Digital Nomad Accounting and Tax Tips

Moving to a new country? Planning on embracing the digital nomad lifestyle?

Awesome! But it’s not all sunshine and sunny beaches. The biggest challenge to overcome for all digital nomads isn’t adjusting to foreign culture, language or cuisine. It’s adjusting to foreign financial matters! In this article, we’re going to learn some tips on making that financial transition easier for digital nomads.

Digital nomad tax residency

Tax residency is a concept that exists across most (if not all) tax-paying jurisdictions. Note that tax residency is different from having a residency visa in a country. Tax residency is usually determined by the number of days that you have spent in your new country. Let’s look at an example:

Taane is from Aotearoa New Zealand (NZ), but he has recently moved to Malaysia to work on his travel blog. In Malaysia, an individual is considered a tax resident if they have been in the country for 182 days or more during a calendar year. Taane has been in Malaysia for two months — close to 63 days. Therefore, he is not a Malaysian tax resident. However, this also means that he’s still a tax resident in NZ, the country he last spent more than 183 days in a 12-month period.

Working out your tax residency is important as it affects the tax that you pay in your host country and your home country. In Taane’s case, as a Malaysian non-tax resident, he only needs to pay income tax on income earned in Malaysia. However, as an NZ tax resident, he has to declare his overseas income in the NZ inland revenue and pay taxes on it. This tax residency situation can change as he spends more time in Malaysia, thus becoming a Malaysian tax resident and an NZ non-tax resident — which will also change how he pays taxes.

Before you move to any country for work purposes, it is very important that you find out:

1. How tax residency works in your destination country
2. How your tax residency is affected in your home country by living in a different country

Double taxation agreements for digital nomad tax

Another bit of tax to wrap your head around is double taxation agreements. Double taxation agreements are memorandums of understanding between the tax authorities of different countries/jurisdictions. Basically, they exist so that individuals paying taxes in different jurisdictions don’t end up getting taxed twice on the same amount. Let’s head back to Taane’s example:

Taane earned some income in Malaysia teaching English as a contract worker for a local college. As a Malaysian non-tax resident, he needs to declare this income to the Malaysian Inland Revenue Board of Malaysia (IRBM) and pay taxes to the Malaysian tax authorities. As an NZ tax resident, he still has to declare this income to the NZ Inland Revenue Department (IRD). Fortunately, there is a double taxation agreement between Aotearoa NZ and Malaysia, which means that Taane can claim the taxes he paid in Malaysia on his Malaysian income as tax credits when he declares his Malaysian income to NZ IRD.

Confusing? Here’s how it works with numbers:

Tax by the numbers

Taane makes MYR 10,000 teaching English in Malaysia for two months. He pays taxes of MYR 3,000 on this amount to the Malaysian IRBM. He then converts the MYR 10,000 to NZD using the NZ IRD’s foreign tax schedule to declare it to the NZ IRD. MYR 10,000 converts to roughly NZD 3,500. On this amount of NZD 3,500, he’ll have to pay NZ income tax of NZD 350. He can claim the tax credits of MYR 3,000 (which converts to roughly NZD 1,000) against his NZ income tax to pay. This means that he can claim a tax refund from the NZ IRD of NZD 750.

In summary (figures in NZD):

Note that this situation applies only when a double taxation agreement exists between your host and home country. If no such agreement exists, you may find yourself in a position where you have to pay tax twice! Be sure to do your research on double taxation agreements before you pick your digital nomad destination.

Accounting for digital nomad taxes

Learning how your tax is affected by moving overseas is important. However, it is more important to calculate your income accurately!

Accounting for digital nomads isn’t too different from accounting for non-digital nomads. The only difference is that you may have bank accounts from different countries to manage. Here are some tips for accounting whilst overseas:

Get a local bank account in your host country

If you’re planning on earning money in your host country, it is a good idea to register for a local bank account. This is especially true if you’re on a travel work permit. There are a lot of travellers to Aotearoa New Zealand who travel while working, picking fruits at orchards and doing other seasonal work. Having a local bank account makes it easier for employers to pay you.

Consider getting an accounting app like PocketSmith which allows you to connect banks from multiple different currencies. It also can display your balances in your chosen currency. This is especially great if you’re making income from different countries.

Separate your personal from your work account

Since your tax situation may be more complicated as a digital nomad, it is a good idea to keep your personal and work accounts separate. This means setting up at least three accounts while working as a digital nomad:

1. Work account: All work-related income and expenses should be paid in/out to/from this account.
2. Personal account: You can transfer money from your work account into your personal account. All personal expenses (rent, groceries, utilities, etc) should be paid from this account.
3. Tax account: To transfer money from your work account for tax savings.

Ideally you should have a set of these three accounts for each currency that you are earning in. Keeping the accounts separate makes it easier to prepare your income statement for tax purposes. Also, if you’re using PocketSmith, you can generate income statements on individual bank accounts or denote tax-deductible expenses. This makes it even easier to prepare your taxes.

Use an accounting app

I’ve probably said it a few times now — get an accounting app to help with your finances. PocketSmith is a great fit for digital nomads as it allows you to have bank accounts in multiple different currencies. If you have an accountant, the accounting app will also make it easier for them to calculate your taxes (and potentially save you some money!)

Spreadsheets are… okay… but seriously, we’re living in 2024 now. There exist a lot of better options for accounting that are superior to calculating your income and expenses on a human error-prone spreadsheet. An accounting app like PocketSmith is certainly worth the investment.

Remove tax anxiety, and enjoy yourself!

Don’t let tax anxiety get in the way of your digital nomad lifestyle. While you’re out there experiencing new cultures, foods and ways of living, you don’t want to be worrying about accounting and taxes. Make sure that you are educated on the tax residency laws and double taxation agreements before heading to your host country.

And remember the simple accounting tips in this article. They will go a long way in making your digital nomad experience a more enjoyable one!

Stay positive!

Sam is the director of SH Advisory, an online accounting firm for small businesses and startups in NZ. He is also the creator of The Comic Accountant, an internationally-read finance comic blog. With 15 years experience in accounting and finance, he loves sharing quality financial advice with small business owners everywhere. In his spare time, he likes to nerd out over the latest board game launches and great PC gaming deals online. If you need help with your small business and startup, Sam is the person you want to talk to!