Payroll and Taxes for Remote Workers: A Guide

Whether you like it or not, remote work is a reality. The days when workers visited the office each day are long gone. There may be occasions when an employee works in person, but you likely have remote workers that do all of their work from a distance.

Working remotely can be simple and practical in some situations. Without needing to consider proximity, you may identify the best candidate for the position. But remote work presents certain challenges in terms of the administrative side of things. It’s crucial to seek professional assistance while modifying your payroll procedure.

Payroll taxes for remote workers can be tricky. Especially if they reside in separate cities or states. Do you obey the tax regulations where they live or where your firm is based if they work from home?

What Kinds of Remote Workers Are There?

Not all of your employees are subject to the same tax obligations as you. Depending on their relationship with your organization, employees have varying statuses. Employees and remote workers are the two basic types of workers.

Remote Workers

Even if they work from home, your employees are integral components of your company. Typically, you anticipate hiring someone who will remain on your team indefinitely. An employee has a stake in the long-term success of a business, and the employer owes them certain legal duties, particularly if they work full-time.

Employers are responsible for managing employee withholdings for income taxes. Laws governing minimum wage, overtime pay, benefits, and worker’s compensation insurance must also be followed by every firm.

Independent Business Person

Independent contractors are not expected to become full-time, long-term team members like employees are. Contractors are not subject to the same controls as employees. Independent contractors choose their schedules, supply their equipment, and make their own decisions regarding how to complete the work. Employers are expected to pay their contractors according to the terms of their contracts, but they are not required to deduct taxes or withhold money for other benefits.

How Different Types of Remote Workers Are Affected by Taxes

Employees working remotely receive the same compensation as those working locally. However, if they reside or work in a separate state, the taxes for remote workers are more challenging federal income taxes and FICA remain constant, but other factors such as state income taxes and unemployment will change.

Employees Who Live and Work Outside the State

Your employees must pay taxes based on the local tax rates if they reside and work in another state. To withhold state income taxes and pay payroll taxes for workers who are located outside of the state, you must incorporate your business there.

This covers state and local taxes related to the county or municipality where remote workers reside, as well as income and unemployment taxes.

Temporarily Employed Workers in Other States

You might need to register your business with each of those states if your employees routinely move between them. Regulations at the state level will determine the payroll taxes that apply to employees who temporarily work outside of the state.

You often only have to pay state tax for the state where the business is situated or where the employee resides if they are traveling and only stay a short time in each state. Even if they just work there for a week or two, some jurisdictions require a corporation to register and pay state income taxes for remote employees.

Workers Doing International Work

Outside of the US, tax withholding for remote workers becomes even more challenging. You will probably need to register and open an office in the country where the employee resides to abide by local rules and regulations.

What Taxes Affecting Remote Workers Do Employers Pay?

Taxes for remote workers operate in the same way as taxes for on-site workers. The main difference is that depending on the employee’s home, local city and state requirements may need to be adjusted for remote employee taxes.

To process payroll for employees, a percentage of their income must be withheld to pay income tax and FICA on their behalf. You must also keep in mind which payroll taxes fall under employer liability.

Income withheld from the employee is used to cover all income taxes. Contrarily, the employer and employee split the cost of FICA payroll taxes. You are required to contribute a total of 15.3% of an employee’s income toward Social Security and Medicare. The other half is paid directly by the employer, with the other half coming from employee income that has been withheld.

How to Set Up Taxes for Remote Workers

All of your employees, whether they work remotely or not, must have taxes withheld from their pay. However, you are only required to provide a Form 1099 to contract employees once a year.

The measures to take to handle your remote employees’ taxes are as follows:

  • Check to see if your business has a license in the employee’s state of residence.
  • Fill out an IRS Form W-4 for federal withholding and any applicable state withholding forms with the assistance of your employee.
  • To make payments for taxes, register with the appropriate tax authorities.
  • Make payroll tax installments for remote workers.
  • Inform workers of taxes paid with their yearly W-2 return.
  • Payroll taxes for remote employees should be reported on standard payroll tax forms.

How to Set Up Payroll for Remote Workers

In addition to taxes, payroll setup itself can be challenging if you’ve never done it before. How are workers who reside and work in multiple states paid?

If you already use a certain payroll tool or supplier, you might discover that they are already set up to handle payments for remote workers. The payroll process for remote employees should be the same as it is for on-site employees unless you wish to personally distribute checks to your team.

Payroll management options available to you include:

  • Banks’ direct deposits
  • Postal checks issued by your payroll service
  • Application for direct payments like PayPal or Venmo

Work With a Payroll and Tax Expert

Payroll taxes for remote workers can rapidly become complicated, but you don’t have to handle it alone. By turning over your payroll to a professional at Your Part Time Accountant, you can save time, and money, and improve payroll efficiency.

An accountant can calculate all the remote worker tax consequences for you, so you don’t have to. Then, freed from having to worry about setting up and organizing your remote team payroll, you can concentrate on expanding your business.