Profitable Nomad Couple

60. US Taxes for Digital Nomads | Krystal Pino from Nomad Tax

September 27, 2023 Austin and Monica Mangelson
Profitable Nomad Couple
60. US Taxes for Digital Nomads | Krystal Pino from Nomad Tax
Show Notes Transcript Chapter Markers

Do taxes as a digital nomad have your head spinning??

We've got Krystal, a digital nomad herself and an expert in US taxation, here to help us navigate the murky waters of taxes.

The complexities of the US tax system can often be daunting for those of us living abroad. Krystal, with her expertise, breaks down everything you need to know to get started.

In this episode with Krystal, we cover:

  • tax systems around the world
  • Foreign Earned Tax Exclusion (FEIE)
  • self-employment taxes
  • business entities, including sole-proprietors, LLC's, S-corps and C-corps
  • tax deductions for digital nomads

It's a whirlwind of information - but Krystal is a master educator and breaks everything super well for your easy understanding!

Get help from Nomad Tax:

Get in touch with Krystal:

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Speaker 1:

Hello and welcome to the profitable Nomad Couple podcast. This is a show where we share all of our secrets about building a sustainable location independent lifestyle.

Speaker 2:

We are Austin and Monica. We're a digital Nomad couple here to help you develop an entrepreneurial mindset, ignite your passions and develop a purpose-driven online business.

Speaker 1:

Get ready for weekly insights and inspiring stories to empower you to live life on your own terms.

Speaker 2:

So are you ready to unlock the Nomad mindset and embrace a life of limitless possibilities? Let's dive in, all right. Well, welcome Crystal. We're super, super excited for this chat with you today. We are very fortunate to be talking with you about taxes and how they work with digital Nomads. I know there's a lot of questions in this space, because there's. I mean, taxes in general are kind of a complicated topic for a lot of people. Add to the complication that we're moving around all the time. We're never in one spot for very long. So we're excited to get your expertise and to learn from you about how it all works.

Speaker 3:

Yeah, absolutely, I'm excited to be here, cool thanks.

Speaker 1:

So why don't you start out by telling us a little bit more about yourself and your experience of taxes and your experience of being a digital Nomad, and more about who is Crystal?

Speaker 3:

Yeah, absolutely so. I actually. I mean, I went to college to be an accountant. Obviously I followed the normal track. I went to grad school, I took the CPA exam, I got the tax internship, I got the traditional tax firm job and at some point in my life I just thought that spending 14 hours a day, strapped to my office chair, six days a week there kind of had to be more out there than that. I was really fortunate to run across an opportunity to travel with Remote Year for a year and I thought it was just going to be that, you know, just a year of my life traveling the world and I would go back to you know this very promising career that I had. But kind of what happened is I ended up falling in love with the digital Nomad lifestyle and here I am, nearly six years later still still living it. And the second unfortunate thing that happened to me was that within the community, as I started to travel more and interact with the community, I saw that there were a lot of questions, a lot like the questions that you guys a lot of people had those same questions and I had that knowledge base. So I had this really incredible opportunity to launch a business around you know, doing what I was good at, which was taxes, and what I loved, which was, you know, helping people in my community. This December will be four years ago that I launched yeah, that I launched Nomad Tax, and we work with nearly 500 clients now all digital Nomads you know, some of which you know own their own businesses and stuff like that. So we've been working in this space for for that amount of time and it's just been an incredible journey.

Speaker 2:

So that's so great. I think it's so cool that you saw that need that people, that digital Nomads, have, and it's a space that you knew and it's a space that you enjoyed, and so you saw that need and you filled it. I think your story is something that a lot of people can resonate with. As far as you know, having a more traditional job, I suppose you could say, and then wanting to, knowing that there's more out there and so wanting to go out and explore that I think that's great, yeah. So maybe let's start super basic and just talk about what taxes do digital Nomads have to pay? Are they paying taxes from their home country? Are they paying taxes in the country they're living in? Are they paying state and federal? How's that all work?

Speaker 3:

Yeah. So the area of tax that we work in is going to vary right on where you're coming from. So we're assuming you know that most of your audience is American, but we're going to have some other people in there as well. Our expertise is in the US tax space. I can speak a little bit to other regimes, but not so much. And so there's basically three types of taxation based systems in the world. There's residents based taxation, like work based taxation, and then what the United States have, which is called citizenship based taxation. Now, this is the common misconception right that if you're not in the States, you don't have to be paying taxes. That's not exactly true, because the United States has citizen based taxation system. It means that if you are a citizen meaning you hold a US passport you are responsible for filing and paying taxes. So that's step number one. Just because you're not in the States doesn't mean that you don't still have those responsibilities. As far as other countries that you're traveling to, it can definitely vary. I mean, I definitely recommend you kind of looking into, most of the time, what you're going to come up with is if you're not spending more than about 183 days in a country, which equates to about six months. Then you're not going to trip up against the tax liability. But that's not a hard and fast rule. So I definitely always recommend you know talking to somebody and making sure that you're not putting yourself in a taxable situation.

Speaker 2:

So make sure you do your homework, for wherever you're going to go and live, make sure you're abiding by their laws and their regulations.

Speaker 3:

Absolutely. I mean, as a digital nomad community. We need to put on a good front right as a community, so that these countries want us to come in right. So make sure that we're doing everything right. As far as the United States is concerned, though, they still want your money. They still want you to file, at least.

Speaker 2:

Yeah, but not going to be that easy.

