country (i.e., Canada, Australia, the UK, etc.), they won’t be taxed. The truth is that it’s not always this simple. The 183-days rule is known as the days test, but it is not the only factor that most countries take into account when deciding whether or not you qualify as a tax resident. I just reviewed a tax memo from one of my tax guys in a country with a residential taxation system where he explained that you can’t even get close to 183 days. For instance, if you already have connections in Australia – you grew up there, you’ve been working there, etc. – and now you want to leave, you don’t get to simply say, “All I did was spend 182 days there.” There are other things that need to be taken into consideration. That’s why proper tax residence planning is important before you can say that you are fully out of the tax system. The 183-days rule is really for someone like me who goes to Australia as a non-Australian citizen. If I spend less than 183 days in Australia and have no other connection to the country, I could avoid any tax obligations there. But if I spend the full six months there, chances are they’re going to tax me. If you are a citizen of countries like Australia, the UK, Canada, Germany, and others that have residence-based taxation systems, not only do you need to stay outside of your home country for more than 183 days to avoid paying tax but you also need to reduce or eliminate your connections to your home country and establish an official tax residence in another country. You can become legally tax non-resident in countries with residence-based taxation and free yourself of any future tax obligations until you return, but the burden of proof that you no longer live in your home country is on you. As these countries become stricter about what qualifies as “satisfying proof of residence,” it is becoming much more difficult for citizens of these countries to do as US citizens do and declare that their tax residence is wherever they go with their laptop. This is the one downside to not being a US citizen: you have to take proactive steps toward establishing your actual tax residence. It’s possible that if you’re a small fish you can get away with simply saying that you’re a digital nomad. But governments don’t understand the growing movement of location independence. Generally, bureaucrats (and bankers) come from older generations and have a difficult time keeping up with the trends, so you’re going to have a hard time, not only from an operational standpoint but from a tax standpoint, saying that you don’t have a tax residence and that you don’t pay tax anywhere. Not only may they not understand that but increasingly they’re not going to like it either. While your tax base may technically be wherever you’re spending time (even if you don’t pay tax there), it’s a good thing to set up a tax residence. The good news is that, depending on your situation, there may be tax residences that you can obtain where you pay zero tax. People get confused and think that by becoming tax resident somewhere they will have to pay taxes, but that’s not always true. There are places with tax exemptions, places that don’t tax foreign income, and places that have some other provision depending on your situation or your wealth that will give you a second residence and still exempt you from tax.
3. Where do you spend your time?
If you spend more than six months in a country, chances are they are going to tax you. As we established in question two, if I were to go to Australia as a non-Australian citizen with no connections to the country, I would still have to pay tax there if I spent 183 days or more in the country. As another example, Canadians and folks with B1B2 visas who can spend six months at a time in the US will be taxed in the United States if they choose to spend all of their available time in the country. I had a guy who came to me who got trapped in that system and it took him four years to get out of it merely because he was in Florida for nine months one year. Where you spend time almost de facto determines your tax base, but it doesn’t necessarily mean you’ll pay taxes to those countries. That’s why, for everyone except US citizens, establishing a tax residence is important. But, you also want to make sure that you’re not spending too much time in one place. There are certain countries that have a territorial taxation system. If you are a solopreneur working in a territorial tax country, even if your clients and bank accounts are located outside of the country, they could argue that if you’re doing the work in their territory you are violating their principles of foreign source income. People think that if they make money in a territorial country it won’t be taxed. But if you’re a solopreneur and you’re not incorporated, that work may be deemed under some countries’ tax laws as being locally sourced income because, after all, you are on their soil doing the work and the money is coming to you. So, depending on how you’re structured, even a territorial tax country might not help. Now, that doesn’t mean that many people don’t get away with it. It just means that, technically, the laws are stricter. As someone striving to be 100% compliant, you should be aware of such caveats.
