Working Remotely for US Companies from Abroad: Tax, Legal, and Practical Realities

# Working Remotely for US Companies from Abroad: Tax, Legal, and Practical Realities

In 2023, an American software engineer working remotely for a San Francisco startup was quietly laid off after her employer discovered she had been logging in from Lisbon for eight months. The company's legal team flagged three problems: Portugal considered her a tax resident after 183 days, her tourist entry had no work authorization, and the employer had unknowingly created a "permanent establishment" that could expose it to Portuguese corporate tax. Stories like this appear with increasing frequency in employment law journals, and they illustrate the central truth about working remotely for a US company abroad: the laptop travels easily, but the legal structure around it does not.

As of 2024, roughly 18.1 million Americans describe themselves as digital nomads, according to MBO Partners' annual State of Independence report — a 4.7% increase over 2023 and more than triple the 2019 figure of 7.3 million. A growing share of them are W-2 employees rather than freelancers, and many discover only after arrival that their arrangement sits in a gray zone their HR department never contemplated.

The US Tax Obligation Does Not Go Away

The United States is one of only two countries (the other is Eritrea) that taxes citizens on worldwide income regardless of where they live. An American earning a salary from a US employer while sitting in Mexico City still files a Form 1040 and still owes federal income tax on that salary.

Two mechanisms can reduce the bill. The Foreign Earned Income Exclusion (FEIE), claimed on Form 2555, allows qualifying taxpayers to exclude up to $126,500 of foreign earned income in tax year 2024, rising to $130,000 in 2025, per IRS Revenue Procedure 2023-34 and 2024-40. To qualify, the taxpayer must meet either the Bona Fide Residence Test (establish residency in a foreign country for an uninterrupted tax year) or the Physical Presence Test (330 full days abroad in any 12-month period). The Foreign Tax Credit, on Form 1116, offsets US tax dollar-for-dollar against income taxes paid to a foreign government and is usually the better choice in high-tax jurisdictions such as Germany or France.

FICA taxes — Social Security and Medicare — continue to come out of a W-2 paycheck regardless of where the employee physically works, unless the destination country has a Totalization Agreement with the United States. The Social Security Administration lists 30 such agreements in force as of early 2025, including with Canada, the UK, Germany, Japan, and most of the EU, but notably not with Mexico, Thailand, Colombia, or Indonesia.

State Tax Is Often the Bigger Surprise

Federal residency is straightforward; state residency is not. California, New York, New Mexico, South Carolina, and Virginia are known as "sticky" states that continue to assert tax jurisdiction over former residents who have not affirmatively severed ties. California's Franchise Tax Board applies a nine-factor test from *Corbett v. Franchise Tax Board* (1960) and Publication 1031 that weighs the location of a taxpayer's home, bank accounts, driver's license, voter registration, and family. An American who moves to Bali but keeps a California driver's license and returns for a month each summer will likely still owe California income tax.

New York goes further: under Tax Law § 605(b)(1)(B), anyone maintaining a "permanent place of abode" in New York and spending more than 183 days there is deemed a statutory resident, even if they are a bona fide resident of another country under federal rules. The 2022 Tax Appeals Tribunal case *Matter of Obus* narrowed this slightly, but the trap remains.

Before leaving, employees should change their driver's license to a more favorable state (Florida, Texas, Nevada, Washington, Wyoming, Tennessee, and South Dakota have no state income tax), close in-state bank accounts where possible, register to vote in the new domicile, and document the move with dated records.

The Immigration Problem Most Employees Ignore

A tourist visa or visa-waiver entry (such as the Schengen 90-day rule or the UK's six-month visitor permission) prohibits productive work in the host country. Enforcement is inconsistent, but the legal exposure is real. Spain's 2023 Startups Law explicitly clarified that Zoom meetings from a Barcelona Airbnb count as work on Spanish soil, and Portuguese tax authorities began issuing AT Circular 5/2022 guidance to the same effect.

As a partial fix, at least 66 countries now offer a dedicated digital nomad or remote-worker visa, per a March 2024 Migration Policy Institute review. A sample of the more commonly used options:

• **Portugal D8 Visa** (launched October 2022): requires proof of monthly income of at least €3,480 (four times the minimum wage as of January 2025), valid for one year and renewable up to five. After five years, applicants can apply for permanent residency.
• **Spain Digital Nomad Visa** (Law 28/2022, effective January 2023): requires €2,762 monthly income (200% of the Spanish minimum wage in 2025) and allows a 15% flat tax rate under the modified Beckham Law for the first four years.
• **Estonia Digital Nomad Visa** (launched August 2020, the first of its kind): requires €4,500 gross monthly income and allows stays up to one year.
• **Mexico Temporary Resident Visa**: requires monthly income of roughly $4,300 or a bank balance around $73,000 (figures adjust with the UMA, Mexico's unit of measurement); valid up to four years.
• **Costa Rica Rentista/Digital Nomad Visa** (Law 10,008, January 2022): requires $3,000 monthly income ($4,000 for families) and exempts holders from local income tax on foreign earnings.