Speaker 3:

No, they're definitely not letting anybody off that easy, so you have a filing requirement. The one thing that we have at our disposal, though, is something called the foreign earned income explosion. So the foreign income explosion can be qualified for two ways. One way is called the bona fide residence test. This is kind of for your nomads who find a country that they want to go live in and you know they decide you're going to do the D7 visa in Portugal, you know, or they're going to live in Thailand for a year or something like that. You know they go somewhere, they live somewhere else, they're now a resident of that country and, you know, given a certain set of facts and circumstances, they can qualify for the exclusion. It's going to be probably the minority of the people in the digital nomad community. Most of us are qualifying under what we call the physical presence test. The physical presence test states that if you spend 330 days out of a 365 day period present in a foreign country, you can exempt up to a certain amount of your income from federal income taxes. Now, I'll kind of break that down a little bit, right, so 330 days out of any 365 day period. What that means is that your exemption period does not have to be on a calendar year. It can be any 365 day period for which you were physically present in a foreign country. For 330 of those days. Okay, physically present in a foreign country means that boots on the ground. Typically, the rule of thumb is midnight to midnight, you know, 24 hours spent like on foreign soil. This can get tricky when transiting out of the? U, in and out of the US. Talk about, you know, crossing international waters, and when do you actually cross into foreign territory, right? Oh sure, yeah.

Speaker 1:

Yeah.

Speaker 3:

Kind of as a safety rule. I always just say what's the first midnight to midnight that you're in the foreign country, right, there are some restrictions that come along with that. International waters are not considered present in a foreign country. There are restricted countries that you cannot, that don't count as foreign countries. Right now it's like North Korea, Cuba, Iran the list hasn't changed too much in the past few years but typically places Americans aren't going anyways, and then obviously US territories like Puerto Rico and Guam don't really care for that. But if you can qualify under those statutes, you can exempt. For 2022. The number was 112,100. For 2023, they bumped it all the way up to 120,000. Yeah, so big jump. It moves with inflation, so it seems to be pretty big inflation these past few years. So, yeah, so I mean in 2022, you're looking at, you know your first 112 exempt from federal taxes and next year, your first 120 exempt from federal taxes, which can add up to quite a bit of tax savings when you think about it.

Speaker 2:

Yeah, that's awesome. That's so cool.

Speaker 1:

So do you have to be in one country for that period of time, or can you be jumping around?

Speaker 3:

You can absolutely be jumping around. The second part of the foreign income explosion is called the tax home test. And the tax home, you know, despite having the word home in it, it's not where you live, it's about where you perform your work. You know. So, like for people with a bona fide residence test, obviously they go, they live in, like Mexico, and you know that's where they live, they perform their work there. But as far as digital nomads, what happens is your tax home kind of moves with you, you know, as you move. So I can say you know, especially for, like, self-employed people and fully remote workers, now if you're moving, your tax home is moving with you, so you don't have to be spending all that time in one place.

Speaker 1:

Well, what kind of documentation do you have to have to prove where your tax home has been?

Speaker 3:

Yeah, and this is kind of an area where I'm going to knock on the wood. None of our clients have been requested to provide this information yet, so I'm not sure what they would look for. My gut feeling would be you know, if you were ever audited, you would need to provide things like passport stamps, airline tickets, airbnb and hotel bookings, that kind of stuff. But you are going to want to be keeping a travel schedule for your tax professional because that does need to be submitted with the form.

Speaker 2:

Okay, it's good to know cool.

Speaker 3:

Yeah, that's just on a federal level. So let's talk about the state. Another really big misconception that our clients have if you don't live in your state anymore, you don't have to pay taxes, not true? Most of the states have a rule that says you are a resident of that state until you establish residency somewhere else. Establishing residency somewhere else is not just not being present there anymore. A lot of our clients get checked up on things like their driver's license. Right, having a driver's license is considered being a privilege of being a resident of the state. Registering to vote in that state considered being a privilege of the resident of that state, right, so you are still responsible for yourself for your state taxes until you establish residency somewhere else. So what we see is a lot of digital nomads qualifying on a physical presence test, meaning that they don't really have any home. A smart move for them is to move to either a no income tax states or a State that recognizes the foreign during income exclusion, right. So there's a 12 11 states that don't have state income tax. Majority of states do have a foreign income exclusions. Notable exceptions Massachusetts, california don't have foreign during income exclusions, right. So if you're in one of these states, you can find yourself still with a, with a heavy state tax burden, you know, despite the fact that you never spent any time in that state.

Speaker 2:

So we ready it.

Speaker 3:

I know it really is. It really is. But states are really aggressive. They get the majority of their revenue from income tax and therefore they're really aggressive about chasing after their residents. I mean, we saw a huge uptick in State of New York chasing after their residents when the pandemic happened. Right, because there was a mass exit is from New York City. Yeah, so you can mitigate this, like I said, by changing your residency to a Knowing contact state. There are several states that make this incredibly easy. South Dakota is one of them. They set up their residency program to be from the really good for the RV community, favorable for the RV community, so it works really well for digital nomads as well. Right, it's basically kind of like a one-day process and you can become a South Dakota resident. They're notable states like Texas, florida, tennessee. You know, if you can get set up in those states, then you can avoid your state tax burden. If a knowing contact state isn't an option for you, you know seeing if you can set up residency in a state that has its own foreign income exclusion and then you can save yourself that state tax burden as well.

Speaker 2:

Okay, I think that's a great point that you're making, because I know a lot of people wonder, like maybe technically they're a resident of California or Washington or something, but they have an online business. They either are never in that state and they're in other states in the country, or they're never even in the country. So I know a lot of people wonder where do I register my business, where do I set it up so that I can, you know, maximize my tax benefits or have to pay the least amount of taxes? And so I think that's getting into a little bit, as you can set up a residency in different state.

Speaker 3:

Yeah, and the majority of times too. We'll talk about business structures a little bit more in depth later, but a majority of the times, what's happening? Digital nomads. They set up a things called pass through entities, which means that the income passes through to you and is taxed at your level. So it really doesn't matter where your business is set up at betters, where you are set up. But we'll definitely talk a lot more about business structures later.

