As remote work continues to be a prevalent part of the modern business landscape, accounting and finance firms must adapt to the evolving payroll and tax requirements for remote workers. Properly classifying employees, investing in payroll software, and staying compliant with tax regulations are essential steps in this process.
As the workforce landscape continues to evolve, more and more companies are embracing remote work. This shift has brought about several changes in how businesses manage their finances, particularly when it comes to payroll and taxes.
If you are an accounting or finance firm that provides payroll and tax services to businesses with remote workers, you need to be aware of the different rules and regulations that apply to different types of remote workers, such as employees and contractors.
You also need to know how to set up payroll and taxes for remote workers in a way that is compliant, efficient, and accurate. In this article, we will explain what is different about payroll and taxes for remote workers, how to distinguish between remote employees and contractors, how to set up payroll and taxes for remote workers, and how to make it simpler with an end-to-end management provider.
What Is Different About Payroll and Taxes for Remote Workers?
Payroll and taxes for remote workers are different from those for in-office workers in several ways. First of all, remote workers may be located in different states or countries than the employer, which means that they may be subject to different tax laws and rates. For example, some states have income tax withholding requirements for nonresident employees who work remotely for an employer based in that state. Some states also have reciprocal agreements with other states that allow remote workers to pay taxes only in their state of residence. Additionally, some countries have tax treaties with the United States that affect how remote workers are taxed on their income.
Secondly, remote workers may have different expenses and deductions than in-office workers. For example, remote workers may be able to deduct some of their home office expenses, such as rent, utilities, internet, phone, and office supplies. However, these deductions are subject to certain rules and limitations, such as the exclusive use test and the regular use test. Remote workers may also be eligible for certain tax credits, such as the foreign tax credit or the earned income credit.
Thirdly, remote workers may have different reporting and filing obligations than in-office workers. For example, remote workers may need to file multiple state tax returns if they work in more than one state during the year. Remote workers may also need to file foreign tax returns if they work in another country for more than a certain period of time. Remote workers may also need to report their foreign bank accounts and assets if they exceed certain thresholds.
Remote Employees Vs. Contractors
One of the most important distinctions to make when setting up payroll and taxes for remote workers is whether they are employees or contractors. This classification affects how they are paid, taxed, and treated by the employer. Generally speaking, an employee is someone who works under the direction and control of the employer, while a contractor is someone who works independently and has more autonomy over their work.
Remote Employees
Remote employees are individuals who work for your company on a regular basis, typically following a set schedule and using company-provided equipment and tools. They are considered part of your organization and are entitled to the same benefits and legal protections as in-office employees. As such, their payroll and tax arrangements should mirror those of your in-house staff.
Remote Contractors
Remote contractors, on the other hand, are independent professionals or businesses that provide services to your company on a contract basis. They are responsible for managing their own taxes, and you do not withhold payroll taxes for them. It's essential to correctly classify workers to avoid legal and tax issues down the line.
The IRS uses three main criteria to determine whether a worker is an employee or a contractor: behavioral control, financial control, and relationship type. Behavioral control refers to how much the employer can direct and supervise the worker’s work process and methods. Financial control refers to how much the worker can influence their own income and expenses. Relationship type refers to how the worker and the employer perceive their contractual agreement and benefits.
The classification of a worker as an employee or a contractor has significant implications for payroll and taxes. For employees, the employer is responsible for withholding federal income tax, Social Security tax, Medicare tax, and state income tax from their paychecks. The employer is also responsible for paying half of the Social Security tax and Medicare tax on behalf of the employee. The employer is also required to provide certain benefits to employees, such as health insurance, retirement plans, paid leave, unemployment insurance, workers’ compensation insurance, etc.
For contractors, the employer does not withhold any taxes from their payments. The contractor is responsible for paying their own federal income tax, self-employment tax (which covers Social Security tax and Medicare tax), state income tax, etc. The contractor is also responsible for tracking their own income and expenses and filing their own tax returns. The employer does not provide any benefits to contractors.
Therefore, it is crucial for employers to correctly classify their remote workers as employees or contractors. Misclassifying a worker can result in serious penalties from the IRS or state authorities. Employers should use Form W-9 to collect information from contractors and Form W-4 to collect information from employees. Employers should also use Form 1099-NEC to report payments made to contractors and Form W-2 to report wages paid to employees.
How To Set Up Payroll for Remote Workers
Setting up payroll for remote workers can be a complex and time-consuming process, especially if the employer has remote workers in different states or countries. Here are some steps that employers can follow to set up payroll for remote workers:
#1. Determine the legal status of the remote workers
As discussed above, employers need to classify their remote workers as employees or contractors based on the IRS criteria. Employers should also check the state and local laws that apply to their remote workers, as some states may have different or stricter rules than the IRS. Employers should also consult with a tax professional or a legal advisor if they have any doubts or questions about the classification of their remote workers.
#2. Register with the relevant tax authorities
Employers need to register with the federal, state, and local tax authorities where their remote workers are located. This may involve obtaining an employer identification number (EIN) from the IRS, registering for state unemployment insurance (SUI) tax, registering for state income tax withholding, registering for local payroll taxes, etc. Employers should also check the tax filing and payment deadlines and frequency for each jurisdiction where they have remote workers.
#3. Choose a payroll system or service
Employers need to choose a payroll system or service that can handle the payroll and tax requirements of their remote workers. There are many options available, such as online payroll software, payroll service providers, professional employer organizations (PEOs), etc. Employers should compare the features, costs, and benefits of each option and choose the one that best suits their needs and budget.
