One of the best things about living in a post-lockdown world is the ability to log onto the internet and earn an excellent wage from almost anywhere.
This has opened up new opportunities for contractors who have sought-after skills but want to find work/life balance or stay close to family.
One question many contractors ask when signing up for contract work with companies based outside of where they live is how everything works in terms of tax and visas. For example, if you live in South Africa but your employer is in the UK, which country has the right to tax your income?
Here is a quick look at how it may play out for you.
If you live in South Africa
South Africa has a residence-based tax system for individuals. Residents are subject to tax on worldwide income (excluding certain exemptions or exclusions) and non-residents are subject to tax on income from a source within South Africa.
If an individual earns employment income in excess of R1.25 million and there is no double tax agreement between South Africa and the foreign country, both countries will have a right to tax the income. The portion of the income in excess of R1.25 million may end up being double taxed.
To help contractors and other workers to avoid this situation, South Africa provides double tax relief in the form of a foreign tax credit, subject to limitations.
You can find out more about Foreign Employment Tax Exemption in South Africa here.
If you live in Australia
As an Australian resident for tax purposes, you are taxed on your worldwide income. This means you must declare all income you receive from Australian and foreign sources in your income tax return.
However, if you pay tax on foreign income in another country, you may be entitled to a foreign income tax offset. This will save you from being taxed twice. There is an online Guide to foreign income tax offset rules which shares more information.
Keeping detailed records of your income and working with a good accountant will ensure you don’t pay more tax than necessary.
If you live in the UK
The UK has a similar system to Australia. If you are a UK resident, you will pay tax on foreign income. You may be able to claim tax relief if you’re taxed in more than one country.
If you are a UK resident but you live abroad, you will not have to pay tax on income from a foreign employer.
If you are not a UK resident, you will not have to pay UK tax on your foreign income.
You will find more information on the UK Government’s website.
If you live in the USA
Wages paid to a U.S. citizen or resident for services performed outside the United States for a foreign employer are subject to U.S. federal income tax, but if you meet certain requirements, you may qualify for the foreign earned income exclusion.
There is a tool to help you determine if you can exclude the income you earn from a foreign company for tax purposes.
If you live in Canada
Canada also taxes worldwide income. If your foreign-source income has already been subject to foreign taxes paid, as with many other countries, you may be eligible for a deduction or a credit.
Canada has agreements with countries including the US when it comes to the reporting of salary and wages. You’ll find more information here.
Other regions
Indonesia just announced an incentive allowing foreign workers to conduct online work for up to six months without paying tax. There is talk of this being extended to five years, which is very appealing to contractors and other people who can do their job from anywhere.
From Bermuda to the Czech Republic and even Iceland, several other countries are adopting similar ‘Digital Nomad’ visa arrangements which let people have a ‘workation’ and earn an income from a foreign source while residing locally.
If you want to live in your home country but work for a foreign employer, a local government website should give you an idea of how your tax payments will be structured and whether you will be taxed on global income.
Superannuation and insurance
Outside of tax, there are other things to think about when you earn a wage as a contractor for an overseas employer.
For example, some countries require employers to pay their staff a set amount of money to be put away for retirement (this is often referred to as superannuation). In Australia, a foreign employer is normally required to pay super for Australian resident and foreign resident employees who perform work in Australia (with some exemptions).
No matter where you live, it is worth checking if you will receive superannuation or a similar type of payment. If you don’t you may choose to put aside money yourself.
The other thing to think about is insurance and whether your overseas employer includes worker’s compensation insurance as part of your contract. The best thing to do is ask as policies differ between organizations.