Speaker 1:

Interesting.

Speaker 3:

Okay, I'm excited for that, cool. So the one tax yeah, the one tax that you can't avoid Unless there is there is a point that we get we'll talk about a little bit later with business structures is the self-employment taxes. So self-employment taxes are basically the self-employed version of what employees are Are deemed fika taxes. It's social security and Medicare, right? So it's 15.3% for those of us who are self-employed. Also that for those of us who are employed, however, your employer picks up half. So you get a little bit of tax savings there. But as a US citizen, you are responsible for social security and Medicare, no matter what. There are no tax provisions that get you out of that, except if you are paying social welfare taxes to another country, right? So if you're paying into Japan social welfare systems, if you're living in Germany and paying into their social health care systems and the US has a treaty with the country that you're paying into, then you can be exempt from paying your social security and Medicare in the United States. Mm-hmm, but you know, unless you know, when we get into later, when we're talking about you know more in depth, like foreign business structures and stuff like that You're still gonna be responsible for that 15.3%. That encompasses social security and Medicare.

Speaker 2:

Okay, awesome, I did not know that. I I feel like this would be a good time, while we're kind of bouncing around this topic it why don't we jump into the differences between, like, being a sole proprietor versus starting an LLC, and how to go about doing that?

Speaker 3:

Yeah, so I mean, our clients range across. You know the spectrum as far as employment option goes. You know, one one question that we often get you know before we type into the self-employment structures is do I so qualify as a W2 employee? Right, and the answer is yes, you know, you can still qualify for the foreign and income exclusion even if you're a W2 employee, because, as we said earlier, it's about where you perform the work, not where your employer is or where your clients are. Okay, so if you're, if you're fortunate enough to have, you know, remote job offers that are offering W2 employment, I always say that that's kind of it's the best setup for you. Right, employment offers you first of all we talked about. They pick up half the path for the self-employment taxes. You also have access to benefits that way. So, like 401k a company runs 401k Health insurance, you know that kind of stuff. So if you have the option, you know, for a W2, fully remote W2 position, that's really an incredible position to be in, you know. So I think that that's kind of optimal if you're assessing kind of options around that For those of us who don't have that W2 option, you know, either we work for a company who can't get themselves comfortable with us working from other countries, you know, or we're entrepreneurial minded and we're kind of want to work ourselves and run our own businesses. You know, we go the self-employment route and there are several structures to do that, the easiest being Soul proprietorship. So soul proprietorship is basically just saying, hey, I want to run my own business. Right, you don't need to, you don't need to have any formal structure around it, you just need to be kind of reporting your income and expenses. So proprietors also, it's Taxes, a pass through which I mentioned earlier, which means it's income less expenses. That amount passes to you and it's taxed on your personal level. So that's just kind of the easiest out of the box, right out of the gate.

Speaker 2:

A lot of times, I know, sorry, quick question with that. I know a lot of people have asked this before, like what I need to do to get set up, to start to become a soul proprietor? But literally you don't do anything right, you just. You just are a soul proprietor just by starting a business automatically.

Speaker 3:

Yeah, by being a soul-employed, you are a soul proprietor. A lot of times I recommend this structure for my clients, who you know they were. They were working for a company and the company says we're not comfortable paying you as an employee in these countries because we don't know Our tax liability, but we want to keep you on, so we're gonna keep you on as a contractor instead, right, okay, yeah, so now, like you're only working with one company, right, there's not a lot of risk level, there's not a lot of complexity to it, right? You're probably running a very lean operation, right? So there's no need to, you know, go out and spend, you know, a few hundred dollars setting up a structure that you don't need right, okay, that makes sense. Yeah, but when you get into an area where you possibly do need a structure, what kind of structure do you need? The first structure that we talk about is the LLC structure. So an LLC honestly doesn't change anything for you tax-wise. An LLC is basically a sole proprietorship that has liability protection. It's a state level business designation that just basically builds a wall in between you and your business so that if anything happens in your business Clients, lawyers, insurance agents they can't come after your personal asset. Also, if anything happens in your personal life, they can't come after you, they can't come after your business assets. So when you start working with like the general public, you know are more than one companies or you're in an area where some risk is Involved, the LLC structures are great. They're relatively inexpensive to set up and maintain. There's not really much to learn, you know, from a tax perspective, because it's still simply taxes. A pass through First, local fire leadership, okay, cool, yeah. So then we have our clients who say, okay, well, now I own my own business. How can I mitigate taxes? And there are a couple of ways to mitigate taxes through through business structures. We'll talk about them. There's the S corporation, the C corporation and the foreign corporation. So the S corporation is this great structure that came out a while back. Where it what it does is? It allows you as a, as a business owner, to split your income between salary and profit, the benefit being that only salary is subject to the Social Security and Medicare taxes that we talked about before, and your profit passes through to you and is only subject to income taxes. So that's where the tax mitigation comes from. Is used to be an incredible structure, right, and so there are a plethora of accountants and articles on the internet and blogs and people who will tell you that the Ascorp is the end, all be all. I am not one of those. I see there's a lot of flaws in the S corporation, especially when it comes to digital nomads and the types of businesses that digital Nomads are done. So there's a couple of reasons for that. So I talked about how you split it into salary and profit. So the salary portion is, as a greater than 2% shareholder of an S corporation. Most reclines are you need to pay yourself something called reasonable compensation. A reasonable compensation is this incredibly vaguely defined term by the IRS, right, of course, that basically, you need to pay yourself what you could reasonably expect to make. Were you doing what you were doing for a company that you didn't know? Oh gosh. So you can see how this is kind of a broad interpretation. So what we've done is we'd, you know, we analyze tax court cases and see how this stuff kind of shakes out. What we get into with digital nomads is a couple of issues. First of all, a lot of our digital nomads they're single-member business, right, so it's, you know this person and they're a software developer and they're doing all the software development for their company. So the problem is is that the majority of the income Generated by the company comes from that one business owner. Right, and that business owner were to God forbid go out and get hit by a bus, the business would no longer generate income.