4. How do you deliver your services?
How you deliver your services is yet another issue of physical presence. The best situation would be if you were going from one co-working space to the next while you traveled around providing totally location-independent work. If you are truly location independent, the only reason you would move is because you wanted to. If you want to move every week, every month, every three months, every six months, if you want to slow travel, if you want to be a perpetual traveler, that is up to you, not your profession or the specific services you provide. To be truly location independent, the only acceptable thing that can dictate your lifestyle is your preference, not your actual work delivery. For me, for example, I help people create offshore plans. I have a distributed team, I travel to do research, I travel for fun, I travel between my homes, but that’s all irrelevant to the work that I am providing. When I travel later this month to a country in Asia to look into their new citizenship program, it’s really because I want to do it personally. It’s not actually a requirement for my business, I already have enough citizenship programs to offer the people I work with. The challenge with how you deliver services comes into play if, for example, you’re providing on-site IT services. If the IT freelancer has to go into an office to work on someone’s servers, they may have issues arguing that their ultimate source of income is not tied to a specific location. Determining the ultimate source of your income can get complicated if there is a difference between where the products are sold and where the products are fulfilled. In my situation, I sell products based on wherever I am at in a particular moment. I am not traveling to the United States to physically be in someone’s office and do the work for them. And, even if I did, being in someone’s office and having a chit-chat may or may not be an issue in some places. The bigger issue is if I were actually doing work on location. I once helped a guy who gives motivational speeches. People call him to go into their office to train their staff. The work is being done on location and his physical presence is required for the service to be delivered. For someone in that situation, that could potentially be an issue. Now, if situations like this are limited in scope, there could be some cases where it is possible to present the overall case from a tax point of view that doesn’t tie you down to one location for tax purposes. But if you are spending four months a year in a country giving speeches, it will be harder to make that argument. Now, that doesn’t mean that all of your income will potentially be taxed in that country, but maybe a portion of your income will be taxed there, so it’s best to figure out how you can perform those services not only outside of high-tax countries but also figure out how you can avoid going into someone’s office and having to report for work.
5. Do you even need an offshore company?
A lot of people think that they need an offshore company, and in many cases, a company can help because it separates you from the business and limits your liability. I’m not a litigation expert so I won’t speak to that, but having an offshore company can also clarify your income from the business’s income in certain countries. However, for US citizens, if you’re legitimately a freelancer or solopreneur, having an offshore company is not really going to help with that – it is only going to add more complexity and expense. If you’re a US citizen, you’d be much better served by putting together an appropriate US tax strategy along with a travel strategy and then going from there and eliminating the expense. Again, I am speaking to legitimate freelancers and solopreneurs. For non-US citizens, there may be a greater need for an offshore company. Depending on how your clients are invoicing you, an offshore company may be helpful. But, in some cases – and this is where it’s worth getting some advice – it may be better to have people pay you into your personal bank account, have a good personal tax strategy, and avoid spending the money on an offshore company. If you can save the money, you should.
Freelance and Solopreneur Tax Strategy Examples
Now, for a few specific examples of how this all plays out with different freelance and solopreneur professions…
Consultants and Coaches
Consultants and coaches are a great example of someone providing services from overseas. Whether it’s life coaching, consulting, or teaching coaches how to become coaches, you’re in a great position because you’re providing the work over the phone. As long as your personal tax strategy is fine, your business should be fine as well because wherever you are will function as your tax base. However, a lot of coaches and consultants have different membership websites or they have digital products that they sell. The good side of selling digital products is that there may be other people helping you to create them and you could make the case – depending on how your digital products are created and sold – that you’re actually not a solopreneur but a business owner and, therefore, eligible to get the tax benefits of being an active business. The downside is that, unlike personal services that are sold from a zero tax perspective, you may have to charge GST or VAT on digital products depending on where you’re selling them and what your sales volume is. Remember, solopreneurs and freelancers are folks who are paid for what they do in terms of their time and effort – they trade money for time. If you’re selling digital products or anything that makes you money while you sleep, then there’s a different set of rules that apply.
Programmers and Coders
For web developers, programmers, people who write code, etc., if you’re not doing the work in a physical office and simply work from your laptop wherever you may be, then you should be fine. However, do keep in mind that certain countries have rules regarding code as intellectual property. This means that the type of agreement that you have could dictate who owns the code, how the code is being transferred, etc. Overall, there are several issues to consider depending on who your clients are and where they are located if you’re doing code.
