If you haven’t, don’t worry – it’s a fairly new concept that’s been gaining popularity in recent years. A digital nomad is someone who works remotely and is not tied down to a physical location. This means they can work from anywhere with an internet connection, whether it be a coffee shop, a co-working space, or even a beach in Maui.
The rise of the digital nomad lifestyle is largely due to advancements in technology that have made remote work more accessible than ever before, and its popularity exploded when the COVID-19 pandemic hit. With the ability to communicate and collaborate online, many jobs can now be done from anywhere in the country– and the world! As a result, more and more people are choosing to embrace this lifestyle and enjoy the freedom and flexibility that comes with it.
However, one thing that digital nomads traveling throughout the United States need to be aware of is their possible exposure to multi-state tax liability. If you’re working remotely while traveling outside of your resident state, you may be subject to taxes in each nonresident state you work from as well. The rules vary between each state taxation authority when it comes to taxing remote workers, and some may require you to pay taxes if you work in their jurisdiction for a certain amount of time, or earn more than a specific level of income while working there.
Remember that you are always taxed on your overall income in your resident state, regardless of where you earned the income. However, when you are earning income in other states, this could create a situation where you are taxed twice on the same income. Thankfully, there are tax laws in place to help with this – you can either utilize state tax credits or take advantage of reciprocal agreements between states to avoid an unfair additional tax hit.
To help clarify things, let’s take a look at an example. Let’s say you’re a digital nomad who is based in California but is currently working from New York for a few weeks. While you’re in New York, you may be subject to New York state taxes on the income you earn during that time. However, you could take a credit on your California tax return for the amount of tax paid to New York, thereby avoiding double taxation.
Some states have been known to be more challenging for digital nomads when it comes to taxes. For example, states like California, New York, and Massachusetts have strict tax laws and may require digital nomads to pay state taxes even if they are not physically present in the state for the full year. These states have what is known as a “nexus” rule, which means that if you earn income from sources within the state, you may be subject to state taxes, regardless of where you are physically located.
It’s also important to note that the tax rules affecting remote workers are constantly changing, and some states have recently passed laws specifically targeting digital nomads. For example, in 2020, the state of Hawaii passed a law requiring digital nomads to pay state taxes if they are working remotely from the state for more than 30 days in a year. Other states, such as Vermont and Oklahoma, have implemented programs to attract remote workers by offering tax incentives and exemptions.
Overall, being a digital nomad can be an incredibly rewarding and fulfilling lifestyle. However, to avoid any surprises come tax time, it’s important to do your research and stay up-to-date on the tax laws in each state you work from, so you can enjoy all the benefits of remote work while avoiding any potential tax headaches down the road. As always, if you need more guidance regarding how this applies to your specific tax situation, be sure to consult with a tax professional.