Speaker 2:

Mm-hmm.

Speaker 3:

So the IRS likes to argue is that, effectively, all of the income made by the business should be compensation? Right, because it's generated by the single member owner? You know what we come into with this is like okay, well, we can argue that we want to leave some money in the business for cash flow purposes right, you know, but you're still coming up with a lot higher percentage that you need to be paying yourself. I recommend it's probably no less than 60%, right? You know, 60% of your revenue needs to be reasonable compensation. This is this is the first issue that we're running into. So the second issue that we run into is that there's something called the qualified business income deduction that allows for and this came in with the tax cuts and jobs out to 2017. So, 2017 sounds like a really long time ago, but as far as tax court law is concerned, that's pretty recent. And the QBI allows for a 20% deduction for small businesses. What we saw happened with the QBI was that when you have these, we call them highly compensated employees, right? So, single member escort owners who are generating all of the money for their business highly compensated employees. We saw that there was this shift where it was actually more beneficial to not be an S corporation, not pay yourself that high compensation, because then you get a higher QBI, right? So we saw things kind of like flip, where we're like, okay, well, actually doesn't save you enough money anymore being an S corporation because you get a better deduction with the QBI. We bring a digital nomad piece into it. It's a complicated just a little bit further, of course, and QBI doesn't come into play anymore because QBI is on domestically earned income. So if we're calling this foreign earned income, but now we're looking at the foreign earned income exclusion, right. So now with the foreign earned income exclusion, salary counts for the FEE profit, does not, right? So if you want to take advantage of FEE benefits, you have to pay yourself a higher salary, generally somewhere around the post to the FEE max as you get right.

Speaker 1:

Well, now are you?

Speaker 3:

are you still capitalizing on that arbitrage of you know, paying yourself less? You're really not right. Right, I'm not saying that the escort isn't still a great structure. I'm not saying it's not the right structure for you. I'm saying it warrants a longer conversation, you know, to take into consideration the factors that you have. The last piece on this, too, is that last year in October, the IRS announced that they would be scrutinizing this area a lot more heavily. The issue of escort owner compensation, you know so that's something that I like to make my clients and, you know, your customer base will aware about as well is that you know that compensation of escort employees is something the IRS is going to be looking at. Yeah thanks yeah.

Speaker 2:

I like to wear that.

Speaker 3:

Yeah, a lot of complexities that come in with the escort operation. It definitely warrants a conversation if you're thinking about going that way, okay, yeah, I love that.

Speaker 1:

I love that refreshing take on it because, like you said, I feel like the end all be all in the business where everyone's like, oh, you need to become an escort.

Speaker 2:

No, a lot of people are shooting for that.

Speaker 3:

Yeah, that's super. I get so many calls and clients. They're like I want to be an escort and I'm like let's have a conversation 30 minutes later. They're like, wow, that's my great idea for me. Yeah, I'm happy about that. You know, just because recently I have one of my clients dealing with us. Escorts can't have foreign owners, so if you're ever like looking to partner with somebody that you meet while traveling abroad, the escort structure is definitely not going to be a good idea.

Speaker 2:

Okay, so tell us about the other ones you were talking about, because you mentioned two others that sound like they might be better options for the insurance.

Speaker 3:

Yeah, there's the C-scorp structure. The C-scorp structure is probably the highest domestic structure that is available out there to you. It works a lot like the escorporation. The escorporation is a hybrid of a sole proprietorship and a C-corporation, so you still have the reasonable compensation that comes into that. Corporations have what they call double taxation, because you are paid later in dividends, so you have to pay tax on the profit and then you also have to pay tax on the dividends later. But it doesn't mean that it doesn't have its place. A lot of times the C-scorp structure is really good. If you are building a product that you're looking to sell, you know that, be that a digital product or a physical product. If you're looking to bring on investors angel investors or any type of investors the C-scorp structure is really favorable for that. Or if you're looking for an American structure where it allows foreign ownership, the C-scorp structure is kind of bad. It's the most rigorous. It does require things like annual meetings and it's got a pretty intense tax return and that kind of stuff that goes along with it. But for those specific use cases I find it really helpful. The C-scorp taxation needs to be like 39%, so everybody shied away from it for a long time, but more recently it's been cut down to 20%. So it has its place and it can provide some tax sheltering as well. But as far as if you're a full-time digital nomad and you're an entrepreneur and you're running a business and it starts to be incredibly successful and you're not living in the United States, you don't foresee living in the United States. Maybe you see up some clients in the US, but you're not really US centric. A really great option that has gotten immensely popular, especially over the past year, is the offshore structure. So the offshore structure, also known as the CFC structure, also known as the IBC structure yeah, controlled foreign corporations, international business corporations, so it's kind of the same thing all kind of wrapped into one. The basic idea around these is absolute tax mitigation. They are a bit more expensive to set up You're looking at probably $3,000 to $10,000 depending on where you set up but the structure allows for the bypass of the self-employment tax entirely, which is what digital nomads are trying to get around. Right, we've already bypassed our income taxes with the FBI. We went to a no-income tax state, so we don't have state taxes anymore. How do we get rid of this self-employment tax? So we have this offshore structure. That helps with that. The basic gist of the offshore structure is you can have a US entity or not. So you either have a US-facing LLC. If you need a US-facing LLC for anything, having an EIN an employer identification number really helps with US bank accounts. If you have US clients, they like working with US businesses. So you can have this US-facing entity or not. But if you have it, it's a pass-through entity. So either the money passes through the US entity or just bypasses a US company at all and goes to a foreign company. The money made by the foreign company is not taxable in the US and you are paid a salary from that foreign company. And salaries from foreign companies are also not subject to self-employment tax. That's interesting, mm-hmm. So typically the structure of this looks like you have a US facing LLC that all of your money gets paid to. The US LLC is a past your entity. It passes through the foreign corporation. You pay yourself a salary from the foreign corporation, usually somewhere out where around the FBIE limit. Right, you accept your federal income taxes from foreigner. With a foreign earning come exclusion, you exempt yourself employment taxes because you're being paid by a foreign corporation and we've found a way to mitigate yours assuming we found a way to mitigate your state taxes by now right, so now we're eliminating the majority of your tax burden in the United States. We set up to our complex, so there's there's a point when it becomes worth it, right. So I mean, if you start making more than the foreign earning come exclusion max, you know, and we start to look at you like, okay, well, it's definitely worth investing in you know this more complex structure we look to set up in a place that has favorable taxation laws so you're not subject to taxation in that place. I mean, I set up somewhere that has a taxation basis and that says if you're not a resident and you're not living here and you're not working here, you don't know taxes, right. And now you don't know taxes there, you don't know taxes in the US. It's a really nice structure Control, foreign corporations are subject to something called guilty taxes, global and tangible low tax income. This was kind of set up for the apples and the gobbles of the world, right, that we're moving, like their big business, offshore. But it's kind of a tax. It's based on assets of a foreign corporation. So if you get to a point where your assets are in Excessive about a hundred and fifty thousand dollars you could come across this tax. It's usually between ten and fifteen percent, so still a good bit of savings over what you would really be paying terrible, for sure.

