Factoring in the global pandemic, many companies have quickly embraced remote working, which generates great benefits to their bottom line and workers. However, this has also brought in the complicated matter of state and local taxes with a remote workforce. Generally, relevant tax authorities require employers to prepare and submit payroll and income taxes on time.
Meanwhile, multiple states apply different approaches to how you should comply with their tax laws. For example, Connecticut, Delaware, Nebraska, New York, and Pennsylvania have the convenience rule where remote workers will have to pay income tax earned working for an employer located in that state, even if the worker works remotely in a different state. This introduces the issue of double taxation, although there are other states which are more tax-friendly.
Knowing the exact tax implications for you as an employer and for your remote employees is essential to avoid facing a tough time with the taxman. Here is an overview of tax issues to take into account:
Identify Your Remote Worker Relationship
Do you classify your worker as an employee or contractor? Even if either provides similar services, the tax treatment varies. According to the IRS, an independent contractor is also self-employed as they provide services to businesses for a fee. Usually, they are responsible for filing their taxes. However, if you pay the contractor more than $600 in a tax year, you should send them form 1099 to report non-employee compensation.
On the other hand, when you hire an employee, whether in-house or remote, you’re responsible for withholding and paying income and payroll taxes. Regardless of the nature of your relationship with the worker, it’s important not to miss out on your tax liabilities.
Know Your State Business Tax Obligations
The tax setup can be a little tricky with remote workers in regards to federal and state business taxes. You will need to take into account factors such as the location of the remote workers and where the firm is based.
Typically, your employees will be subject to income and payroll taxes in whichever state they work in. At the moment, all but nine states impose income taxes. As the employer, you should register for taxes, where your firm is located, and where your employee resides.
Also, in some 16 states, there are reciprocity agreements where workers only pay taxes to states where they live and not the states they work in. So if your employee lives in Illinois but works in Wisconsin, they will only owe taxes to the state of Illinois as the two have reciprocity. For employers, they only have to withhold state and local taxes from the state the employee resides.
Double taxation is also another possibility where you pay taxes to two states on the same income. However, an individual usually receives tax credit if they live in one state but work in another to eliminate double taxing of that income.
Convenience rules are also in place in states such as New York, which reduce tax liability. If a worker resides in another state out of convenience while the employer is based in another state, the income tax will be charged on where the job is based. There are also state withholding taxes and unemployment insurance for consideration.
Stay Up to Date With State Labor Laws
Having multiple employees working remotely across different states establishes a physical nexus. This means as an employer, you will have to adhere to the federal and state labor laws. These include the minimum wage, overtime, sick, and family leave. In regards to minimum wage, a document by DOL guides how employers can accurately track the minimum working hours of their remote workers for fair compensation.
Employers must also display labor law posters in line with the Family and Medical Leave Act (FMLA) and other relevant labor law agencies that their remote workers should be able to access. Aside from understanding the relevant state labor laws, you need to lay down the correct procedures and policies that will support your tax compliance.
Set Up Your Payroll
Thanks to technology, it’s cost-effective and convenient to transfer payments to your employees. Beyond that, you still have to pay attention to withholding, deducting, computing, and filing both federal and state taxes.
Once you determine the type of remote workers in your team, this will clarify if you have to provide overtime, disability insurance, or withhold or pay taxes. Also, ensure you have the right tax forms to issue your employees or contractors for efficient tax filing. Another significant component is accurately and properly maintaining your payroll records as per IRS rules.
The best way forward is to hire a payroll expert as your remote workforce grows to streamline the administration and compliance aspects.
Simplify Your Remote Work Taxes
Hiring remote workers allows you a wider reach when it comes to picking the best talents. The good thing is that you can rely on others to handle your business taxes so that you can focus on growing your brand in different states.
ASAP Payroll integrates both automated solutions and payroll expertise to ease how you hire, pay your remote workers, and pay taxes. Contact us today to learn more about how you can optimize your tax compliance for a productive remote workplace.