So you want to hire the best talent regardless of location? Great news: it's never been easier.
You have access to a huge talent pool of people who want the flexibility of remote work. But how do you pay them? Is processing payroll more difficult for workers in other parts of the US? What about internationally?
If you're asking these questions, we have the answers.
At ConnectPay, we strive to help small businesses navigate all aspects of payroll
In this article, we'll outline everything you need to consider when processing payroll for remote employees. From correct classification to taxes, and even tips on managing remote employees.
You'll be ready to confidently hire remote workers and level up your team!
Payroll for Remote Employees: How to do it Successfully
Remote work benefits you as the employer as much as it benefits your employees. If you get it right. You need trust and robust systems and processes to ensure your team is productive. Benefits include:
- Increased Productivity: With fewer meetings and distractions, remote workers can be more productive in their own space.
- Lower overhead costs: Some companies are fully remote and don't need to rent office space or worry about related expenses.
- Access to a larger talent pool: You can expand your search for talent beyond your local area. With today's tools, you can hire qualified candidates from anywhere in the world.
- Greater flexibility: Remote workers can work from anywhere and usually have the freedom to work anytime, save for internal and client meetings they need to attend.
- Employee retention: According to this survey, 82% of respondents said the ability to work from anywhere has made them happier. Happy employees stay longer.
- Increased diversity: You'll inevitably increase your team's diversity, bringing fresh perspectives and ideas to the table.
Alright, so we know the benefits of remote work. So what do you need to consider when running payroll? Is it different from running payroll for in-house employees?
Various things relating to schedules, taxes, worker classification, and currencies could trip you up.
Consider outsourcing payroll if you want to ensure you're getting it right. Many payroll providers can assist with running payroll for remote employees to take the pressure off.
1. Employee or Contractor?
The first thing to do is determine whether the worker is a remote employee or an independent contractor. It's easy to blur the lines in ordinary settings and even easier with remote workers. What's the difference?
Related: 1099 vs W2: 4 Tips for Classifying Workers Correctly
Let's use the example of an IT consultant.
If you classify them as contractors, they will provide their own computers, get paid on a project-by-project basis, and set their schedule. They’re also free to accept projects from other clients.
Conversely, you'll have more control over W-2 employees, including when they work, who they work from, and how they're paid.
Make sure you know the rules. You're not saving money on payroll taxes by misclassifying employees as contractors. But you might open yourself up to audits, fines, and penalties.
If you hire an international worker, is employee or contractor best? Consider the laws and regulations of other countries and ensure you're compliant.
In comparison, international contractors take on their own tax and legal responsibilities.
2. Paying Remote Workers in the US
Paying remote employees in various states is the same as paying employees who work in a physical location. You're still responsible for withholding payroll taxes from their paychecks.
However, if they live in a different state, you need to comply with the specific tax laws and regulations where they are. This is where things get tricky. Do remote employees trigger nexus?
Each of the 46 states with state and local sales tax has its own definition of what defines nexus. But the crux of it is, having even one employee working in a state can trigger nexus.
You'll need to do your due diligence to determine how it affects your team.
You can pay remote workers by a variety of methods, including
- Direct deposit
- Through a payroll provider
- Venmo, PayPal, and more
Payroll providers calculate and withhold taxes, file them, provide guidance on compliance, and ensure you pay employees on time and in full, whether in-house or remote.
Taxes for Remote Employees
You're responsible for withholding and remitting several federal taxes, including
- Federal income tax: This is based on the employee's income and the tax rate specified in the Internal Revenue Service (IRS) tax tables.
- Social Security and Medicare taxes (FICA): This includes a 6.2% Social Security tax and a 1.45% Medicare tax, both of which are withheld from your employee's pay.
- Federal Unemployment Tax Act (FUTA): You, as the employer, pay this. The revenue it generates funds unemployment benefits for people out of work.
Depending on the employee's location, you may also be required to withhold and remit state and local taxes. These may include state income tax, unemployment, and disability insurance tax.
Taxes for Remote Contractors
Remote contractors handle their own taxes. When you pay remote contractors, you don't have to withhold taxes from their pay. You also don't need to comply with local or state laws and regulations.