Speaker 1:

Interesting, okay. So where would you recommend like, especially just starting out? I imagine most of people watching this are gonna be looking at the LLC or a sole proprietorship, so where would you recommend setting Setting that up? Would you recommend in your state of residence? Would you recommend somewhere else?

Speaker 3:

Definitely depends. You know you can set up your your so a sole proprietorship. There's no set up right, so I have to worry about that. If you're looking to set up an LLC structure. You can set up an LLC anywhere you want. It doesn't have to be in your resident state. So I definitely, you know, with our clients, we definitely want to look at those options. Your resident states Provides the benefit of you not having to have a registered agent. So a registered agent is somebody who is qualified to receive legal mailings on your behalf, right? If you set up in an in a state where you're not a resident, you need a registered agent, right? Somebody who can, you know, receive mailings from state on your behalf. So setting up in your home state negates that. Not really a reason to to do that because your registered agents there are dime a dozen. They'll us $100 a year. It's usually not a hindrance, you know, to set up somewhere else. So the next thing you want to look at is kind of like, what are the goals of your business and what is your state look like? There's about four or five states out there that have. You know it's. It's less than a hundred dollars to set up. There's no annual report due and there's no annual fees on the LLC and that's super favorable, right, because it's forget it. And then you know. And then you want to look at the high end of things. You want to make sure that you're not setting up in in a state that's not going to be favorable for your goals later. California has one of the highest costing LLCs in the union. Obviously it's a hundred eight hundred and fifty dollars a year minimum To be an LLC in California. So I don't ever recommend being an LLC in California unless you're living in California, your business is in California and you're doing work in California right, they're gonna get you for that tax anyway. It's if you want to be an S corporation. There are several states that don't recognize the S corporation status. No tax, you know, tax you as a corporation. They have subject you'll be subject to franchise taxes. So, like Texas doesn't recognize S corporation status, you'd be subject to a franchise tax. New Hampshire is really not favorable for an S corp structure just because of their, the way their tax law works. They don't have income tax but they tax interest in dividends right, and the money that comes from an S corporation through profit is considered dividends, right. So there's just a couple of things to that need to be considered there. But generally, you know, looking somewhere that's easy to set up, easy to maintain, as usually the easiest option, you know, when you're just starting out and you're just like, oh, this is kind of the first thing I did, you know the first question you ask yourself is do I need liability protection? Okay, yes, and let's start looking at options for LLCs.

Speaker 2:

Yes, I think it's a good, it's good to have you know those benchmarks of thinking. Do I even need to worry about setting up a business? Because I would imagine there's a lot of people who maybe are worrying about that and maybe don't need to. Maybe they're totally okay with just a sole proprietorship.

Speaker 3:

Yeah, and I mean I have clients too. So typically we'll look at. We'll look at a couple factors. You know it's like do you have that liability? Do we need an LLC? What is your income level? Do we need to start thinking about mitigating taxes, you know. And also like, what is your comfort level with the amount of work that has to go into these structures? Because obviously the higher you get In complexity, the more quarterly filings that you have to do or annual filings or some stuff like that. And I mean I have clients who make over two hundred thousand dollars a year who are happy still being sole proprietors, just because they don't want to have to deal with quarterly and annual payroll filings that go along with the S corporation, the man's corporation tax return and and all of the burden on that you know.

Speaker 2:

So these are good things to consider and I'm glad you mentioned that there's places you can set up an LLC without annual filings. Ours is actually coming up here pretty soon.

Speaker 1:

So yeah, I'm like wait what.

Speaker 3:

And making a note too. I mean LLC filings are generally not something that's included in a tax return. Sometimes they can be. There's some states that allow for filing of the annual report with the tax return. I know that Alabama is one of them. Has the same due date, but a lot of times it's on the anniversary of the company, so it's not something that's included with a typical tax return. So it's a burden that might fall on you unless you hire a service to help you with it, right?

