(This post is targeted at people who are pretty serious about becoming a consultant while living abroad. For most people it will bore you to tears. In addition, although I am a lawyer, this post is NOT LEGAL OR TAX ADVICE. If you take one thing from this, hire an accountant in every country where you owe tax.)
For me, the last seven weeks have been a crash course in the legal aspects of being a consultant. I’ve probably spent 100+ hours researching this stuff so maybe I can save you some time.
In March, I was a happy employee of Soundcloud in Berlin, Germany. Like most companies with employees, Soundcloud has an HR department that really takes care of you. (Although Soundcloud’s is quite a bit better than some other companies out there.) Once you’re a consultant, you just get money at random intervals, and suddenly you need to take care of a lot of stuff yourself. Here’s a few things that I’ve learned. I hope they’ll be helpful to at least one person out there making the leap. Please note, I won’t be discussing the wisdom of the various laws and regulations I’m complying with, just how to stay safe and legal.
First, a little bit about me, so you can see how closely your situation matches mine and how applicable my experience is for you. I’m a US citizen, which means I pay income tax on all worldwide income, no matter where I am in the world. (To see where your country stands on this issue, look it up on this chart). I’m not very interested in tax avoidance, although a lot of people you meet in the world of digital nomads and perpetual travelers are very aggressive with their taxes. For 15 months from January ’14 until March ’15, I lived in Berlin, which made me a something called a “tax resident” of Germany, subjecting all of my worldwide income to German tax during that period. (Happily, Germany and the US have a double-taxation treaty, which means that I don’t have to pay tax to both countries, the tax I pay to Germany “counts” for the US. Warning: don’t try to parse these treaties on your own, check with your accountant.) I’m now on the move, and don’t intend to become a tax resident of any country in 2015. That means in 2015 I’ll pay all of my taxes to the US, since it doesn’t matter whether I live there or not, we Americans still have to pay.
If you aren’t a US or Eritrean citizen, your income earned while living outside of your country of citizenship isn’t taxed by your country. Therefore, in some situations you can live in a country without income tax, or never establish tax residency anywhere, and avoid income tax altogether. Check with your accountant. Hire an accountant!
When I started to look into paying taxes as a digital nomad, I did an Ask HN. The advice I got was loud and clear—hire an accountant in every country where you might owe tax. I asked around and got good recommendations in both countries. Germany: click here (speaks English). The US: click here. I’ve been happy with both, and in my situation for 2014 they actually needed to talk to eachother, which worked out great, and I’m thrilled that I’m 100% legal. They are responsive and both seem to know their stuff. The German fees are going to be €250-350, and the US $250-350, depending on how complicated my taxes end up being and how many forms are involved. As someone who someday hopes to be an officer of a corporation, I am fastidious about avoiding any kind of blemish on my credit or tax history. In addition, hiring accountants frees up my time for activities that advance my career or just for leisure.
A quick sidenote for Americans: In 2014 I did both remote cross-border consulting work, and ordinary work for Soundcloud. That’s why my taxes are complicated. If all you did in a given tax year was work a regular job, then by all means use Turbotax for your US taxes. Do this whether or not you owe tax to the IRS, because all Americans living abroad must file a tax return every year. This is true even if you’ve never set foot in the US, e.g. if you were born to an American parent in Canada, you are a US citizen and were at birth, and you must file a tax return every year. Ignorance of the law is no excuse, and even not knowing that you’re American is no excuse.
Americans: The biggest and most important difference for Americans receiving 1099 income instead of W2 income is that you need to pay your taxes four times a year. Yes, you don’t wait until April 15th of the following year, you have to pay taxes every three months if you’re self-employed. Ignorance of the law is no excuse, you will be fined if you pay late. To read a bit about this click here. If you pay late you will be fined and charged interest. This year, I’m having my accountant take care of all of this for me. Eventually I might be able to handle it myself, but why bother and potentially make a mistake when I can pay someone a few $100 and not worry? As a rule of thumb, you should set aside about 30% of your freelance income for taxes.
I also did some research about living in another country for an extended period of time while remote consulting for a US company. In general, if you live in a country for more than six months, or you move there with the intent to remain, then you become a tax resident, and are subject to tax in that country. However, even in high tax countries like Spain you should not rule this out immediately. For example, check out this advice for freelancers working remotely in Spain. In short, if you’re making enough money, you should hire a lawyer to create a Spanish corporation for you, which will lower your top tax rate from about 43% to about 25-30%. So if you have a dream country, really dig into their law and possibly hire someone to advise you ahead of time. Some countries want remote freelancers, check out this program for Portugal.
US State Taxes
Most states don’t try to tax you when you don’t live in them. Some do. Check if your last state of residency is on the list.
You can deduct business expenses from your income for tax purposes. You need to have receipts for everything in case you get audited. I made a Libreoffice spreadsheet with columns for Date, Expense and Amount. Then I save a pdf of each receipt in the same directory with the filename prepended by [date in format year month day]_expense_name.pdf. Send the total to your accountant.
If you’re leaving Germany, get your Abmeldebestätigung as soon as possible before you leave. You need this document to cancel your contract with SuperFit and O2, and eventually to do your taxes and prove you left Germany. To get one, download this form and fill it out. (Available from this site). Then email the filled-out form to this email address. You can do this a few weeks ahead of time and save yourself some time and money.
Also don’t forget to be really sad because Berlin’s a great place and it’s sad to leave!
