need to understand payroll taxes for at-home workers as remote work gains popularity. Read on to learn about remote employee payroll taxes and what employers should consider before dealing with these taxes. Rooled goal is to give you an overview of how payroll and working remotely tax work so you can avoid stress and stay in compliance.
Workers who work from home are treated as employees for tax purposes. This means they must pay income taxes.
A new survey has found that about a third of employed Americans work remotely during the week at least part-time, and many people find it’s easier to balance their lives outside of an office environment.
In the wake of layoffs and cutbacks, more employers may offer telecommuting options to their workers. If you’re considering a job with a company that lets workers work from home, it’s important to have a basic understanding of how your payroll taxes will be affected by this kind of job situation. You’ll want to research these things before making a decision:
What is the difference between working as an “employee” vs. working as “self-employed” in your state? If you’re self-employed, you’ll need to set up a small business and file taxes that way. As an employee, your employer will take care of this for you. How much does the company deduct from each paycheck? Is there anything else that’s deducted besides federal and state income taxes? Some companies also may require workers to contribute to Social Security and Medicare (FICA taxes).
Will I be required to pay estimated quarterly taxes? If so, when and how do I submit them? Are my benefits affected by working remotely? One of the biggest reasons people prefer working from home is being able to drop their work pants any time they want. Even though you’ve been asked to keep the top part of the business attire on, working from home has its perks.
An employer can hire a worker as an employee or contractor. There are many factors that go into determining whether a worker should be paid as an employee or a contractor, but these two designations have very different tax implications for both parties. Employees are entitled to certain protections and benefits under the law, while contractors save costs by avoiding certain benefits and self-employment taxes.
The Internal Revenue Service (IRS) may audit your company if it classifies employees as independent contractors who were really misclassified, so it’s important that companies understand the difference and be able to justify their classification of workers.
Who is an Employee?
The IRS has a twenty-factor test that it uses to determine whether someone is an employee or independent contractor. It falls on the employer to prove why a worker should be classified as a contractor and not as an employee, since the burden of proof lies with them.
If your company misclassifies employees, you could face hefty fines from the IRS for failing to withhold taxes. There are various types of remote workers. Some travel across state lines while others live out of state and work from home. Others work from home temporarily. So, how do you deal with such a diverse range of remote workers?
Let’s look at the types of remote workers so you can make an informed decision on employee wage classification and avoid penalties. Following that, let’s go more in-depth about some of the different situations you may experience as a worker or employee.
Commutes Between States
With new HR recruiting tools, it is easy to attract elite personnel from different states. Commuter staff is more likely to be hired if your company is located near a state boundary. You might consider an out-of-state employee for the following reasons:
- Employees from your company travel between states to various company locations.
- Your company is expanding into a new state.
- Your company is transitioning to a remote, hybrid, or flex model.
Works From Home and Lives Out of State
You need to understand how payroll taxes work for out-of-state remote employees if you have them on your payroll. When you have an out-of-state employee on your payroll who works from home in that state, you will withhold their income taxes for that state.
Take note that you don’t need to report these employees’ wages to your state’s tax office. If the employee lives and works in a different state, you report their earnings to the state where they live.
Working From a Different State Temporarily
A temporary remote employee is another form of remote employee you could have. A temporary remote worker is someone who normally works in one state but now works in another.
If your employee’s spouse, for example, is going through a job transition, they may live out of state for a time. Your employee may need to work in another state while they complete the sale of their property.
Understanding out-of-state payroll taxes will aid your organization in remaining consistent and compliant. If employees do the majority of their work in-state, regardless of where the temporary labor occurs, you must record earnings and pay regular unemployment rates to that state.
What Taxes Are Employers Responsible for With Remote Workers?
Employers must withhold income tax as well as Social Security and Medicare taxes from their employees. Yet, withholding monetary amounts from local employee payments isn’t the only option. Payroll taxes for at-home employees might be complicated. While you are responsible for withholding taxes for remote employees, there isn’t one simple solution.
Withholding amounts are different across federal, state, and local governments. Additionally, remote work classifications vary based on a company’s location, where an employee lives, and where an employee works.
Collaborate With an Expert in Payroll Taxes
Choosing to work with a payroll tax professional can help you relieve the stress of remote employees’ compliance. This collaboration will be helpful especially if you are working remotely and you have no idea about working remotely taxes.
Other Resources
Working with a payroll tax professional is only the first step. You should seek out other resources as well. A comprehensive resource that can guide you through federal, state, and local taxation guidelines is the U.S. Payroll Association’s guide.