The responsibility falls on the contractor.
Hiring a remote contractor is an attractive proposition for a company, but it's essential to classify workers correctly.
3. Paying Remote Workers Outside the US
It takes more research and thought to pay remote workers outside the US. Before you hire an international employee, get all your ducks in a row.
- Tax laws: Will you need to withhold and remit taxes to a foreign government? What about Value Added Tax? You might need to register with a foreign tax authority and obtain a taxpayer identification number. The best thing to do is consult with a tax professional or lawyer familiar with the tax laws of the country where the remote worker lives to ensure compliance.
- Currency exchange rates: The currency's value may fluctuate, affecting the amount of money the remote worker receives. It's a good idea to use a reliable currency conversion service or consult a financial advisor to understand the exchange rate better.
- Compliance requirements: What are the labor laws in the country your employee works in/ Think about minimum wage requirements, overtime pay, and benefits. Again, a tax professional or lawyer will be a helpful resource.
- Payment methods: International wire transfers, online payment systems like PayPal, and international checks are all viable options. Each method has its pros and cons, such as fees, exchange rates, and transfer time.
- Employee Classification: Similar to remote worker classification in the US, you'll also need to determine if international workers are employees or independent contractors. Your decision affects taxes, benefits, and compliance with labor laws.
Taxes for Remote Workers Outside the US
International contractors handle their own taxes and compliance.
Hiring international contractors is beneficial as it reduces your compliance obligations and costs associated with taxes, benefits, and labor laws.
However, classifying a worker as an independent contractor rather than an employee can have legal and tax consequences.
Bringing your international workers on as full employees provides more stability and security for your workers and your company and can help ensure compliance with labor laws.
Still, it also comes with more compliance obligations and costs.
4. Communicating With Remote Employees About Payroll
Remote workers need clear communication and guidance as much, if not more, than in-house employees.
You must establish clear expectations with employees by clearly communicating information on pay rates, pay dates, and how you'll pay them (direct deposit or check).
Related: Choosing a Payroll Schedule: 4 Things You Need to Consider
Remote employees also need access to their pay stubs, W-2 forms, and other documents.
It's a good idea to have someone on staff who's an expert in remote employment and can answer remote employees' questions.
The most important thing is that remote employees, like your in-house employees, are paid accurately and on time.
5. Payroll Software and Remote Employee Payroll
We don't blame you if your head feels like it may explode.
Understanding payroll, taxes, benefits, and rules and regulations is complex enough as it is. Now that remote work is becoming so popular, there's an extra layer of confusion to deal with.
Outsourcing payroll is the way to go. It takes the pressure off of you.
Outsourced payroll providers can calculate and process payroll for remote employees, including withholding and remitting taxes, calculating employee benefits, and issuing paychecks or direct deposits.
Some providers also offer time tracking and management services to help businesses keep track of hours worked by remote employees.
Outsourcing payroll means taking compliance off your plate, too!
Payroll providers ensure they're up to date with the latest laws, regulations, and compliance requirements and that you comply with the laws that apply to your remote workforce.
What about reporting? Many payroll companies provide reports and analytics to help you track payroll expenses, manage your budget, and make informed decisions about your remote workforce.
Lastly, Some providers specialize in handling international payroll, and can manage the complexities of a remote workforce in different countries, such as different tax laws, currency exchange rates, and compliance requirements.
Payroll for Remote Employees: You're Not Alone
Paying remote employees in the US is simple once you know how - the main issue being state laws and regulations. Paying employees outside the US is more complicated.
Still, many remote workers enjoy the flexibility of being a contractor, anyway–so you might not have to worry about it unless you plan on expanding your company internationally.
Partner with an outsourced payroll provider to ensure accuracy and keep remote employees in the loop and productive.
Payroll providers that connect with local, regional, and state experts can manage all aspects of payroll so you can focus on your business.
Still have burning questions about remote payroll processing? Reach out to a ConnectPay representative, and we'll connect you with a local expert who can help.
Additionally, discover the best way for your business to run payroll in our free guide, the Connected Guide to Small Business Payroll.