#4. Collect information from the remote workers
Employers need to collect information from their remote workers, such as their name, address, social security number, bank account details, tax forms, etc. Employers should use Form W-9 to collect information from contractors and Form W-4 to collect information from employees. Employers should also verify the identity and eligibility of their remote workers using Form I-9 and E-Verify.
#5. Calculate and pay the wages and taxes
Employers need to calculate and pay the wages and taxes for their remote workers according to their classification, location, and agreement. For employees, employers need to withhold federal income tax, Social Security tax, Medicare tax, state income tax, and local payroll taxes from their paychecks. Employers also need to pay half of the Social Security tax and Medicare tax on behalf of the employees. Employers also need to provide benefits to employees, such as health insurance, retirement plans, paid leave, etc., if applicable. For contractors, employers do not withhold any taxes from their payments. Contractors are responsible for paying their own taxes and benefits.
#6. Report and file the payroll and taxes
Employers need to report and file the payroll and taxes for their remote workers with the relevant tax authorities on a regular basis. For employees, employers need to use Form 941 to report federal income tax, Social Security tax, and Medicare tax on a quarterly basis. Employers also need to use Form 940 to report federal unemployment tax (FUTA) on an annual basis. Employers also need to use Form W-2 to report wages paid to employees on an annual basis. For contractors, employers need to use Form 1099-NEC to report payments made to contractors on an annual basis.
#7. Maintain records and compliance
Employers need to maintain records and compliance for their payroll and taxes for their remote workers. Employers should keep copies of all the forms, receipts, invoices, contracts, agreements, etc., related to their remote workers for at least four years. Employers should also update their records and compliance whenever there are any changes in the status or location of their remote workers.
How To Set Up Taxes for Remote Workers
Setting up taxes for remote workers can be a challenging and confusing process, especially if the employer or the worker has nexus in multiple states or countries. Nexus is a term that refers to the connection or presence that a business or an individual has with a state or a country that triggers tax obligations. Nexus can be established by various factors, such as physical presence, economic presence, sales volume, etc.
If an employer or a worker has nexus in more than one state or country, they may be subject to double taxation or conflicting tax rules. Therefore, it is important for employers and workers to understand how nexus works and how to avoid or minimize double taxation.
Here are some steps that employers and workers can follow to set up taxes for remote workers:
#1. Determine where you have nexus
Both employers and workers need to determine where they have nexus based on their activities and transactions in each state or country where they operate or work remotely. Nexus rules vary by jurisdiction and by type of tax (such as income tax, sales tax, etc.), so it is advisable to consult with a tax professional or a legal advisor if you have any doubts or questions about your nexus status. You can also use online tools or services that can help you determine your nexus status, such as TaxJar, Avalara, etc.
#2. Check for tax treaties or reciprocal agreements
If you have nexus in more than one state or country, you may be able to avoid or reduce double taxation by checking for tax treaties or reciprocal agreements that exist between those jurisdictions. Tax treaties are agreements between countries that define how income and other taxes are allocated and eliminated between them. Reciprocal agreements are agreements between states that allow residents of one state to pay taxes only in their home state, regardless of where they work. You can find information about tax treaties and reciprocal agreements on the websites of the IRS, the Department of State, or the tax authorities of each jurisdiction.
#3. Calculate and pay your taxes
Based on your nexus status and the applicable tax treaties or reciprocal agreements, you need to calculate and pay your taxes to the relevant tax authorities. For federal income tax, you need to use Form 1040 to report your income and deductions and pay your tax liability. For state income tax, you need to use the appropriate forms and schedules for each state where you have nexus and pay your tax liability. For local income tax, you need to use the appropriate forms and schedules for each locality where you have nexus and pay your tax liability. For foreign income tax, you need to use Form 2555 or Form 1116 to report your foreign income and claim the foreign tax credit or the foreign earned income exclusion, if eligible. You also need to use Form 8938 or FinCEN Form 114 to report your foreign bank accounts and assets, if applicable.
#4. Report and file your taxes
You need to report and file your taxes with the relevant tax authorities on a regular basis. For federal income tax, you need to file Form 1040 by April 15 of each year, unless you request an extension. For state income tax, you need to file the appropriate forms and schedules by the deadline set by each state, which may vary from the federal deadline. For local income tax, you need to file the appropriate forms and schedules by the deadline set by each locality, which may also vary from the federal deadline. For foreign income tax, you need to file the appropriate forms and schedules by the deadline set by each country, which may also differ from the federal deadline.
#5. Maintain records and compliance
You need to maintain records and compliance for your taxes for your remote work. You should keep copies of all the forms, receipts, invoices, contracts, agreements, etc., related to your remote work for at least four years. You should also update your records and compliance whenever there are any changes in your status or location as a remote worker.
Make It Simpler With an End-to-End Management Provider
As you can see, setting up payroll and taxes for remote workers can be a daunting and complicated task for both employers and workers. However, there is a way to make it simpler and easier: using an end-to-end management provider.
An end-to-end management provider is a company that offers a comprehensive solution for managing payroll and taxes for remote workers. An end-to-end management provider can help you with:
- Classifying your remote workers as employees or contractors
- Registering with the relevant tax authorities
- Choosing a payroll system or service
- Collecting information from your remote workers
- Calculating and paying wages and taxes
- Reporting and filing payroll and taxes
- Maintaining records and compliance
By using an end-to-end management provider, you can save time, money, and hassle when setting up payroll and taxes for remote workers. You can also avoid errors, penalties, and audits that may arise from misclassifying or miscalculating payroll and taxes for remote workers.
Some examples of end-to-end management providers are Remote.com, Deel, Pilot, etc. These providers offer different features, costs, and benefits for managing payroll and taxes for remote workers. You should compare them and choose the one that best fits your needs and budget.