Each of these visas is for the worker, not the employer. They do not, by themselves, resolve the employer-side question below.

Permanent Establishment: The Risk Your Employer Cares About

Under Article 5 of the OECD Model Tax Convention, a company can create a taxable "permanent establishment" (PE) in a foreign country if an employee regularly concludes contracts or conducts core business functions there. The threshold is not high: a single sales employee closing deals from Mexico for more than a few months can trigger Mexican corporate tax liability for the US employer. The 2017 BEPS Action 7 amendments expanded the definition to capture more dependent-agent arrangements.

This is why corporate legal and HR teams increasingly require employees to disclose foreign work and will often refuse arrangements that last more than 30 to 90 days. Deloitte's 2023 Global Workforce Location Survey found 64% of multinational employers had formalized cross-border remote work policies, up from 21% in 2020, and that the median approved duration was 60 days per calendar year.

Some workers route around this by converting to contractor status and invoicing through an Employer of Record (EOR) such as Deel, Remote.com, or Oyster. An EOR becomes the legal employer in the destination country, handles local payroll and benefits, and shields the US company from PE risk. The cost is typically $500 to $700 per employee per month on top of gross salary, per published pricing from Deel and Remote as of 2024.

Practical Operational Issues

Beyond tax and immigration, the day-to-day logistics deserve attention:

• **Time zones**: A Pacific-time engineer in Bangkok has a 14-hour offset, meaning a 9 a.m. PT standup is 11 p.m. local. Eastern Europe (UTC+1 to +3) and Latin America remain the most common "overlap-friendly" choices for US teams.
• **Banking**: Many US banks, including Chase and Bank of America, can freeze accounts that show consistent foreign logins under patterns flagged by the Bank Secrecy Act and OFAC screening. Wise, Charles Schwab (which reimburses ATM fees worldwide), and Fidelity's Cash Management Account are commonly used alternatives.
• **FBAR and FATCA**: Any American with foreign bank accounts exceeding $10,000 in aggregate at any point during the year must file FinCEN Form 114 (FBAR) by April 15 with automatic extension to October 15. Form 8938 under FATCA applies at higher thresholds ($200,000 for single filers living abroad at year-end).
• **Healthcare**: US employer health plans, including most Blue Cross and UnitedHealthcare plans, cover only emergency care abroad. SafetyWing, Cigna Global, and GeoBlue are the most cited supplemental options for long-term stays; SafetyWing's Nomad Insurance starts at around $56 per four weeks for travelers under 40.
• **Data and security**: SOC 2 and HIPAA obligations do not pause at the border. Employees handling regulated data should confirm their company's policy on VPN requirements, endpoint encryption, and whether the destination country is subject to US export controls under EAR.

Action Checklist Before Departure

1. Get written approval from HR and, ideally, a short addendum to the employment agreement specifying the arrangement's duration and location.
2. Consult a cross-border tax professional — not a generic CPA — at least 60 days before departure. The American Institute of CPAs maintains a directory of international tax specialists.
3. Establish domicile in a no-income-tax state before leaving, if feasible.
4. Secure an appropriate visa; do not rely on tourist entries for stays beyond 90 days.
5. Open a Wise or Schwab account while still in the US (both are easier to open with a US address).
6. Verify your health insurance covers the destination or buy a supplemental policy that does.
7. Register with the State Department's Smart Traveler Enrollment Program (STEP) for consular notifications.
8. Keep a day-count log — a simple spreadsheet will do — to substantiate the Physical Presence Test.

What Comes Next

Working abroad for a US employer is legally workable, but the default assumption — that a US paycheck and a foreign Wi-Fi connection are all you need — is the assumption that most often ends careers and produces six-figure back-tax assessments. The decision point is not whether to go, but whether to go as an employee, a contractor, or through an EOR arrangement, and whether the destination's tax and visa regime makes the math work.

The next step for most prospective remote workers is a one-hour paid consultation with an international tax attorney or enrolled agent familiar with the destination country. That conversation, typically $300 to $500, usually surfaces issues that a Google search will not. From there, visa applications, employer conversations, and state-domicile changes can proceed in parallel, with a realistic target departure window of four to six months out.