Since the pandemic, remote work has become a standard practice for many businesses. While remote work offers several advantages, managing payroll for remote employees can be a complex process, especially when it comes to taxes. In this article, we’ll explore important tax considerations and how to do payroll for remote employees.
Employee classifications, locations, and taxation
Are your workers considered employees or independent contractors? This distinction has significant tax implications. For example, for employees, you need to withhold payroll taxes. However, you do not need to withhold taxes for independent contractors. If you’re not sure what classification is right for your workers, you can use the IRS’s form SS-8 to find out.
Employee Location & Tax Implications
- Resident: A remote employee who lives and works in the same state as your company is considered a resident. Your business may need to pay state income tax, state and local taxes, unemployment insurance taxes, and possibly local taxes for resident employees.
- Non-Resident: Non-resident employees reside and work in a different state. There are several taxation options for out-of-state employees:
- Payroll procedure may follow the rules of the state in which the work is performed.
- Employers may withhold partial amounts for both the worked-in state and the state of residence.
- The employee may manage the withholdings themselves on their personal tax return.
- When two states have a reciprocity agreement, the employee will only owe income tax to the state where they live, not where they work.
You can get more information on the right taxation option for your business by contacting your state tax or revenue department.
- International: An international employee resides or works outside of the U.S. Typically, when a U.S. person or business pays a U.S. citizen or resident for services that are performed outside of the U.S., the income is subject to U.S. federal income tax withholding. However, wages earned by nonresident aliens for services performed outside of the U.S. are usually considered foreign source income and are not subject to reporting or withholding. Learn more about international taxation from the IRS.
Types of Taxations & Situations
State and Local Taxation
Taxation protocol varies from state to state. Here are a few situations to be aware of:
- State Income Tax: Out-of-state employees may be subject to different income tax laws. Always check to make sure the withholdings are accurate for their work location.
- Corporate Taxes: If you have a physical location in multiple states, it’s important to see if any of your remote employees work within those states. If so, your business may be subject to corporate income tax for the other states.
- Local Taxes: Some local cities or counties have additional taxes that could apply to your remote employees.
It’s important to ensure your business is withholding the correct federal taxes from remote workers. Federal taxes include:
- Social security tax
- Medicare tax
- Federal income tax
You can check with the IRS for guidelines and to find the most up-to-date information on federal tax withholdings.
Payroll Setup Considerations and Tips
Should I use a service provider or run payroll manually?
To run payroll, you can either use a service provider or process it manually.
With a service provider, you typically will have access to tools that are designed to help manage payroll and the accompanying taxes.
When you run payroll manually, your business has greater control of the process, but you’ll need to run more calculations manually and make sure you’re on top of evolving taxation requirements.
Make payroll easier with accurate time tracking
Tracking your employees hours is particularly challenging with remote workers. This is why it’s essential to have a good time tracking tool to make payroll as simple as possible. Here are a few features to look for:
- Online Access: Online time tracking makes it easy for employees to track time from just about anywhere, any time.
- Flexibility: Flexible time tracking software is key. Options like Timesheets.com offer the option to track hourly timesheets for payroll and attendance, project timesheets for billing and invoicing, and more.
- Integrations: What’s better than a great time tracker? One that can integrate seamlessly with your payroll service provider!
Determine a pay schedule and method
Once you’ve decided how to track time, you need to set a payment schedule and method. Common payment schedules are weekly, biweekly or monthly. In terms of payment methods–direct deposit, checks, and digital payments tend to be the most common options. In addition to determining when to pay your staff, you also need a payment plan for your taxes.
Other tips to make running payroll simpler
- Use multifunctional software: Instead of having a different program for every aspect of payroll, look for software that performs many of the necessary tasks. For example, rather than just time tracking, look for a system that can track PTO, vacation time, expenses, and more together.
- Automate: Setting up direct deposit, importing time tracking data, and other automations can help make payroll much easier.
Setting up and managing payroll for remote employees requires a broad understanding of tax requirements on a state, federal, and international level. Investing the time to carefully research and establish your payroll system and processes is critical for simplified and successful payroll management for remote employees.