Which state is best to domicile as an RV entrepreneur or digital nomad? I get this question often. There is no one right answer. However, here are a few things to consider when choosing your domicile state.
You probably already know the top 3 states that full-time RVers and digital nomads pick as their domicile state. If not, they are Florida, South Dakota, and Texas.
Why these states?
The biggest reason is that none of them have an income tax. Sounds good to you, right?
I believe that all 3 of these states are good for RVers for different reasons with a few gotchas depending on your situation. Ask yourself the following questions when choosing your domicile state.
Choosing your domicile state
Let’s first go over the top 3 considerations as part of nomad life:
1. Vehicle registration: How much does it cost to register a vehicle including your RV in the state? Does that state allow you to renew online? What about the cost of insurance? Is it higher or lower? Is there a requirement to get annual vehicle inspections?
2. Driver’s license: Do you need an upgraded driver’s license (non-commercial Class A)? How often do you have to renew it? Can that be done online vs. going in person?
3. Health insurance: What are your options? Can you buy insurance off the state or government exchange? If so, is that coverage available nationwide or only in-state? Is it affordable?
Bonus: Receiving mail and having a mailing address accepted by banks. Will you keep your home in your current resident state? If yes, will you be able to receive mail in that state and keep your driver’s license, etc., in that state? If not, will you use a mail service to help you create a domicile in a new state?
While I can’t advise exactly which state or mail service is right for you and your situation, I can go over some other considerations from a tax perspective. Most importantly, this includes running a business as a digital nomad or working as a workamper.
Business ownership or workamping and domicile
Why even consider this when picking a domicile state? Most small business owners are going to have a pass-through business, which means the income will be reported on your personal return. This includes sole proprietorship, partnership, and S Corp. It also includes freelancers and independent contractors, which are most commonly treated as sole proprietors. This also includes most LLCs, which are usually taxed in one of three ways – sole proprietor, partnership, S Corp.
It’s nice to have no income tax on that pass-through business income, right?
There are other things to consider when choosing your domicile state as a business owner.
Here are some questions to ask yourself as you think about business ownership and choosing your domicile state:
Will you be doing business in multiple states? Or will you be workamping in several states?
If your business conducts physical business in multiple states, you may owe state income tax to other states even if your domicile state doesn’t require you to file.
The same thing applies if you workamp in states with income tax. If you work in a state with income tax, they will withhold that tax, and you will be required to file there to get it back or possibly owe.
Is there a business or franchise tax in a state?
Texas has a franchise tax based on your business income. It no longer requires all business owners to file a franchise tax report, but it does have an annual information filing necessary. This is very important to be aware of so you don’t get penalties for failing to file! Or worse, your business gets dissolved by the state for failing to file.
While Washington has no income tax, it does tax businesses. This is known as the business and occupation tax. Are you prepared to pay the extra taxes and aware that the tax is a requirement?
Going further. Tennessee might seem like a great state because it, too, is mostly income tax-free. However, there is a franchise tax in TN as well.
Is a separate tax return due for that state?
If you workamp in a state with income tax, then more than likely, you will need to file in that state. This is true even if you are domiciled in a state with no income tax.
Many states require a separate tax return for a partnership or an S corp business. As a sole proprietor in no income tax states, you typically only file a Form 1040 with a Schedule C. However, it’s important to know exactly what is required when filing taxes in each state, not just a federal return with the IRS.
Is there a tax on services and goods?
Both Texas and South Dakota tax services and goods! Yes. That’s right. Services are taxed in several states. Be aware of that when setting up a business. Do your research!
As you can see from the above examples, different states have varying requirements. It’s very important to be aware of what is required in your state and also how that income will be treated as it shows up on your personal return.
The safest option is to register your business in your domicile state. Why?
It keeps things simple, clean, and easy to keep track of. This is an important subject. One which deserves its very own post about where you should form an LLC. It’s important to get started on the right track. If you already have a business, then learn how to transfer an LLC to your new domicile state. This could save you headaches and also keep you from filing multiple returns in different states.
Are you a W-2 employee?
Due to regulations in South Dakota, I do not recommend SD as a good domicile option for those who are still working or need health insurance in the US.
You cannot use SD as your address for employment taxes. They will not allow it. I do NOT recommend South Dakota if you have a business with W-2 employees (including an S Corp where you must pay yourself a W-2 salary). I suggest you pick another option.
Physical Presence Test
Consider the physical presence test if you are running a business. Regardless of your business entity, there are certain rules to determine whether or not you have to register a business in a certain state. If you have a physical presence in a state, you absolutely MUST register the business in that state.
This is pretty simple if you own a traditional sticks and bricks business. You have a physical location, therefore, you are required to register in that state.
What if your business operates completely online? Do you have a physical presence in any state?
There are established rules to help determine whether or not you have a physical presence in a state, even for an online business.
Consider the following statements. Do you
-have stationary employees in an office in a state?
-have any type of office, meeting room, or warehouse within a state?
-work with a client in their office on a project?
-hold a physical business meeting or conference?
-bank in a certain state (online banking can be argued here)?
Did you answer yes to any of the above statements? If so, then your business is considered to have a physical presence in that state, and you will most likely be required to register there.
If you answered no to the above statements, then consider registering your business in your domicile state. It’s the safest option for avoiding audits and questions from both state and federal authorities.
If you already have a bank account set up in a certain state and move your domicile to a new state, you can probably keep that old account and continue to bank online. This is why I have trouble with the banking statement for nomads. However, if you plan on going into your bank to conduct business, such as opening a loan or a new credit card, this can be considered doing business in a state. A bit of a weird situation, but also one I believe can be argued, if necessary, as a nomad.
Why mess around with registering in the wrong state only to be caught later on? Get it right from the start and avoid headaches in the future with state departments of revenue. Honestly, if you move states, you can move your business with you.
Workamping and full-time RV life
The last thing to consider when workamping is if you’ll be working in a state with income tax. If yes, then more than likely, the company paying you will be withholding income tax from your pay. This means you’ll need to file in that state. Whether you get the money back or not all depends on the state.
It is important to consider, though, because your taxes might get more complicated.
Also, if you keep a domicile or residence in a state with income tax, consider if that state will tax ALL of your income even if it’s earned out of state or if it will give you a credit for taxes paid to another state. This is possible.
There are too many states, each with its own rules, to dive into the specifics. I encourage you to reach out to a tax professional to understand your unique situation.
