Remote teams are fantastic. However, calculating remote work taxes and processing payroll for remote teams is not the coolest job.
Organizations hiring global talent have a serious competitive edge. Unfortunately, managing such global remote teams is not a breeze.
Remote businesses should have a comprehensive idea of remote work taxes. Remote working taxes differ by state and country.
So, your payroll managers must communicate with the states’ labor agencies to stay updated with the protocols and processes.
This payroll and remote working taxes guide is worth reading if you plan to hire remote teams.
How do remote workers file their taxes?
The United States Office of Personnel Management mentions that remote work refers to a flexible arrangement in which an employee works from a different geographic location.
For example, people who work temporarily from home due to illness/ accident are not remote employees. Similarly, remote employees working remotely due to the pandemic are not considered remote employees. In such cases, remote working tax implications do not apply to the employees.
The filing of remote work taxes depends on whether the remote employee is an independent contractor or a regular W-2 employee. Hence, defining remote work is important before an employee can file their taxes.
Remote employees file their income taxes in the state where they reside, regardless of where their employers are based. Employee classification and location matter most when setting up remote employee work taxes.
Remote work taxes for employees
You must check whether or not the state where your company is registered is the same as your remote employee’s location. Look for any one of the following scenarios:
When both, the company and remote employees, are in the same state, employers must comply with the particular state’s income tax regime and pay State Unemployment Insurance (SUI) tax. You may also have to withhold the local income tax from their compensation.
When remote employees work from different states, remote work taxes get complicated. Here, you must register with the state and local tax agencies of every state where you have remote employees. You will also need to sign-up with the unemployment and labor agencies.
Example – Suppose you are a Florida-based company with remote employees in Washington. Then, you must adhere to the tax rules prevalent in Washington. Also, you must be well-versed with their labor laws.
International remote workers’ taxes
Managing taxes in the case of different states is relatively more straightforward than in different countries. To hire remote employees in other countries, you must open a local company branch in that country.
Further, you must comply with all the local laws for minimum compensation, benefits, and more.
Hence, companies mostly hire international contractors or freelancers instead of full-time employees. Once the contractors register as self-employed or sole proprietors, they manage all their international taxes independently.
Independent contractors handle taxes on their own. But for US-based freelancers and contractors, you must;
- Complete Form 1099 for each contractor you have paid more than $600. This form includes details about the payments made to the staff in the non-employee compensation. Non-employee compensation is the payment made to independent contractors. One copy of the form goes to the Internal Revenue Service (IRS) and the other to the contractor.
- Have your freelancer fill out the W-9 form. This form gives you the freelancer’s Taxpayer Identification Number and Certification you need to fill out Form 1099.
What remote work taxes are employers responsible for?
Employers are responsible for deducting income taxes and Social Security and Medicare Taxes contributions.
However, withholding taxes for remote employees can be challenging as the amount varies across the federal, state, and local governments.
Federal income tax
Under federal income taxes, we have;
In the US, personal income taxes follow a progressive tax system with a seven-tier tax slab..
For remote employees, you must deduct the income tax the same way as your on-site employees. Use Form W-4 to identify the exact withholding amount.
Another remote worker tax deduction is FICA which funds the Social Security and Medicare programs. For FICA taxes, it is crucial to know the employee compensation and the calculation of Medicare and Social Security percentages.
Employers contribute to the Federal Unemployment Tax (FUTA) by compensating employees who lose their employment. Hence, it is not withheld from employee paychecks. FUTA taxes for remote workers are the same as you pay for your on-site employees.
State tax withholding is the same for in-state and remote employees.
Both in-state employees and remote employees must pay state taxes, including income taxes and State Unemployment Tax Assessment (SUTA).
In the following states, remote employees do not require employee income tax withholdings at all;
- South Dakota
- New Hampshire
Further, if a remote employee works from multiple states, you must determine the state taxes considering the employee’s base of work/service.
As mentioned above, SUTA is applicable based on the remote employee’s location. Suppose a remote employee works from Oklahoma for a year. Then, this state will be the localized place of service for the employee regardless of where the employer’s organization is based.
In most states, employers contribute to SUTA taxes. However, paying SUTA is mandatory along with the employers for employees residing in Alaska, New Jersey, and Pennsylvania. To determine the withholding amounts, employers must use Form W-4. Employers must stay cognizant of state guidelines, income tax, and SUTA tables.
Withholding local taxes for remote employees generally follows the state tax regulations. But there are a few adjustments.
If your remote employees are spread over multiple taxable cities, you must deduct taxes based on the rules of each city and the state’s nexus policy. It will help you determine if your company is eligible for a tax nexus within the city or the state.
Your organization must meet the minimum business sales requirement to have a tax nexus within the state or the city. The requirement ranges between $50,000 to $500,000 based on the state laws. If your organization has tax nexus status, you must file payroll taxes for remote employees.