Speaker 1:

Yeah, definitely.

Speaker 3:

Okay.

Speaker 1:

Good, we definitely have some more research to do. It sounds like Only we had known you a couple years ago.

Speaker 2:

We're trying to figure out.

Speaker 1:

Yeah, I really like the idea, though, that there is no blanket solution for the structure of your business.

Speaker 2:

Yeah, it's all very individual and based on you know your circumstances, which for me and hopefully for others, it's comforting because it's it's not gonna be like there's not one question for everyone or one answer for everyone, like it's dependent in it. It's kind of fun to figure out, I think that's one of my favorite tax answers, which is?

Speaker 3:

it depends, yeah.

Speaker 1:

Yeah, I also just love the fact that you can make it what you want it right.

Speaker 3:

There are options. Don't listen to the blog that tells you you have to be an escort.

Speaker 1:

Yeah.

Speaker 2:

So another question that we've gotten a lot of, and that we had ourselves when we were starting, revolves around quarterly taxes. This is something new. If you are, you know, starting your entrepreneurial journey, you don't normally pay quarterly taxes, and so you're not used to it. What are they? How do you pay them? What do you need to file them? How do you figure out how much you need to pay?

Speaker 3:

So, first year, self-employed people, entrepreneurs, solopreneurs, all of that they get what I like to call the self-employment tax sticker shock. You know it's their first year running a business. They're like so excited and they get their taxes earned back and oh, a ton of money. And they're like, oh my god, why do I owe so much money? First of all, you know, when you're employed, your employer withholds taxes for your checks. They remit them. You never have to worry about it, right? You never even see it. When you're self-employed, you're responsible for doing that yourself. And you're also responsible for 15.3% and self-employment taxes, you know which, which previously you kind of hadn't considered because it was just Fricke taxes and your employer picked up half the bill. So you get this massive bill and you're like, oh my god. And I ask a question. I said we'll have you in paying quarterly estimated tax payments and I get the same answer Well, no, I didn't know that I was supposed to. So if you are self-employed, you are a sole proprietor, if you are making money and nobody is withholding and remitting taxes for you, it is up to you to remit your own taxes quarterly. I use the word quarterly very loosely because it's actually not quarterly. The dates are April 15, june 15, september 15th and January 15th, so not exactly on a quarterly schedule. Thanks for making that easy for us, the IRS. There is talk of moving it to a true quarterly schedule and that would just make my brain not explode as much and I would love that. But the things that I get excited about, but the quarterly estimated tax payments, basically they cover the period before that, right. So April 15 covers January, february, march, june 15 Is April and May, september 15th, june, july, august, and then January 15th, the September, october, november and December. So if you just think of, like, whatever date, the payment on it covers the months before that that you haven't already paid on but you're responsible for for remitting your income taxes and your self-employment taxes, you know. So for digital nomads who are qualified for foreign learning come exclusion. This can be a relatively simple calculation 15%, you know, pay 15% for your self-employment taxes on those dates of your income, less expenses for the previous periods. There's a couple schools of thought on this right. So quarterly estimated tax payments are required by the IRS to be paid, and by required I mean if you don't do it you will be subject to interest in penalties. I have clients who hate paying their quarterly estimated taxes and they think that the interest in penalties is worth it to hold on to their Money. So the government doesn't have their money, you know. So they they can make more money off their money. So they don't pay in as much in quarterly estimated taxes, if they pay in at all. And the key takeaway here is that the government does not trust that you will pay your taxes on April 15th. They want you to pay that money beforehand. If you don't, you will be subject to interesting penalties.

Speaker 2:

Hmm, you subject to those penalties if you don't pay every quarter, if you don't pay by the end of the year and paying quarterly. It's just a way to help make sure you do that if you don't pay every quarter, they will assess.

Speaker 3:

In fact we got a letter from one of our one of our clients. Then it's a letter to got the other day that he's getting penalized for not paying evenly. You know, throughout the quarters. So they do want them on that quarterly schedule.

Speaker 2:

Okay, so let's say you figure out how much you need to pay. You marked any account or the tax days so you know when to hop on and you know when to pay it how. How do you go about paying that? Do you have to go through a tax accountant to do that? Can you do it yourself through the IRS?

Speaker 3:

No, you can do it yourself. I mean, most tax services will offer, like our, our company offers quarterly estimated tax payments. You know, $250 per quarter will calculate it for you, you know. But if you just kind of have this simple you know simple setup and you think you can calculate them on your own, more than welcome to, and then just go to irsgov backslash payments and there's an option in there where you can remit a payment via the irs website. I recommend doing this just because it's directly with the irs. There's a couple of drop-down options. You know which tax year are you applying it to? Obviously the current tax year that you're in, and then it asks what the payment is for. There's an estimated tax payment option and then I think that it asks for which quarter they should you should apply it to. You should always save your confirmation and always denote the amount that you're paying and always remit that amount to your tax accountant so that we have it.

Speaker 2:

Otherwise For doing that. Can you tell us about the EFT PS?

Speaker 3:

I mean I can.

Speaker 2:

When we were trying to figure out how to pay quarterly taxes, we came across that as how to pay. We've ended up going back to the irs payment like directly on the irs website, just like you were saying. If there's other people who have come across the electronic federal tax payment system, I'm sure they would appreciate knowing do you pay there? Do you pay directly to the irs?

Speaker 3:

Yeah, so the EFT PS system is? It's set up mainly for payroll tax payments. You can't make any tax payment through it. But I think you probably you guys probably figured out it's not an easy system.

Speaker 2:

No.

