Doing payroll as a small business can be challenging—even more so when you have remote employees. The most common questions from employers with remote workers surround payroll taxes.
Key Takeaways
- How are payroll taxes for remote employees different? Payroll taxes for remote employees may be subject to taxes in two states, depending on the employee’s situation, which can complicate withholding.
- Where do you pay taxes? Taxes are generally paid in the state where the work is performed.
- Do you have to register as a business first? Yes, before hiring and paying employees, it’s necessary to register your business in that state.
- What withholding rate do you use for your remote workers? The withholding rate for remote workers is determined by state tax laws. As an employer with remote workers, it’s vital to understand the payroll taxes in every state where you have workers to ensure full compliance.
Learn more about payroll taxes for remote employees below.
State-by-State Tax Breakdown
You’ll need to determine each remote employee’s tax residence and then register your business in every state where you have a remote worker. For those working from their home or hometown, the tax residence will be their home state.
But what about employees who travel to different states? Some states require your company to withhold income taxes even if the employee only works for one day in that state. Other states have a longer threshold of time. For example, as ADP points out, Maine requires withholding after 12 days in the state and earnings of more than $3,000; Utah, in 2022, adopted a threshold of 20 days.
This means you must familiarize yourself with multiple state laws to compute different tax rates for each employee according to their state’s rate. Refer to our interactive map for each state’s tax rate.
Taxes by State
Besides taxes, many states have their own laws regarding other aspects of payroll, such as minimum wage, final paychecks, overtime, and pay stubs. Check out our state payroll guides for a walk-through of everything you need to know to run payroll within your respective state.
How Remote Worker Taxes & Employee Benefits Work for Employers
The general rule is that the laws of the state where the work is performed apply to the employee. This means, for example, if your business is located in California but you have a remote worker in New York, you would follow New York’s tax and labor laws for that employee. This includes income tax withholding, unemployment insurance contributions, and mandatory benefits.
The crux is this: abide by the labor and employment laws of the state where the work is performed. This includes tax withholdings, unemployment insurance, and mandatory benefits.
For instance, California requires employers to provide paid sick leave to employees, while many other states do not. The solution may be to be generous: offer the most generous employee benefits to all employees, regardless of location. While this could increase your costs, it could also boost employee satisfaction and retention.
If you opt for location-based policy, be clear and transparent. Highlight that the differences are not preferential but merely adherence to state law.
How Taxes Work for Remote Workers
When you’re hiring remote employees, the tax landscape becomes more complex. Both employee and employer taxes are influenced by multiple factors.
For the employee, income tax withholdings depend largely on their physical location or where the work is being performed. This could mean an employee living and working in a different state than where your company is headquartered could be subject to their residing state’s tax laws. As an employer, you’re responsible for paying taxes in the employee’s home state, too.
Employee Withholdings
Generally, an employee’s wages are taxed on a state level in the state in which the work is performed. For remote or work-from-home employees, that means that they are required to pay state tax in the state where they reside. Remember, if you’re partnering with independent contractors, you don’t withhold any taxes as they are responsible for paying those.
State Income Tax (SIT)
Remote employees who live in a state that has state income tax are required to have SIT deducted from their wages and remitted to their home state. While not all states have income tax, for those that do, it is the employer’s responsibility to have these taxes deducted correctly and have the funds paid to the state agencies in a timely manner.
For the employer to be able to withhold taxes in an employee’s home state, they’ll need to make sure that they have followed the proper procedures to register within that state. If you partner with a payroll provider, it may be able to help you streamline this process.
Keep in mind that whether your employees report in person each day or are completely remote, as the employer, you will still be required to withhold and remit federal income tax and FICA (Social Security and Medicare) on their behalf as well. For more information on federal taxes and how to compute them, check out our Federal & State Payroll Tax Rate Guide.
Local Income Tax (LIT)
Besides state income tax, some states, such as Pennsylvania, also have local taxes that residents are required to pay. If your remote employees live in local jurisdictions that require them to pay local taxes, you will be required to deduct and remit those on their behalf as well.
Employer Taxes
In addition to federal tax liabilities such as FICA and FUTA (federal unemployment tax), there are also state obligations that employers must follow for remote employees, ensuring the correct tax rates are paid.
State Unemployment Tax (SUTA)
States have the responsibility of paying unemployment benefits to eligible workers who are involuntarily terminated. To fund these programs, states impose unemployment tax on employers. State unemployment needs to be paid to the state that your employees live in; before being able to withhold and pay SUTA, you’ll need to sign up for an account with that state’s applicable agency.
While most payroll software will complete all filings and payments on your behalf, as the employer, you will generally still be responsible for registering with the respective state agencies. If you’d prefer that to be handled for you, consider checking out our guide to the best PEOs.
How to Setup Payroll Taxes for Remote Workers
Setting up payroll taxes for remote workers involves a series of steps that ensure you’re compliant with both federal and state tax regulations. While each state might have slightly different requirements, the following general steps provide a solid foundation for setting up your payroll system to include remote workers.
Before you start withholding any taxes in a state, you need to register your business with the appropriate state tax agencies and the Department of Revenue. You may also need to register with the secretary of state. Some states require you to register with an unemployment agency, provide proof of workers’ compensation coverage, and register with a local tax entity in the city or county where your employee resides.
Each state has its own set of tax laws, rates, and regulations. Understanding these is crucial for accurate tax withholding. Research the tax laws in the state where your remote employee is based. Consider state income tax rates, local taxes, and unemployment taxes. Also, check to see if the state has any reciprocal tax agreements with neighboring states.
After understanding the tax laws, set up your tax withholdings. Configure your payroll system to automatically calculate and withhold the correct amount from each paycheck and to remit that amount based on the schedule provided to you by the state.
Ensure your payroll team is well-versed in handling payroll for remote workers by training them on how to research and understand state-specific tax laws and staying updated on tax law changes. You and they should regularly review your payroll system and update it as necessary. This might mean adjusting withholding amounts or updating registration information.
Need step-by-step help on how to run payroll in general? Check out our guide on how to do payroll for small businesses.
Frequently Asked Questions (FAQs)
What do I do if a remote employee moves to a new state?
If a remote employee moves to a new state, you need to start applying the tax laws of their new home state—including income tax withholding and potential mandatory benefits. You might also need to register your business in the new state.
How does workers’ compensation insurance work for remote employees?
Workers’ compensation is required in most situations but the requirements and implementation vary by state. Some states allow private coverage while others require you to get coverage through a state agency. If you get private coverage, it’s crucial to ensure your policy covers remote workers.
Are there special considerations for remote employees working abroad?
Absolutely. International payroll can be complex due to different tax treaties, labor laws, and social systems. You might need to withhold foreign taxes, pay into a foreign social security system, and comply with local labor laws. You may even need to register your business in the foreign country.
Can I offer a stipend for home office expenses to remote employees?
Yes, many employers offer a home office stipend to cover expenses like internet or office supplies. However, the tax treatment of these stipends varies. Some states consider them taxable income.
Bottom Line
Handling payroll taxes for remote employees can feel like untangling a bundle of knotted threads. By following this guide, you can successfully navigate the obligations and requirements of remote workers and their payroll taxes. It will require work to understand and stay updated on different state payroll and employment laws. But your goal is absolute payroll compliance so taking these steps is necessary.
Payroll providers like Rippling can make processing payroll for remote employees much easier. Its system will use each employee’s address to determine all employer accounts needed and complete all filings and payments on your behalf.