Remote worker taxes: filing in two states
Generally, remote working taxes require remote employees to file and pay income taxes in their state. But in a few specific situations, the remote worker must file taxes in two states. In such situations, the tax filing is generally based on the remote employee’s organization, the tax legislation of the involved states, and the nature of the situation.
To clarify this remote working tax implication, let’s define the two states first – the resident and non-resident states.
- Resident state: The state where a remote employee lives and has a permanent residence. The state taxes apply to the employee’s income, regardless of where it has been earned.
- Non-resident state: A state where the employee has not lived for the previous year, even though they may have earned an income there. The non-resident tax laws differ from state to state. But if your remote employee’s W-2 form includes the non-resident state, you must file a non-resident state tax return.
Remote worker taxes within the United States
Within the United States, remote work taxes include federal and state taxes.
US employees pay taxes based on where they physically work, not their employer’s place of operation at a federal level.
The state taxes are slightly complicated. Suppose a remote employee resides and works from California for a Washington-based organization. They can work without having to pay Washington state taxes.
But, as already mentioned, remote employees who travel to different states and work from there must file the non-resident state taxes. However, if remote employees do not physically travel to another state and perform work during their stay, they are not required to file non-resident taxes.
In a few cases, remote employees may get protection from taxes in multiple states using a reciprocity agreement.
All states do not levy state taxes (you may check out the list of states above).
For instance, Texas forbids the state government to create state income taxes. So, remote employees in Texas who do not work from other states must file federal tax returns only.
Further, state taxes do not levy on full-time and part-time employees in New Hampshire. But contractors and self-employed workers may need to pay state income taxes under specific situations.
For remote working taxes within the US, an employee’s physical location is the most significant determinant for paying taxes. If you hire remote employees outside your home state, you must fulfill your responsibility to withhold state taxes based on the state tax laws.
Remote worker taxes outside the United States
Covering the international tax laws in a few lines would not be exhaustive. Hence, we consider the taxes for remote workers living out of the United States but employed with US-based organizations.
There are no taxes levied on the non-US citizens who live outside the country but work for US-based organizations.
But if the remote employee is a US citizen working from another country, you need to fill out a few forms. Generally, such remote employees owe taxes in the country where they reside and work.
The high-income US citizens (more than $100,000 annually) may be subject to the US remote work taxes even when they are working from another country. Therefore, US citizens working abroad must plan the filing of tax returns, even if they do not owe it.
For US organizations, hiring remote employees residing abroad is a complex process. You must either open your local entity in the country or hire the employee using Employer of Record (EOR) like Multiplier.
Multiplier also offers a SaaS-based EOR solution that can help you hire talent abroad without launching your subsidiary. It will help you assess the new markets and establish remote teams in new countries.
Due to the complications, most US-based organizations consider hiring independent international contractors instead of full-time or part-time employees. Independent contractors are generally free from restrictions regarding work timing, payment receipts, rates, and working with multiple organizations.
However, employers must be careful when hiring independent contractors. The employed remote workers must fit the definition of independent contractors, or else the local jurisdiction may consider them employees.
Misclassifying the workforce may further lead to huge penalties within the US and outside. Therefore, both the employee and employer need to sign documents clearly stating the nature of the relationship.
For independent contractors living and working abroad, employers do not withhold or pay any taxes. Hence, the remote contractors must ensure that they file and pay their taxes following the local tax guidelines. Also, independent contractors must stay updated on the tax rates for contractors as it varies on a country-to-country basis.
How can remote workers pay less in taxes?
Remote workers can limit their tax liability regardless of whether they are working within the US or outside. Here, we have listed a few suggestions.
Knowing the local tax laws
Employers must possess a comprehensive knowledge of the local remote working tax laws. The tax guidelines may vary according to country, state, region, and even city. Hence, before moving to a new area. Therefore, if required, remote employers can also seek help from local tax professionals who can help them navigate through the uncertainty.
Identifying the status as an employee or contractor
Instead of making assumptions about the nature of the relationship, remote workers must know their status in the organization. They can check out the local laws and find the differences between a contractor and an employee.
Further, asking the employer about the classification can also be helpful. Employers who notice misclassification errors must take prompt action to correct them.
Getting hired through an EOR
Remote contractors outside the US do not always get the necessary support or resources. If they get hired through an EOR, companies will be able to guarantee accurate payrolling by complying with local tax guidelines and labor laws. Hence, your remote teams will get a better work experience through increased employee satisfaction and enhanced employee trust.
Unravel your remote worker taxes with Multiplier
Remote work tax guidelines are pretty overwhelming, no?
Employers must take care of too many aspects here. While the tax laws vary from state to state, hiring remote employees abroad is also a complex process for organizations. Platforms like Multiplier can help you simplify the remote working taxes.
Multiplier offers global payroll solutions in more than 150 countries for all employees, remote and in-house. Therefore, managing remote work taxes and state-wise social security deductions and making payments in multiple currencies would be reduced to a single click on our platform.
Multiplier enables organizations with automated employment contract generation, insurance, benefits, cryptocurrency for freelancers, etc.