I know a lot of IT freelancers who have to physically go into various locations to work on servers. The issue here is, how much time are you spending in an office or in someone’s server room vs. actually on the road or in your digital nomad home making the sales and doing work there? The more work that you can do at home, the better. Ideally, zero work on site is perfect. Still, it depends on where you’re doing the work and how you’re doing the work, among other factors. There are a lot of considerations if you’re doing the work on-site, so that would be a reason to reach out for some help.
Marketing services could include everything from SEO or YouTube marketing to blog and content marketing to any type of marketing service where you charge someone for publicity, media relations, etc. This is another profession that makes it easy to claim your current location as your tax residence. If you want more robust tax benefits, marketing is one profession that you can easily expand outside of the solopreneur space and actually have people doing work for you to scale the business. If you’re in marketing, you generally have it pretty good.
Writers and Authors
Unlike programmers and coders, writers and authors have fewer issues in most countries regarding who owns the copyright to their work. However, where you create content can still matter and you will want to double check all work-for-hire agreements and ensure that everything is set up properly with your clients. The bigger issue for writers and authors is if you are a published author – whether you’re publishing your own books or you are a ghostwriter writing books for other people and taking part of your compensation as a royalty share or a percentage of profits. Revenue from books is often treated as royalties, especially in the United States. So, while an FBA business can be considered an active business, publishing books through Amazon KDP and other similar platforms will likely be considered a royalty-based (passive) business. Because of that, there will then be a whole host of tax treaties that come into play because royalty income in the United States and many other countries is subject to withholding tax. In the US, it’s 30%. If you are an author, consider finding a tax treaty that you can benefit from. You may be able to become tax resident in a country where you are only required to pay 10% on royalties instead of paying 30%. When it comes to anything involving royalties, there are different sets of tax issues. While it can be more complicated, you’ll want to make sure you can avoid as much withholding tax as you can.
Public speakers run into a lot of the same issues as someone like an IT freelancer who does work on site. If you’re getting paid to speak in the United States, that will likely be a tax issue. In the state of California, the last I heard is that they had one full-time employee at the Franchise Tax Board who literally kept track of all the athletes who came into the state. If you are a baseball player and you played four out of 162 games in the year in California, they would come after you asking for their 2.5% of your income. This is because the portion of your income that you earned in California is liable to tax in California. The same principle can apply in different countries. If you’re giving public speeches in the United States, it’s a safe bet that the income from each of those speeches is going to be subject to US income tax. Other countries may have similar laws. Some, however, do not. In fact, many countries want to encourage people to host conferences and conventions there and will exempt income from these types of events from any tax liability for foreigners. Does this mean that they completely exempt the income of public speakers? Honestly, I don’t know. However, when I hosted a conference in Mexico and we hired Jim Rickards to come speak, we did find that Mexico is much more friendly with these types of situations. If you derive a large amount of income from public speaking, you will definitely want to figure out where you’re giving public speeches. If you’re giving them in a bunch of high-tax countries, that will likely give you some tax liability.
The many freedoms made possible by remote work conditions have led many freelancers and solopreneurs to embrace the digital nomad lifestyle, providing their various services to clients from co-working spaces all over the world and living as perpetual tourists. It is an exciting time to be an entrepreneur and work for yourself. But the freedoms of this new lifestyle also come with new responsibilities – one of which is to understand and put in order your new tax strategy. Living abroad can change how you are taxed and, if you want to stay out of trouble and qualify for the maximum tax benefits that this lifestyle makes possible, how you are taxed may also impact exactly how you choose to live abroad. Even when you have a location independent profession, your physical presence in certain countries still matters. If you’re not smart about the decisions you make about where you live and earn money, you could end up owing a lot of money in a lot of different places without even knowing it. Yes, there is great freedom to be had as a freelancer or solopreneur living offshore, but that freedom does not discount the need for good planning. If you need help getting your strategy in place, feel free to reach out for some help.