Are there global financial regulations around remote work? What are the tax implications of working abroad? Do these differ from country to country, or is a unified tax system in place? If you’re wondering how to travel and work within legal compliance, this article will help you understand the tax implications of working remotely from another country.
Since remote working is relatively new, governments worldwide are still updating their tax rules and regulations to accommodate it. Even international employment laws are in a constant state of change. So if you’re interested in relocating, living as a digital nomad, or becoming an overseas student, you’ll need a functional understanding of the tax implications of working remotely from another country.
Why do the tax implications of working abroad matter?
On the surface, many YouTube videos today show people living their wanderlust dream. RVs stretched from Alaska to the Mediterranean Sea, a laptop propped up against a stunning sunset or misty mountaintop. It makes remote work seem an achievable fantasy for anyone.
But in reality, there are many tax implications of working remotely from another country to consider. Remote work abroad is more tad more complex than applying for a host country visa and flying out. It asks more challenging questions. Like, is it legal to work from one country while being a resident of another? What are the tax implications of working abroad?
Understanding legal compliance and tax liability is necessary as these factors affect not just you but also your employer.
Though most taxes are levied on your personal income and determined by the labour laws of the country you work in, there are still plenty of legalities to understand before you rent your dream Airbnb.
What are the tax implications of working remotely from another country?
Plenty of people have discovered the benefits of remote working in recent years. Furthermore, with the coronavirus pandemic normalising remote work, employees worldwide prefer hybrid or remote positions over full-time office jobs.
Benefits like commute-less working, flexible hours, more personal time for socialisation and hobbies, and relocation savings make remote work a desirable way of life for most people. And for travellers, there’s finally the freedom to wander the planet and earn a living at the time.
But along with the opportunities and benefits of work-from-home jobs, some tax implications of working remotely from another country might also apply to you.
Though remote working is gaining favour worldwide, you still need to be legally permitted to work as long as you like from anywhere in the world. Citizens living and working from different countries involves many cross-border laws and tax regulations. Your employer must know your exact relocation status to ensure you have the correct work permit and legal compliance for that particular country.
The 183 day rule
The standard global threshold of tax credit for an individual to live tax-free in a foreign country during one financial year is 183 days. So if you reside in one country for more than six months, you could be considered a resident or have a permanent establishment (PE). The duration of your stay directly impacts the tax implications of your working remotely from another country.
The local tax jurisdiction applicable to you may change depending on where you’re working and for how long. Tax laws are complex and can vary from country to country and even from state to state within the same country.
Double tax avoidance (DTA)
To avoid the unfortunate circumstances of paying twice the amount of taxes—where you’re a registered taxpayer and where you’re remotely based—many countries form reciprocal agreements through Double Tax Avoidance (DTA) treaties. Such a tax treaty protects you from being double-taxed while working remotely.
Tax deducted at source (TDS)
Withholding tax deducted at source (TDS) is common taxation as a certain percentage of every employee’s salary is payable by their employers to tax authorities in the origin country. You must know what’s getting deducted, why, and whether you can file for a refund if you’re not liable to pay it while working remotely.
Tax laws in several countries might dictate you pay advance taxes in expectation of whether your income will likely increase during a particular financial year. Your employer will calculate and deduct this percentage, so it’s helpful you’re aware of how much your pay increase will cost you.
Social security taxations need to be checked from country to country. Some employer countries may still require employee social insurance even if you’re stationed abroad and aren’t a tax resident of that country.
Foreign earned income exclusion
This foreign tax benefit is for citizens of the USA who live and work abroad. By claiming this exclusion per its parameters, expat Americans can often reduce their U.S. tax bill to zero. Nonresident citizens must prove they’re permanent residents in another country or have spent at least 330 full days outside the U.S. within the same financial year.
Intellectual property (IP) rights
Labour laws differ from country to country, and you’ll need to check if the work you create in a particular country belongs to you or your employer as per its intellectual property (IP) laws. IP laws may also apply to companies themselves. So, for example, if an employee produces creative work when residing in a particular country, the usage rights to that work may be bound by the country’s IP laws.
Organisations worldwide are legally bound to provide their employees with contributions like healthcare, superannuation, pension, and unemployment insurance. As a remote worker, you can demand total clarity on which employer contributions you’re entitled to. Compliance failure will lead to your employer paying hefty remedial and punitive fines.
