The pandemic has transformed the way organizations operate now. Where it was the norm to travel to work and clock in the required hours, covid-19 has now made us normalize zoom calls, pajamas, and operating out of our bedrooms. Work overall has become more remote and therefore the hiring processes are experiencing a shift. Not only are companies hiring workers from different states but also different countries.
So, the question is- what should companies keep in mind when hiring remote workers, and what are the tax implications?
If you are lost, we are here to help you out.
When it comes to paying remote employees and handling tax across state and country borders, there are a lot of things that need to be considered. Different states have different mandates for paying taxes – even when the employee is working from home. For instance, employees in New York will need to pay income tax regardless of their domicile location. As an employer, you’ll be required to be informed of various regulations to list them on the W-2.
Before we get to the actual processes, it’s important to understand the types of remote workers, as identifying this will help you make decisions.
Types of remote workers
The type of employment you have with your employees plays a huge role in the tax liabilities that you both will have. Once you have clarity about this, you will be able to determine which taxes you have to withhold and pay, what benefits you must provide to the employees, whether you need to pay them for overtime or not, so on and so forth.
The type of remote workers falls under the following categories:
Full-time: For this category of employees, it can mean that you may have to open a branch of your organization at the location they are at and cooperate with the local laws and regulations. This may even be the case if you are hiring across a state line within the U.S.
Contractor: Many companies opt to hire remote workers on a contract basis as they then don’t have to bear the burden of dealing with taxes. However, there are rigid rules in the U.S. as to whether a worker can be classified as full-time or a contractor. If in case there is a misclassification, it could lead to a heavy tax bill for the employer.
Company/sole proprietorship: Employees set up their own company in this scenario and charge the work they do for their employer. This makes for a very direct way to hire a remote employee (especially if they are working overseas). However, keep in mind that setting up their own company may not be easy for employees and extremely expensive as well.
Depending on these categories, you should choose employees that can benefit your company and fit the payroll and tax process adequately.
Regulations for remote workers
In today’s day and age, you can get money in your account within minutes and that’s what makes remote work so easy to manage. Even so, when it comes to paying your employees, take into consideration where they live.
Along with this, you must also remember that payment does not just mean transferring money. You also have to be mindful of the employer’s responsibilities that include filing, withholding, and depositing various types of taxes (income, health insurance, and unemployment) with the federal or state authorities.
Paying remote workers in the U.S.
Your payroll process will depend on whether your worker is a contractor or an employee. If your remote worker is an independent contractor, your process gets simplified – you don’t have to worry about withholding taxes. But you do need to file for Form 1099-NEC, Non-employee compensation, to report these payments made for services for your business.
On the other hand, employee payroll is tricky. First and foremost, you’ll need to make a note of the work-base of your employee. With employees scattered across the country since 2020, you’ll need to check employment and payroll laws for each of the states your employees are located in. This is especially important for you to know how much tax to withhold for each employee. It is easier if there are only a few out-of-state workers. But if your employees grow in number, you will be bombarded with a huge amount of paperwork.
Outsourcing your payroll function then makes a lot of sense. An outsourced payroll service will keep a track of tax compliances and deduction laws across states, has the expertise of knowing imminent deadlines, and can help you avoid any overlooked payroll errors that might invite a penalty from the IRS.
Taxes for remote employees based in another state
Employees in the U.S. generally have to pay two types of taxes- income and payroll. This applies to even those that are withheld and paid by their employer. Employees working in the state have to pay the taxes where they live.
Therefore, if your company is based in Florida, and you are hiring a full-time employee who resides in New York, you-the employer-need to register with the concerned tax authorities to deposit the taxes in New York. The process may seem tedious but there are payroll companies that can handle it for you.
If you are hiring contractors instead of full-time employees, the process may be less taxing. But even so, there would be some paperwork involved, which includes issuing 1099 forms for your contract workers.
Paying international remote workers
How you comply with payroll laws depends on the type of international worker: U.S. non-resident or a foreign worker.
Paying U.S. workers who are working remotely in other countries, either project-based or otherwise can be complicated. In general, payments made to a U.S. resident for services rendered outside the country are subject to payroll tax withholding (with certain exceptions). However, local payroll compliance is also subject to be considered by your HR team. Even if your employee is on U.S. payroll, shifting the place of employment invites a lot more annoyance and additional knowledge of local workforce regulations.
Hiring a foreign resident on U.S. payroll is also not advisable. Although possible, the foreign resident will not have a U.S ID card, W-4 form, or a social security number required for taxation.
For non-resident employees or contractors, for services provided outside the country, no U.S. payroll laws are applicable. But payments to these workers can be made easier by either setting up a new legal entity overseas (if there is a substantial number of workers from the region), hiring a local partner/3rd party firm to get the employee on payroll, or bringing them on board as independent contractors.
Either way, wiring a bank transfer, sending a paper cheque, or simply using PayPal to pay these remote workers are good options to consider.
Taxes for remote workers based in another country
This is probably the most challenging part of the entire hiring spectrum. As we have repeatedly mentioned, when getting international employees on board, you’d probably have to open a local branch and comply with the local laws of employment which include overtime, minimum pay, health insurance, paid leaves, etc.
This is the reason most companies hire remote international workers as contractors and not full-time. In this case, the employees have to register themselves as ‘self-employed’ or ‘freelancers’ in the country where they reside and pay taxes on their own.
Hiring remotely certainly comes with its set of challenges but don’t let that stop you. Once you figure out which category of employees suits your company model and taxation process, it’s worth the hassle. This is because having a good mix of workers from various areas of the world certainly makes a company richer in culture as well as work ethic.
Want to talk more about payroll, taxes, and how an outsourced service may benefit you? Talk to us!