Updated November 16, 2020
If you find that you’ve got more employees working outside the office, you’re not alone. Whether you’re expanding your workforce, offering employees a more flexible way to work, or extending work-from-home policies you created to respond to COVID-19, giving employees the option to work remotely is something many businesses are thinking about more actively.
From 2005 to 2017, there was a 159% increase in remote work. Recent studies also suggest that nearly 43% of full-time American employees say they want to work remotely more often and that more than a third of US jobs can be done remotely. While remote work has lots of benefits, there are also some hurdles to clear to make it a reality.
When it comes to running payroll, your employees’ physical location is used to determine which payroll taxes should apply. Having employees in multiple states can add some layers of complexity to your calculations, so here’s a closer look at what you ought to think about when you’re paying remote workers.
Remote employees and contractors
Whether you classify a worker as an employee or independent contractor matters to both your payroll calculations and the IRS. You have to withhold and pay state income taxes for most employees, but contractors are on the hook for their own taxes.
So before you spend too much time thinking about how to pay remote employees, it’s best to make sure your remote workers are employees at all. Here’s a quick overview (or you can see a more detailed view of the differences):
Who’s an employee?
Start by looking at the degree of control you have over the worker’s behavior and finances. Ask yourself:
- Do I set the worker’s hours?
- Do I provide the worker’s equipment to do their work?
- Do I provide detailed instructions on how work is to be completed?
- Do I provide training on how to do the work?
- Do I provide on-going training about company procedures and processes?
If you answered yes to all or most of these questions, the worker is probably an employee.
Now ask yourself these financial questions:
- Did I make a significant investment in the equipment the worker uses to do the work?
- Do I reimburse the worker for any out-of-pocket expenses they incur?
- Is the worker unable to work for other companies?
- Do I pay the worker a guaranteed wage (i.e. hourly rate, annual salary)?
- Do I provide benefits, like medical insurance, vacation pay, or retirement contributions, to the worker?
Again, if the answer is yes, the worker is probably an employee.
Who’s a contractor?
If you answered “no” to most of the above questions, then it’s very likely that they are a contractor who’s working for themselves while providing a service to your company. A few other things to consider are:
- Is there a written agreement between you and the worker that spells out fees to be paid, deliverables, or a timeline for completion? This worker is probably a contractor.
- How long is the relationship expected to last? If the work is project-based or for a specified period of time, this worker is probably a contractor.
Why a worker’s location matters when calculating payroll
Once you’ve confirmed your employees are actually employees, the most important thing to know is that employers calculate and pay state payroll taxes based on where each employee works — not where the employer is based. If an employee works in Georgia, for example, they must pay state income taxes to Georgia.
This, for example, wouldn’t be a big deal if your company is also located in Georgia. But if your business is located in Illinois, you’ll have some extra work to do to get payroll right. If this feels like a lot to keep straight, you may consider a payroll service that can handle a lot of these tasks (and save you a bunch of time).
For an out-of-state employee, you’ll probably need to register your company with the state’s taxing authority. You’ll also need to look into registering with the unemployment department. Typically, this involves completing forms and possibly paying small registration fees.
Once you’re set up, you’ll have to withhold state income tax from your employee’s paycheck, file a payroll tax return, and send the tax to the state. If you have employees in multiple states, you’ll have to complete this process for each state.
As you sort this out, keep in mind that not all states are the same. Some require employers to provide disability insurance to employees. And others require employees to contribute to unemployment insurance or require workers’ compensation. Knowing which taxes to withhold and what benefits you’re required to provide can be complicated.
It pays to do a bit of homework before hiring remote workers in other states so you know what to plan for — and before you start doing any payroll calculations. Or have your accountant or payroll service provider handle the set-up for you. They’re experts and can take care of the heavy lifting here. Though most providers charge a fee for these services, some have all-inclusive payroll pricing that cover the costs up front.
Time tracking and remote employees
If your remote employees are hourly, you’ll need to communicate their schedule and track their hours to get them paid correctly. You can use something as simple as a calendar system or shared spreadsheet, but online scheduling and time-tracking software can be a real time-saver here. Many also integrate with payroll software, so it’s worth investigating what options are available.
You’ll also want to take into account both states’ minimum wage requirements when you’re determining pay rates for hourly employees. While location may not currently be a protected class when it comes to pay discrimination, it’s a good idea to be consistent across similar job roles when determining wages.
Paying contractors in different states
Paying contractors that reside in a different state from where you operate shouldn’t create additional work for you since employers typically don’t withhold payroll taxes for contractors. Like any contractor you work with locally, you’ll need them to complete a Form W-9, and you’ll send them a Form 1099-NEC in January if you paid them more than $600 in the previous year.
Keeping up with payroll deductions and taxes when you have workers in different states can be complicated, but we hope this article has spelled out the things you need to know — and document — to get your payroll right. Here’s a checklist to help you understand your choices if you decide to consider an outsourced payroll solution.
This article is for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.