Navigating Payroll and Taxes for Remote Workers

Like it or not, remote work is here to stay. Gone are the days when employees came into the office every day. Maybe an employee works in-person sometimes, but chances are you’ll have at least a few employees or contractors that work entirely remotely. 

In some ways, remote work can be easy and convenient. You can find the best person for the job without having to worry about proximity. When it comes to the administrative side of things, however, remote work creates some complications. It’s important to get some professional help adapting your payroll process. 

How do you handle payroll taxes for remote employees, especially if they live in different cities or states? If they work from home, do you follow the tax laws for where they live or for where your business is located?  

What Are the Different Types of Remote Workers?

You aren’t required to pay taxes the same way for all of your staff members. Workers have different statuses according to their relationship with your company. The two main categories of workers are employees and independent contractors. 

Remote Employees

Employees are full members of your team, even if they work from home. You usually expect an employee to join your team and stay indefinitely. An employee is invested in the long-term success of a company, and the employer has a number of legal obligations toward them as well, especially if they are full-time.  

Employers are required to handle income tax withholdings on their employees’ behalf. Each employer must also abide by laws concerning overtime pay, minimum wage, benefits, and worker’s compensation insurance.  

Independent Contractors

Unlike employees, independent contractors are not expected to become full or permanent team members. Employers do not have the same control over contractors as they do over employees. An independent contractor sets their own hours, provides their own tools, and decides for themselves how to accomplish the job. Employers must pay their contractors as specified in their contract, but they are not required to withhold or pay taxes or provide any other benefits. 

How Taxes Affect Different Types of Remote Workers

Remote employees are paid the same way on-site employees are paid. However, the taxes for remote employees are more complicated if they live or work in a different state. Federal income taxes and FICA don’t vary, but state income taxes and unemployment will, among other things. 

Employees Living and Working Out of State 

If your employees live and work in another state, then they need to pay taxes using the local tax rates. You will need to incorporate your company in their state in order to withhold state income taxes and pay payroll taxes for employees working out of state. 

This includes state income taxes, unemployment, and other local taxes associated with the county or municipality where the remote employees live.   

Employees Temporarily Working in Different States

If your employees are frequently moving around from state to state, you might need to register your company with each of those states. Payroll taxes for employees working out of state temporarily will depend on regulations at the state level. 

For employees on the road who may spend just a few days in each state, you will usually only have to pay state tax for their state of residence or where the business is located. However, some states require a company to register and pay state income taxes for remote employees, even if they work there for only a week or two. 

Employees Working Internationally

Tax withholding for remote employees becomes even more difficult outside of the United States. If you want to hire an employee who lives in another country, you will most likely need to register and launch an office in that country in order to comply with local laws and regulations. 

What Remote Worker Taxes are Employers Responsible For?

Taxes for remote employees work the same as taxes for employees who work on site. The only difference is that remote employee taxes may require adjusting to different local city and state regulations according to the employee’s place of residence.  

Processing payroll for employees requires withholding a portion of employee income to pay into income tax and FICA on their behalf. However, you also need to remember which payroll taxes are the employer’s responsibility. 

Income taxes are paid entirely by income withheld from the employee. FICA payroll taxes, on the other hand, are split between the employer and the employee. You must pay a total amounting to 15.3% of an employee’s income in contributions to Social Security and Medicare. Half of that comes from withheld employee income, and the other half is paid directly by the employer.  

How to Set Up Taxes for Remote Workers

You are responsible for withholding taxes for all of your employees, remote or not. For contract workers, however, you are only responsible for issuing the worker a Form 1099 each year.  

These are the steps to follow to take care of taxes for your remote employees: 

1. Ensure your company is licensed in the employee’s state of residence
2. Have your employee fill out an IRS Form W-4 for federal withholding and any relevant state withholding forms
3. Register with the relevant tax agencies to make tax payments
4. Make payments on payroll taxes for employees working remotely 
5. Keep employees informed of taxes paid with their annual W-2 return
6. Report payroll taxes for remote workers on regular payroll tax returns 

How to Set up Payroll for Remote Workers

In addition to taxes, setting up the payroll itself can be complicated if it’s not something you’ve done before. How do you pay employees who live and work in different states? 

If you already work with a specific payroll provider or program, you may find they are already prepared to process payments for remote workers. Unless you prefer handing checks out to your staff in person, the payroll process should be no different for remote workers than it is for on-site staff people. 

You have several options for how to run payroll: 

• Direct bank deposits
• Mailed checks released by your payroll provider
• Direct payment applications like PayPal or Venmo  

Partner with a Payroll and Tax Expert

Payroll taxes for remote employees can get complicated quickly, but you don’t have to do it all on your own. You can save time and money and make your payroll more efficient by handing off your payroll to a professional. 

You don’t have to work out all the remote worker tax implications yourself when an accountant can do it for you. Then, with your remote team payroll all set up and streamlined by the experts, you’ll be free to focus on growing your business.