Remote working has proven to be one of the best options any company can offer their employees. It provides some excellent benefits for the employee and organization that is offering it as a working option. It’s been so increasingly popular that plenty of companies have been considering expanding their workforce of remote employees. The idea behind remote work is gradually becoming popular with most companies, especially with the positive impact it had throughout the pandemic.
However, like any good thing out there, remote working does present a set of challenges that business leaders need to deal with. The payroll is going to be one of the more essential things you are going to deal with when setting up your remote team. After all, what is the point of them working for your organization if you are not willing to pay them appropriately?
Usually, when it comes to running payroll, your employee's physical location is used to determine which payroll taxes need to be applied. However, having workers in various locations all over the globe can add an extra layer of complication to your calculations. To understand this situation, let's take a closer look at what you need to consider when you are paying remote employees.
The types of remote workers
The working relationship you have with the remote worker holds a significant role in the tax liabilities both of you are going to deal with. For your company, it determines which taxes you have to withhold or pay, which benefits you need to provide, whether you have to pay for overtime, and much more. Generally speaking, no matter when in the world your remote employee is located, the relationship between you and them will fall into these categories:
Remote employees are the ones who are working for your company outside of your office environment. When you pay remote workers, you are responsible for withholding payroll taxes from their paychecks, similar to those that work in the office environment. Although, you need to comply with all the tax laws and regulations in the city/state/country the remote employee is located in. This part may be different than the rules applied to your office working employees.
Independent contractors, otherwise known as freelancers, are individuals who are self-employed and not employed by your company. That means that these contractors are in charge of handling their taxes. That means whenever you pay these independent contracts, you are not required to withhold payroll taxes concerning their pay. Additionally, you don’t have to spend time researching or comply with any of the local regulations governing the place where the independent contractor lives. These independent contractors are solely responsible for themselves.
It’s in your best interest to consider hiring freelancers, especially for jobs that are one-time-based. If a job requires continuous attention then you can always consider longer contracts with the option to renew. For many skills like marketing, social media management, and graphic design you can find plenty of talented freelancers. Especially for technical tasks such as SEO (Search Engine Optimization), consider hiring an SEO consultant if you’re putting out content that you would like to get ranked on search engines like Google. In general, it’s much easier to deal with freelancers than with employees. More often than not, they also produce higher quality work because of their experience within their area of expertise.
One of the many reasons why companies even hire independent contractors is because they don't have to worry about dealing with the payroll taxes for remote work. Now that you know the differences, we need to go over what it means for the payroll.
Setting up payroll for remote workers.
A common piece of advice you will hear from other professionals is to choose the best payment method that is popular where the remote employee lives. Doing so provides you with a widely accepted option that is more likely to comply with the local laws of the employee's location. Here’s what your organization needs to do to hand over that hard-earned cash to their remote employees.
Paying US remote employees
There are several options available for companies to pay any of their US remote employees, such as:
- Check from a payroll provider
- Direct deposit
- Third-party financial services such as Paypal, Venmo, Stripe, and other payroll apps.
- Mobile wallet
If your company is already using a payroll provider for the on-site employees, they will have an option for processing remote payments as well. Similar options may also be available for paying remote employees who work overseas.
Paying International remote employees
While the options you have for international payments are more limited compared to US employees, there are two things you need to consider for this particular situation. First, you’ll want to look up what the international bank fees for fund transfers are in the country of the overseas remote employee. Sometimes these bank fees can cost up to $30 per transaction, making them the least cost-effective option.
Furthermore, you need to remember that international exchange rates are a thing. International remote employees could potentially lose money after their portion has been exchanged for their local currency. Additionally, banks and other payroll services could include a high fee to handle the cost of exchange, which increases your costs extra.
Handling taxes for remote workers
In the same way, you deal with your payroll arrangements, you need to take some time in figuring out the tax liabilities you are going to deal with comes down to your remote employee's classification and where they live.
For remote employees
Generally, when you are paying a remote worker, you are also paying the local taxes in the state where the employee is working. If your remote employee is working in the same state as your organization is registered in, you withhold state income taxes and pay state unemployment insurance taxes in your state. There is a chance you may need to withhold local income taxes from their paycheck.
However, if your remote employee is working in a different state, things need to be done a bit differently. The organization needs to register with tax agencies in each state that has one of your remote employees. The company may also need to register with the labor/unemployment agencies in each location as well. It requires you to withhold taxes in the state where your remote employees are working.
For example, if your company is based in California and is hiring a remote employee in New York, your organization needs to comply with the tax liability rules in New York. That means you need to do some research and comply with their labor laws.
For Independent contractors
As mentioned previously, independent contractors are in charge of handling their own taxes. But your company still needs to take care of essential paperwork. There are two things you need to take care of when hiring US-based contractors.
The first thing you need to do is have your independent contractor sign a W-9 form. The file is an official “Request for Taxpayer Identification Number and Certification.” The information you get from this form is vital for the next step you need to take.
The second step requires you to fill out a 1099-MISC form for each contractor your company has paid more than $600 during the year. That form tells the IRS how much you paid team members in non-employee compensation. Two copies of these need to be made, with one going to the contractor and the other to the IRS.
Once you’ve followed these steps, it’s up to the independent contractor to deal with the rest of the taxing issue.
Taxes for international remote workers
Recruiting and paying remote employees in other countries introduce another set of challenges. Usually, it’s best to hire remote employees from countries you are already conducting business.
It's due to most countries requiring businesses to open up a local brand of their company in that country. This means you need to follow every local law concerning the benefits, minimum wage, and more for your employees there. Requirements like these are one of the many reasons why international applicants are usually hired as contracted employees and not full-time employees. Once they have registered themselves as self-employed business owners, or freelancers, they can take care of the international tax liabilities on their lonesome.
While this may seem like too much, don’t let that prevent you from hiring some top talent from across the seas. The right technology can make processing payments much smoother to handle.
Paying your employees the easy way
Regardless of the size of a company, each of them is going to have their own system in place for handling the payroll of their remote team. A good percentage of them agree that it’s worth paying a couple of extra bucks for a service to do all of the tedious parts for them.
Using this route saves you up tons of time and frustration. Plus, it prevents the possibility of being hit with some price tax fines.
One of the options you have to make this easier is to outsource the remote payroll to a payroll agency or accountant firm. If you choose this route, the agency and firm will run your payroll, file the taxes, and pay the remote employee through a check, direct deposit, and so forth. When you hire an expert, you will be comforted by the fact you’re making sure everything is accurate.
Furthermore, since your employees and remote work situation vary, their experience with labor/tax laws could be a significant advantage for your team. However, over the years, a wave of automated payroll services has become increasingly popular.
Over the years, a line of online payroll providers has appeared and given small businesses an advantage they previously didn’t have at their disposal. These grant business owners the tools they require for both payroll and taxes for their remote employees, all for an affordable price.
Services like Gusto take into account every payroll and tax law of the location your remote employee is working. The platform helps a business owner run payroll, handle benefits, and supports the entire remote team. Transferwise is another option that helps lower the cost of sending international payments for your remote workers overseas. It grants you a way to send money at the market exchange rate for a low flat commission.
Knowing how the payroll system works when it comes to remote working is crucial for any business that wishes to hire a remote workforce. If you are a business owner considering the idea of expanding your workforce into a more remote direction, make sure to do your research before entirely committing to this action.