Payroll Taxes for Remote Employees in the US: What You Should Know
Charlette has over 10 years of experience in accounting and finance and 2 years of partnering with HR leaders on freelance projects. She uses this extensive experience to answer your questions about payroll.
This article is part of a larger series on How to Do Payroll.
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.
How are payroll taxes for remote employees different? Where do you pay taxes? Do you have to register as a business first? What withholding rate do you use for your remote workers? As an employer with remote workers, it’s vital that you understand payroll taxes in every state where you have workers to ensure full compliance.
If you prefer not to worry about understanding tax obligations for remote employees, consider using a payroll provider like Rippling. Its system will use each employee’s address to determine all employer accounts needed and complete all filings and payments on your behalf.
Need step-by-step help on how to run payroll in general? Check out our guide on how to do payroll for small businesses.
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 23 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.
State-by-State Tax Breakdown – /how-to-do-payroll-remote-employees/
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.
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 2022 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 PEOs.
Bottom Line
Remote employment has become more prevalent in many jobs today. It’s important small business owners know their role and what’s required of them to remain in payroll compliance. Processing payroll for remote employees can be complicated, but using our state guides to understand your obligations on a state-by-state basis will make the process much easier.
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.