Form a Corporate Entity
Most American long-term consultants form a corporate entity in the US. This is either an LLC or a corporation that shields you from liability, gives you tax advantages, and makes it simpler for your clients to pay you. I haven’t formed one of my own yet, and on my current gig I’m getting all the advantages of having one without having to do anything because of how the gig is structured. (Long story.) Eventually I’ll probably form one.
I recommend you talk to your accountant about this, and hire a lawyer to form it properly. The only exception to the “hire a lawyer” rule is if you’re forming an LLC with yourself as sole owner, which might be OK to do using some “auto-LLC” site. Still, if you make a mistake doing this you can sometimes end up making a very expensive mistake. For example, if you give your shares a par value of $0.00 instead of $0.0001 when you form a Delaware C-corporation, your tax bill can be $180,000/yr. instead of $350.
I bought a health care plan from GeoBlue for $138/month. This is a plan that does not cover you when you are in the US, but does cover you in every other country in the world. To add the US to this coverage, the price more than doubles to over $300/month. n.b. it is illegal for US citizens to go without health insurance if you spend more than 29 days in the US in a calendar year. There is a floor on the amount of health coverage you are allowed to have under Obamacare, and Geoblue will happily sell you a plan that complies with that. My current plan is to upgrade my plan when I visit the US, and downgrade when I go abroad. Will update this blog on how that goes, but Geoblue has been responsive so far, and when I asked them about this they gave me a number to call to set it up.
This is a limited health care plan. It doesn’t cover vision or dental. It does cover emergency and routine care in any country, and they have an app where I can find English-speaking, vetted doctors anywhere using geolocation. On their website when you sign up you can mix and match whatever coverage you want. Personally I don’t need vision (yet!) and will just pay a dentist to clean my teeth at some point. The plan does cover flying me back to the US in extreme cases, including death! If you’re in a third-world country and something really bad happens, they will fly you somewhere nearby like Singapore to get first-world care.
After you sign up you’ll need to send them some info about your old health care plan, which I was able to do by emailing my previous health insurance provider and asking for it. It took some back and forth, but I was covered the whole time.
In the end, buying health care on the open market was less complicated that I feared. You just do some searching, pick a company, and pay them once a month. If I’m ever a regular employee again, I’ll be much better informed regarding health care and I’ll pay more attention to what my plan covers.
This is very US-specific advice.
I have a 401(k) from a previous employer just sitting there gaining value (it’s invested in the “high-risk” stock market option since I’m only 32 years old.) Sadly self-employed people are not eligible for 401(k)’s, but we can invest in IRA’s. I’m personally saving 5% of my income for retirement while I consult, and once I hit the minimum investment amount I’m going to invest in one of these IRA’s. Vanguard is a very well-respected company that got mentioned as good in the book A Random Walk on Wall Street, and their name came up several times when I asked around.
An advanced option is to move your 401(k) money into your IRA. I’m going to investigate that once I get this account set up.
Don’t put off retirement savings! Due to compound interest, saving in your 30’s is really huge. Seriously, Social Security won’t be enough, and people are living to be 80+ on a regular basis these days. Sock away a little money now and let it grow.
Finding Your First Client
First step: figure out what you’re looking for. Figure out what you’re great at. Then post on facebook/twitter that you’re a digital nomad now, that you’re looking for a certain kind of remote work (on-site not OK, remote only). All your friends know you’re good, but post a few sentences that they can cut&paste to people who might hire you to make it easier for them. Update your linkedin, no one will know about the cool stuff you did unless you write it out.
When I first tried to become a remote consultant, I sent out a ton of resumes. From the responses I got, I could tell that anyone who posts a remote job these days gets a lot of good resumes and has their pick of the litter. Sending out blind resumes was a dead end for me. The only good leads I got were from coder friends who weren’t looking or had too much work and thought I was good enough to hand off their potential client to me.
Remember, if you drop the ball with a potential client, the worst that will happen is you don’t get the engagement. There are other clients. Don’t undercut yourself just because you “need” work. Cheap developers aren’t valued. Also, in my experience American companies and startups pay the best. You don’t need to be a US citizen to remote freelance for a US corporation, and doing so can increase your consulting rate.
Plan on consulting about 30 weeks a year. Figure out what your weekly rate will be. Multiply those numbers and you have your hoped-for annual income. Congratulations, you just gave yourself 22 weeks a year to goof off. Eat your heart out European five weeks of minimum vacation time! (Let’s not discuss the fact that consultants aren’t eligible for unemployment.)
Increasing your weekly rate is a good and scary thing. I’m still figuring that out, but one idea I’m pursuing is declaring yourself an expert on some valued topic, and demonstrating your expertise through blog posts, conversations with other hackers, commits, talks at meetups, etc.
All of the loan companies I deal with are set up for one kind of person: a W2 employee with a regular paycheck. When I call them and explain what I’m doing the drone on the other end cannot compute what I’m saying. That goes double for my income-based repayment loans. Don’t even get me started on getting your income-based income classified when you aren’t paid in US dollars. All I can say about student loans is you gotta pay the beast, and when you need a break just call them up and ask them to be flexible. Student loans have been the bane of my existence for 10 years and I don’t anticipate that changing anytime soon.
Frequent Flyer Miles
This applies to everyone. For every flight you take from now on, sign up for the frequent flyer miles program for that airline. There are a few big miles collectives like Oneworld and Star Alliance, you’ll be able to merge the miles. Even if you never get status on any one airline, just signing up for the program makes you more likely to be treated well. I’ve gotten two exit row seats for free by just signing up before my flight, even when I had zero miles accrued. Seriously, if you’ve been putting it off, look into FFMs.
Let me know if you have any questions about becoming a remote consultant! I’d be glad if all this writing helped even one person.