Is Your Nomadic Lifestyle Costing You More in Taxes Than You Think?

For many remote workers, life as a digital nomad offers the ultimate freedom: the chance to travel while still earning a living. But beneath the surface of this flexible lifestyle lies a complex and often-overlooked web of tax responsibilities.

Whether you’re crossing state lines or international borders, tax laws follow you, and failing to understand them can lead to unexpected costs and penalties.

Understanding Tax Obligations and Common Pitfalls for Digital Nomads

As a citizen of the United States, you must report and pay taxes on your worldwide income, whether working remotely for a U.S. company, freelancing internationally, or running your own business while on the move. Self-employed nomads are also responsible for paying self-employment tax and income tax.

Managing these obligations while traveling can be complex, and many digital nomads make mistakes along the way. Here are some of the most common tax and financial pitfalls to watch out for.

Failing to Track Time Spent in Each Location

Not logging where you live or work can create unintended tax residency in multiple states or countries.

“Digital nomads often underestimate how complex their tax situation can become when they move frequently,” says Jose A. Cruz, certified public accountant (CPA) and founder of Cruz Tax Advisory. “A major mistake is failing to track which states or countries they spend time in. This can unintentionally create tax residency in multiple jurisdictions.” 

Assuming Remote Work Eliminates State Tax Obligations

Some states may still tax you based on residency and employer location, even if you’re working remotely. They consider more than just where you physically are. Driver’s licenses, voter registration, and property can tie you to the state, triggering tax residency.

“Another common issue is assuming that if they’re working remotely, they don’t owe state taxes. States like New York and California often still tax income based on residency or the ‘convenience of the employer’ rule,” Cruz said. “Internationally, tax residency is usually based on a 183-day rule or your ‘center of vital interests.’ Even if you meet foreign residency thresholds, U.S. citizens and green card holders are still subject to U.S. taxes on their worldwide income unless they qualify for exclusions or credits.”

Incomplete Knowledge of Various Tax Liabilities and Rules

If you’re a self-employed digital nomad, a freelancer, or just a remote worker who travels internationally, it’s important to have a good grasp of what taxes you’re responsible for paying and what tax rules apply to you. These are common mistakes people make:

• Missing Quarterly Estimated Tax Payments: The option to make estimated payments on taxes is available, but it is often overlooked or missed, leading to penalties and underpayment issues, which is a 20% penalty plus interest on the underpaid amount.
• Not Accounting for Self-Employment Tax: Many digital nomads forget to budget for the additional self-employment tax, which is 15.3%, resulting in surprise bills.
• Misreporting or Misallocating Income: With income from multiple clients or companies, it’s easy to underreport or mislabel income sources.
• Overlooking International Tax Rules: Without properly claiming credits or benefits, you could face double taxation on your income.“Some nomads don’t realize they may owe taxes in both the U.S. and a foreign country if they don’t properly claim treaty benefits or use the foreign earned income exclusion or foreign tax credit,” Cruz said.
• Failing to Report Foreign Bank Accounts: U.S. citizens must disclose foreign accounts over certain thresholds via a Report of Foreign Bank and Financial Accounts (FBAR) or the Foreign Account Tax Compliance Act (FATCA), but forget or misunderstand the rules.
• Not Separating Personal and Business Expenses: Mixing finances makes deductions harder to track and increases the likelihood of errors or audit flags.

Staying Tax Compliant As a Digital Nomad

The best way to avoid tax trouble as a digital nomad is to adopt a system of diligent recordkeeping and proactive compliance. Without a fixed location, your ability to prove where you live, earn, and spend your time becomes necessary, especially if you’re audited or need to defend your residency claims.

You’ll want to track your income and travel with a daily log of your location and use spreadsheets, apps, or accounting software to record all payments. Both are key to establishing residency and staying compliant.

“Start by using apps or tools like TaxBird, QuickBooks, or utilize a customized spreadsheet to log where you are each day,” Cruz says. “This helps determine your state and foreign tax residency status. It’s also helpful to maintain a separate file with receipts, invoices, bank statements, and payment records organized by jurisdiction.”

• Separate Finances: Maintain separate bank accounts and cards for business and personal spending. As you log your income, clearly mark which expenses are business-related and keep digital or paper receipts.
• Set Aside Money for Unexpected Taxes: To avoid surprises, reserve a portion of your income for your tax payments.
• Make Quarterly Estimated Tax Payments and Adhere to Filing Requirements: Paying estimated taxes to the Internal Revenue Service (IRS) and applicable states each quarter is a smart way to avoid penalties. Depending on where you live and earn, you may also have to file partial-year or nonresident tax returns, as well as federal forms like the FBAR and Form 8938 if you hold foreign financial assets.

“Filing partial-year or nonresident returns in multiple states may be necessary, and those living abroad often need to file an FBAR (Report of Foreign Bank and Financial Accounts) and potentially Form 8938 if they hold foreign assets like foreign bank accounts,” Cruz said. “To avoid underpayment penalties, nomads should pay estimated taxes quarterly.”

Additionally, consider working with a tax professional familiar with remote work and international rules. Tax laws change often, and a qualified advisor can help you stay compliant, maximize deductions, and manage complex filings across jurisdictions.

“Set a calendar reminder to check in quarterly with your CPA to evaluate your estimated taxes, review where you’ve been, and make any necessary adjustments to stay in compliance,” Cruz says. “Being proactive throughout the year reduces the chance of costly surprises during tax season.”

The Bottom Line

The nomadic lifestyle offers freedom, but it also demands financial discipline. Tax obligations don’t disappear when you hit the road, and in many cases, they can multiply. Staying compliant means understanding your responsibilities, closely tracking your movements and income, and seeking expert guidance when needed.

With the right approach, you can enjoy the benefits of being a digital nomad without letting taxes derail your journey.