For many solopreneurs, the digital nomadic lifestyle is a dream that fuels career ambitions. These independent entrepreneurs enjoy an autonomy that escapes business leaders with larger teams. This freedom allows them to make strategic decisions that other entrepreneurs can’t, like moving to a beautiful tropical island that just happens to have zero percent income tax, for example. However, before you pack your laptop and board a plane in search of warmer climates and greater savings, make sure you understand the impact of expatriate tax regulations on self-employed Americans living in. abroad.
Basics of U.S. Taxation for Overseas Solopreneurs
Through a policy called citizenship-based taxation, all Americans are required to declare and pay taxes based on their worldwide income, no matter where they live. However, since most countries have residence-based tax models, the US government has implemented several ways to avoid double taxation.
One of the most common ways to avoid being taxed twice on the same income is the Foreign Earned Income Exclusion (FEIE). This tax saving tool allows you to exclude a certain amount of income earned abroad from your U.S. taxes (up to $ 108,700 in 2021). To be eligible, you must have lived outside the United States for at least 330 days out of 365 or you will need to prove that you are a bona fide resident of a foreign country where you have lived for at least one year.
Despite these advantages, the FEIE does not help reduce self-employment taxes for solopreneurs. Americans abroad with self-employment income over $ 400 must pay 15.3% taxes for Social Security and Medicare. Fortunately, the United States has agreements with several countries to help entrepreneurs avoid paying social insurance taxes twice.
Tax havens for solopreneurs in 2021
For solopreneurs who have the freedom to do business remotely from anywhere in the world, the best-case scenario is to relocate to a country with zero income tax. This means that you can enjoy significant US tax savings through the FEIE without paying an additional income tax bill in your host country.
While several countries do not have income tax by default, some governments have introduced digital nomadic visas with tax exemptions to attract remote workers in the wake of the COVID-19 pandemic.
Bermuda: This popular vacation destination does not levy income tax by default and offers a digital nomadic visa that allows remote workers to stay for up to a year.
Croatia: A new digital nomad visa program that started in 2021 offers one year of residency in this Mediterranean gem tax-free.
Bahamas: Work remotely from any of the 16 islands through the Bahamas Extended Access Travel Stay program while paying no local income tax.
Costa Rica: A favorite among expats, the Central American country has announced plans to offer a one-year digital nomad visa that exempts holders from local income tax.
Cayman Islands: One of the most famous tax havens in the world, this tropical country enjoys a zero percent income tax rate and a Global Citizen Concierge program that caters to the wealthiest remote workers ( $ 100,000 for singles, $ 150,000 for married couples).
Antigua and Barbuda: Like many of its neighbors, this Caribbean beach destination has no income tax and offers a visa program for digital nomads.
Choosing the right location for you and your business
While taxes can be a factor when planning your overseas adventure, the location you choose will depend on a variety of reasons. Ultimately, you’ll need to consider the needs of your business and customers, as well as your personal preferences, when deciding which destination is right for you. However, with good planning, you may be able to lower your tax bill.