Speaker 3:

It's a pin that gets mailed to you. Um, you know who's stealing mail anymore. If you don't get that pain, you can't access the system. So EFT PS is. If you have a company where you have to withhold and remit payroll payments, you're going to find yourself dealing with EFT PS. And instead of dealing with EFT PS, I tell people to deal with a payroll system. Instead, let them handle it for you. But if you don't have the need for withholding and remitting payroll taxes, then I would. Or corporate tax payments Also. Corporate tax payments can't be made via the irs system. Then, yeah, don't use EFT PS, just the straight irsgov backslash payments. I mean, the irs has really stepped up their site in the past few years. You know they even have the same call down, idme. You know where you can log in. The irs now offers you your own portal, right? So if you can set up access to this, you can log into your own portal and you can. You have full visibility of your taxes, ways to pay and stuff like that. So Even I avoid using the EFT PS.

Speaker 2:

Yeah, I would. I would, if you can, at all costs. Yeah.

Speaker 1:

All right, is there any like final piece of advice you'd want to give our audience as far as like setting up your Corporation, your business, or filing taxes or anything like that?

Speaker 2:

or maybe any myths about taxes you want to bust.

Speaker 3:

One of the things that I definitely like to cover you know, especially if you're talking to to business owners is what tax deductions are available to you. Right, Especially digital notepads. Right, because they all want to know what they can deduct for travel. Right every digital nomad wants to deduct all they have. Expenses and business deductions are great, right, because they lower your tax burden and you want to make sure you're maximizing your business deductions without being unreasonable. Yeah, so when it comes to running your own business and tax deductions that come in with that, you are allowed to take expenses that are ordinary in your course of business, necessary in your course of business and are not considered personal expenses. So ordinary, necessary in your course of business. Digital nomads, something that's ordinary, necessary for all of us would be, like your laptop, a co-working space, you know, depending on software subscriptions, you know this kind of stuff like this stuff is ordinary, it's necessary at the cross the board. When it comes to travel, there are a couple caveats to be considered. So the IRS statute, the way the IRS statute is written for travel expenses, it says that you can deduct ordinary and necessary travel expenses for when you travel away from your tax home For overnight or longer. So now, if you remember from our earlier conversation when we were talking about qualifying for the foreign learning come exclusion, in order to qualify for the FEIE, your tax home has to do what move with you.

Speaker 1:

Yeah right.

Speaker 3:

So now, all of a sudden, you're not traveling away from your tax home anymore, right? So this is a big qualifier when it comes to travel expenses. It's like you're no longer traveling away from your tax home. So, if work doesn't qualify as travel expenses, another caveat that comes in here is we say that it cannot be considered a personal expense, right, if travel is your life and a portion of your travel is personal, right? I mean, this is your life, you know. So our, our company, tends to lean a bit more conservative on what you can and cannot deduct for travel expenses, just because it's also it's a very highly scrutinized area. You know, the most highly scrutinized business expenses are meals, the home office deduction and travel, right, and these are the three things that all digital nomads want to deduct as well. Not saying that, yeah, I'm not saying that none of it is deductible, but I am saying it does take an extra thought and an extra consideration. You know, before you just went, you know, through all your travel expenses on there, kind of treat examples that I like to use. You know, a couple of years ago I was living in Mexico City, right, and I was presenting at a conference in cancun. I don't really like cancun that much. I flew there, I went to the conference, I spoke and then I flew back to Mexico City. Right, mexico City was my tax home. All of my travel. You know, I only went to cancun for this business conference. All of my travel, everything 100% deductible, right, that's, that's a true business expense. You know, in a couple of weeks I'm speaking at a conference in Cape Town. I'll be flying from Mexico City to Cape Town presenting at this conference. But also, you don't fly to Africa for a week, right? So I'm gonna be spending three months there because Africa is one of my favorite places in the world. This is an instance where I have to consider that there is a personal portion to my travel, right? So, while I could say that, absolutely, my flight there, maybe there and maybe even back, are deductible right, because I would have to fly there either way for the conference. What portion of my lodging is considered a business expense? Well, obviously the portion for the conference, but not the whole three months, right, you know, yeah, so this is, this is, yeah, this is an instance where, like, it's a portion, right, and then, like this summer, you know, I'm living in Mexico, I decided to fly to Croatia, you know, to sail around the islands and Hang out with some friends, and while I'm there, I meet somebody and they become a client, right, and I'm like, oh cool, business expense, no, like I went to Croatia for personal reasons and, yes, you know, maybe maybe I dropped into a co-working and I gave a talk on taxes, or maybe, you know, I picked up a client or two while I was there, but the main purpose of the trip was personal, so that's not a business expense at all right.

Speaker 2:

Yeah, that makes a lot of sense and I think that's really helpful to help separate things out between what am I doing for personal reasons, what am I doing for business reasons. I would imagine it would help immensely we're going to be talking about this later but to to separate your personal business expenses, especially if you have a business account Separate from your personal account, and so when you make a transaction you can tell yourself okay, this is for my business, this is coming out of my business bank account, and then it makes it a lot easier, I would imagine, to separate, for tax deduction purposes, what money spent is for business and can be deducted and what's not.

Speaker 3:

I highly recommend you know, if you're starting a business, have some way of delineating your business expenses from your personal expenses. It makes your life a lot easier, oh yeah, yeah another big one that we get with visual nomads is the home office deduction, right, okay, am I already at home? Every where's from home, they want to deduct a portion of their Airbnb because they work from it. Oh, this is an area of contention for me, you know. I wholeheartedly hope that they're going to be changing they wording around the home office deduction soon with the rise of remote work. But I just think that the tax law hasn't caught up to the times in this yet, because currently the way that the home office deduction is written is that in order to be deductible for tax purposes, you have to have an area of your home that is used exclusively for business and no other purpose, which means if you are working from your kitchen table at your Airbnb, if you're working from bed, if you're working from your couch, if you're working from the balcony, like I am, that's not considered home office as part of the IRS is concerned. And, honestly, in the statue hotel rooms you know vacation homes Airbnb isn't specifically stated in there because it was written before Airbnb was a thing, but they're exclusively I mean they're, they're absolutely like, excluded by word in the statue, right? So you're working from your hotel room doesn't count as home office.