How to pay less taxes when working remotely
Many people are depressed when the time for annual income tax filing comes around. And as if calculating regular tax returns isn’t tedious enough, remote workers have to jump through even more hoops to determine tax liabilities.
But worry not; keeping the following pointers in mind will help you make sense of taxation.
Know whether you’re a contractor or employee
The taxation you’re liable for will depend on whether you’re a remote employee or contractor. As an employee, your hiring contract will state how much tax your employer will automatically deduct from your salary. However, if you’re not an employee but a remote contractor, you’re considered self-employed. In this case, you must file your own taxes and pay them either quarterly or annually per the laws that apply to you.
Arm yourself with local tax laws
Regulations on income tax rates can differ by country, state, region, and city. Even though your income is usually taxed according to where you live, you can also be liable for tax if you’ve worked remotely elsewhere. It’s a good idea to take advice from a certified public accountant (CPA) or another professional tax service rather than navigate international taxation alone.
Ask to be hired you through an Employer of Record (EOR)
Your remote employer can hire you with third-party assistance through an Employer of Record (EOR) to ensure you get the organisational support you need within legal and tax compliance. Many overseas companies work with EORs to offer remote workers payroll contracts, employee benefits, and taxation in compliance with state tax and local labour laws, guaranteeing a safe and secure remote work experience.
More information on work visas and tax residencies
Most countries have rules stating how long you’re welcome to stay before you’re liable to pay taxes as a resident. Such tax-residency restrictions apply to you whether you’re an employee, freelancer, part-time worker, or independent contractor.
These scenarios from individual countries may help you understand how visa regulations and taxation laws differ from nation to nation:
D7 visa & residence permit for Portugal
Winning the global race for a remote-friendly haven, Portugal invites digital nomads and remote workers to live, work, and travel in Portugal on a D7 visa and residence permit. This visa is aimed at non-EU citizens with passive or remote income, allowing professionals to extend their stay comfortably.
Form 1042 for foreigners working in USA
The Internal Revenue Service (IRS) Form 1042 must be filed by foreign workers—such as digital nomads—to ensure they declare their salary and earnings in compliance with U.S. income laws and aren’t committing any tax violation during their stay.
Short contract postings for EU citizens
For European citizens, travelling and working in other EU member states does not impose tax obligations or require them to procure work permits, provided they spend a minimum of 183 days each year working from their own country of employment.
Temporary work permit for Mexico
Mexico allows remote workers to apply for a temporary visitor visa with an attached work permit, allowing them to stay in the country for six months while employed. Additionally, Mexico only collects tax on income sourced within the country, meaning you aren’t taxed when employed remotely.
The fallout of tax avoidance while working remotely from another country
If you ignore the tax implications or fail to declare the correct tax-residency status while working abroad, you might face some pretty severe consequences:
- You increase your risk of double taxation by being taxed in your home country and the country from which you’re working.
- You might have to pay penalty fines or late fees with interest on the taxes you owe.
- You might be banned from re-entering the country before you resolve your tax issues or even face a permanent entry barrier.
- You could even be caught on criminal charges and serve prison time for tax evasion or fraud.
Working remotely from another country is easier than ever before
Most tax rules and regulations were created at a time when remote work didn’t exist. Today, however, world governments favour changing outdated tax policies that don’t help businesses grow or benefit the modern economy.
Digital nomad visas are growing more popular, and several nations have begun offering remote workers attractive tax exemptions to attract more business within their economies. Furthermore, if the tax implications of working remotely from another country negatively impact business flow, they are modified to encourage and support remote workers.
‘Home office‘, ‘remote work’, and ‘telecommuting’ aren’t special categories anymore but are increasingly the global norm. And as businesses and economies continue to incorporate tools and systems to support new ways of working for the betterment of all, the future looks bright for remote workers and employers.
On your part, remember to keep meticulous records of your work experience, earnings, and expenses through the years for tax purposes. A clean track record lets you follow your remote working dream without a hassle wherever you go next.
The Cocoroco adventure
Now that you know everything there is to know about the tax implications of working remotely from another country, why not put your knowledge to use with a secure WFH job?
The Cocoroco platform is always looking for talented and qualified professionals to serve global customer needs through our remote-first platform.
We want to level the global marketplace by expanding the borders of professional opportunity for citizens worldwide. We don’t care where you live as long as you love your work.
To look for a remote job right away, register for free on our candidate applications page, or read more about what we have to offer here.