How to Set Up Payroll and Taxes for Remote Workers

Don’t let the process of payroll taxes for remote employees scare you from hiring a more global, productive, cost-efficient team. Use this overview to see what it takes now:

How does your company set up payroll and taxes for remote employees?

If you’re looking to add more remote workers to your team, this is one area you’ll need to get right before you start the hiring process.

But since the rules are different for workers in every city, state, and country, doing everything by the book may seem like a daunting, overwhelming task.

So this resource is here to help.

You’ll find an overview of the steps your company needs to take to fulfill its tax liabilities and make sure your remote workers get paid.

It’s by no means the end of your research and legwork. But it should provide a road map to get started.

First: Identify the Types of Remote Workers On Your Team

Payroll and tax liabilities largely depend on the classification of your remote workforce.

Your team members typically fall into one of two camps: full-time employees or independent contractors.

Their designation dictates whether your company has to:

Withhold and/or pay taxes
Provide benefits
Pay overtime
Comply with minimum wage laws
Provide disability insurance; workers compensation insurance

It’s essential to understand what the IRS says about employee vs. contractor designation. If you don’t classify your team right, you could face severe tax fines and penalties come tax time.

So here’s how to tell your team apart:

Remote Employees

Remote employees are team members who work for your company outside of your office.

When you pay remote employees, you’re responsible for withholding payroll taxes from their paychecks, just like you do with your in-house crew.

However, you must comply with all the tax laws and regulations in the country/state/city the employee lives in. These may be different than the rules your in-house team follows.

Independent Contractors

Independent contractors or freelancers are self-employed, not employed by your company. So contractors handle their own taxes.

This means when you pay independent contractors or freelancers, you don’t have to withhold payroll taxes from their pay.

You also don’t have to research or comply with all the local regulations governing where the employee lives. Contractors take on all this responsibility themselves.

Not having to worry about payroll taxes is just one reason why so many companies choose to hire freelancers for remote work.

Now that you know this critical difference, let’s go over what it means for your payroll.

How to Set Up Payroll for Remote Workers

Many experts say it's best to pick a payment method that’s popularly used wherever your employees live. This makes it a widely acceptable option that likely complies with all the local laws.

Here’s how your company will line your employees’ pockets, no matter where they keep their piggy banks:

Paying Remote Workers in the US

There are loads of options for paying your US remote workers, such as:

Direct deposit
Checks from payroll providers
PayPal, Venmo, or other payroll apps/services

If you’re already using a payroll provider for your in-house team, they’ll usually have an option for processing remote payments too.

The same options may be available for paying remote employees abroad too.

Paying International Remote Workers

Even though you can use many of the same options to pay your team abroad, there are two significant considerations to keep in mind.

First, you’ll want to check the international bank fees for fund transfers. These may cost upwards of $30 per transaction, which may not be the most cost-efficient.

Second, you can’t forget about international exchange rates. International employees may actually lose money after their portion is exchanged for their local currency.

Plus, banks and other payroll services may include a high fee to cover the cost of the exchange, raising your costs further.

How to Set Up Taxes for Remote Workers

Similar to your payroll arrangements, figuring out your tax liability comes down to your employee classification and where they’re located.

Taxes for Remote Employees

Generally speaking, when you pay a remote employee, you pay the local taxes in the state where the employee works.

If your employee works in the same state your company is registered in, you’ll withhold state income taxes and pay state unemployment insurance (SUI) tax in this state. You may also need to withhold local income tax from their paycheck.

What about remote employees working in different states?

Your company will need to register with the tax agencies (state and possibly local) in each state it has remote employees. You may also need to register with the labor/unemployment agencies in each locale too.

You’ll then be required to withhold taxes in the states where your employees work.

So let’s say your Washington-based company hires a remote employee in Florida, for example. You’ll need to comply with all the tax liability rules in Florida. You must also research and comply with their labor laws.

Taxes for Contractors

As we mentioned earlier, contract employees handle all their own tax work. But that doesn’t mean your company’s off the hook entirely.

There are two steps you’ll still need to take for US-based freelancers:

#1. Have your contractor fill out a W-9 form. This is an official “Request for Taxpayer Identification Number and Certification.” You need the information from this form to fill out step two.

#2. Complete a 1099 form for each contractor you’ve paid more than $600 during the year. This form tells Uncle Sam how much you paid team members in non-employee compensation. You’ll send one copy to the IRS and another to the freelancer.

The rest is up to them.

Taxes for Remote Workers In Other Countries

Hiring and paying remote workers in a different country presents its own set of challenges. Generally, it’s best to hire remote employees from countries in which you’re already doing business.

That’s because most countries will require you to open a local branch of your company in that country. Then you’ll need to follow all the local laws regarding minimum pay, benefits, and more for your team members there.

This is the main reason why international candidates are most often hired as contract employees, not full-time company employees. Once they register as self-employed business owners or freelancers, they’ll handle all their international tax liabilities on their own.

Overwhelmed by all these rules?

Don’t let paying your team prevent you from hiring top talent around the world. The right technology makes this process much easier to manage.

The Stress-Free Way To Payroll and Taxes for Remote Workers

Small, medium, and large-sized companies each have their own ways of handling payroll for their teams sans stress.

Most agree that it’s worth paying a few extra dollars for a service to do all the heavy lifting for them. Following this route saves countless hours of time and headaches. It also prevents the potential for thousands in tax fines.

So your company may want to:

Outsource to an Accounting Firm or Payroll Agency

Outsourcing your remote payroll to an accountant or payroll agency takes the task totally off your plate.

They’ll help run your payroll, file your taxes, and pay your employees via check, direct deposit, pay card, etc. while you focus on running your business.

When you consult a professional, you’ll gain the peace of mind of knowing you’re doing everything right.

And since each employee and remote work situation is different, their experience with labor/tax laws may be a massive advantage for your team.

But a new wave of automated payroll services is also quickly gaining popularity — and for a fraction of the price.

Try a Payroll Service or App

Startups and small businesses are taking advantage of new online payroll providers. These give owners the tools to handle both payroll and taxes for their remote workers at a much more affordable price point.

You can try services that help you hire internationally and manage payroll, benefits, taxes, and compliance.

Cloud-based HR services take into account all the tax and payroll laws of where your remote employees live. Their single platforms help you run payroll, manage benefits, and support your remote team.

And services that help lower the cost of sending international payments to your remote employees abroad. They allow you to send money at the market exchange rate for a low flat commission.

Now there’s no reason not to add more remote employees to your team.

Feeling More Confident?

Setting up payroll and taxes for remote workers may be the most complicated part about hiring a remote team. But the obstacles are easy to overcome when you have the right tools and processes in place.

Consider hiring independent contractors for your crew and you’ll bypass a lot of the regulations tied to remote company employees. Freelance team members manage their own taxes according to the laws in their area so you don’t have to stress about them.

No matter which route you choose, nothing compares to the benefits a remote team brings to your company. Hiring from a global pool of well-qualified candidates, and lowering your overall operating costs, is worth taking on the juggernaut known as payroll taxes.

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