Speaker 2:

Okay yeah.

Speaker 3:

So I mean, if this is kind of your setup, you know where you're working, you know from a kitchen table in your Airbnb. I'm sorry, but the IRS does not consider that a home office deduction. A portion of your Airbnb is not deductible for tax purposes as far as they're concerned, if you rent an Airbnb. Some people will have rented this Airbnb specifically because it has great Wi-Fi. Sorry, still not deductible for tax purposes. I rented this Airbnb because it has a second bedroom with an office in it and nobody else lives with me and I just work from that room. Great, that's a home office.

Speaker 2:

Okay okay. And in that, in that case, it's the same. As far as you calculate the percentage of space, you know that the office takes up compared to your whole Accommodation, right, okay, yes.

Speaker 3:

Yeah, so there's two methods. There's the actual expenses method and the simplified method. The simplified method is $5 per square foot and the actual expenses method is where you take you know what is the total square footage of the space, what is the square footage of the office, and then you apply that to all the expenses off the board, across the board. Now, as a digital nomad, if you are ever audited and you have to prove About this home office you know this Airbnb that you rented in Thailand three years ago.

Speaker 2:

Are you?

Speaker 3:

gonna do that. Yeah, I recommend taking pictures and having any, any evidence that you can you know as to the size of square footage, that kind of stuff. Because what's gonna happen is an IRS auditor might look at that and say, well, I'm definitely not gonna fly to Thailand and see if that's exclusive office space, so we're just gonna disallow it. Yeah, yeah, typically any time that you're taking attack a business deduction, I tell my clients would you be comfortable sitting in front of an IRS auditor and defending it as a business expense? And if so, do it. I mean, I check my clients a lot of times. You know, I had one client who came to me with an expense the other day and she's like I would absolutely feel comfortable defending this and I was like you would absolutely lose.

Speaker 2:

But I appreciate the Rule of thumb to gauge things by. So this has been incredibly valuable. We really appreciate your expertise and your insights on everything, and I know there's people sitting there listening to all this, also very grateful for all the information that they've gotten, but also very overwhelmed, knowing that everything is individualized and it all depends and Feeling like there's so much to do revolving the taxes. So if somebody wanted, they wanted to work with you to do their taxes for them, what type of services do you and your company specifically offer that you could help them with?

Speaker 3:

Yeah, absolutely. I do this all the time. I throw a bunch of information at people right and they're like, oh my goodness, yes, but no mad task can help you with any and all of the options above that we have discussed on this call. So we offer to first, we offer consulting services. Their consulting is a $250 an hour. You can put that in 30 or 60 minutes box. You get that time with me, you can ask your questions, run through all of that and then we also have a full range of tax and accounting services. So we have everything from our bookkeeping packages, which is a full suite of services that will handle, you know, all of the needs of your business, from end to end, you know. And then all the card services around my tax preparation. We've been, you know. We do tax preparations for individuals, w2's, social writers, llc's, you know, all the way up to the, to the foreign structures. We handle all of that tax preparation as well. So if you're interested in our services or you just kind of want to hear more or learn more you know about anything that we've talked on on this call. Please don't hesitate to reach out. Our website is nomad taxio and you can email us at info at nomad taxio and our amazing admin team will get you where you need to go and set up what you need awesome.

Speaker 2:

That sounds so good. That's gonna be such a big burden lifted for so many people.

Speaker 1:

Yeah, I just want to speak to anyone watching this right now who is feeling overwhelmed Definitely, definitely, definitely reach out to Crystal and her team. They're super helpful, they're super responsive and also there's no need to take on this extra worry on yourself. If it's super overwhelming to you, you should definitely look into a professional who is super good at this kind of stuff, so that it doesn't have to be that burden on you anymore. So what is the best place for people to find you and follow your journey? And, obviously, your website? Is there any other place that people could connect with you? Yeah, I mean we, so no man's house has an Instagram.

Speaker 3:

I will be honest, we're not great at social media. You can reach us out. We have Facebook, instagram, linkedin, we've got all of that. You can reach out through there. What it is as prompt responses if you use the website, you know it definitely feels great. You know it definitely feels great and I mean you can follow along, you know, with my personal journey as a digital nomad. I mean my Instagram is P nomadic, so P I, n, o, m, a, d I, c, p nomadic. And yeah, I mean, if there's just anything, anything that you need, you know we're definitely happy to happy to help, however we can.

Speaker 1:

Awesome. Thank you so much.

Speaker 2:

Yeah, thank you. This has been awesome. We appreciate it.

Speaker 3:

No problem, thanks for having me.

Speaker 2:

Thanks so much for joining us here on the profitable nomad couple podcast. We appreciate you listening to us today.

Speaker 1:

If you enjoyed this episode, share it on Instagram and be sure to tag us. At Austin and Monica, together, we can inspire others to embrace a location independent lifestyle.

Speaker 2:

And while you're there, we'd love to connect with you, so make sure you follow us for more tips and inspiration on living your dream location independent lifestyle until next week.

Speaker 1:

Remember that you have the power to shape your own path. So stay curious, stay adventures and stay connected.

Taxes for Digital Nomads
Tax Considerations for Digital Nomads
Tax Optimization Using C-Corp and Offshore Structures
Setting Up LLC and Understanding Taxes
Tax Deductions for Digital Nomads
Embracing a Location Independent Lifestyle