Be it cost concerns or productivity issues; the remote office has to be the greatest discovery for HR managers. However, managing remote employees and taxes is not apparently that great.
It’s only rational that you would be opting for a remote office. The whole world went online after the coronavirus took a full swing at us humans. In a survey by Gartner, 75% of CFOs have decided to shift a minimum of 5% of its workforce permanently online after the lockdown.
Moreover, remote settings have halved the employee turnover rate. Furthermore, remote offices seem to have a positive correlation between employee productivity and satisfaction. So, why hasn’t everyone gone remote already?
It’s because of the legal and financial complications associated with remote employees and taxes. With different tax rates and payout rules across different states and nations, maintaining a virtual team often becomes more of a burden.
At the advent of the pandemic, remote workers might find themselves in the middle of a crossfire between two states, paying twice for the same income. Hence, we have done all the legwork, so you understand the cross-border tax issues and save yourselves from unwarranted hassles.
Word of Caution
Do not take direct actions just because we say so. Everything we say is derived from our personal experience with remote teams here at Apploye. Hence, this article merely serves as an introductory passage to remote employees and tax issues. Your decision is contingent on too many factors. Hence, it is always better to seek help from a legal practitioner such as accountants or bookkeepers before going over the board.
Categorizing Remote Employees and Taxes Liabilities
Tax liabilities are contingent on the type of remote worker your company is hiring. We can categorize the remote workers broadly into 3 segments. Each type has its own tax implications.
Having a full-time remote employee means that you are obliged to comply with the local tax laws and regulations. Even having a full-time remote employee in a different state in the US may also result in unwarranted sales tax.
The fact that contractors pay their own taxes often tempts companies to tag employees as contractors. However, the misdefinition of the term ‘contractor’ may cause considerable tax penalties.
Here is a simple way to distinguish between a full-time employee vs. a contractor. In the case of a contractor, you can only control the outcome of a work. However, as for full-time employees, you can also regulate the policies, standards, and resources required to complete the work. For more details, see the official IRS definition.
Finally, an employee may use his/her sole proprietorship as a medium to generate invoices. However, setting up a proprietorship is almost never an option for independent remote workers.
We know what you are thinking. There is no optimum category. Instead, the chosen structure should result in an advantageous position for both sides.
Step-by-Step Process to Hiring and Paying Independent Contractors
- Double-check the definition of an Independent Contractor
We can’t stress this enough. Make sure that the hired person is really an independent contractor and not a full-time employee. Otherwise, you will be drowning in a pile of paperwork and paying fines and penalties. Remember, a stitch in time saves nine.
In case you are still not sure, you can issue an IRS Form SS-8. This form allows you to request an inspection from the IRS.
- Issue a W-9 Form
A W-9 form is an essential form of hiring an independent contractor. Every contractor is bound by the state to fill-up the form while getting on board. The hired person must submit his Tax ID number, employment ID, and social security number.
Other paperwork that you must have is the resume of the contractor and a copy of the contract.
Both you and the contractor must sign the contract. It should ideally include job requirements, pay scale, and confidential issues, if any. Furthermore, the contractor can also issue an agreement for the nondisclosure of intellectual property if required.
- A Thorough Background Check
You must check all the credentials and records of the contractor before hiring. Moreover, check criminal or felony records just to be safe. In case the contractor has a sole proprietorship, you can contact the Better Business Bureau for further background checks.
- Paying the Contractor
There are several ways you can pay an independent contractor. For instance:
- Third-party e-Payment: You can use popular platforms such as PayPal or Payoneer. Since the market for e-payment platforms is saturated, you can have a wide range of platforms to choose from. Just make sure the platform exists in both countries.
- Remittance Services: You can use traditional services such as Western Union for transferring money if you have a long-standing agreement with your contractor.
- Freelance Platforms: Several freelance platforms such as Upwork and Freelancer, offer a built-in escrow billing option. In such an arrangement, the third-party is responsible for receiving and disbursing the money accordingly among concerned parties.
Just reminding again, an independent contractor has to pay his/her own income taxes. Nonetheless, you must trace the total payment amount and report it to the IRS each year.
Keep track of payments you make to independent contractors each year and report the total payment to the IRS.
Form 1099-NECIf you paid an independent contractor $600 or more in a fiscal year; then, you must report it to IRS using the Form-1099-NEC or NonEmployee Compensati0n within 31 January of the reported year. Moreover, you must also send the form to each contractor within the same timeline.
Remote Employee and Taxes Implications
Every discussion on remote employees and taxes ultimately ends up in discussing location.
Where are your employees located?
Tax Implications for Remote Workers based within Borders (the US)
Generally speaking, every worker in the USA has to pay two types of tax, i.e., income tax and payroll tax. The general theorem is that the workers pay to the state they live in and work.
For instance, you are based in California. However, you want to employ a full-time remote employee from Colorado. Hence, you must register with the tax offices of the state of Colorado.
There are several third-party payroll providers who can help you in the process. Paychex and Gusto are two of the best payroll companies that we recommend. These companies will handle all your concern related to remote employees and taxes.
Tax Implications for Remote Workers based in other Countries
Hiring full-time employees from a different nation come with a unique set of challenges. Apart from some exceptions, organizations are required to launch a local branch in the respective foreign country.
Hence, it is obliged to comply with the local law and regulations concerning full-time employment. In such cases, it is wise to hire a local payroll provider. The payroll company would then be responsible for handling the compliance issues as well.
Coronavirus and its Impact on Remote Employees and Taxes
Novel issues have surfaced related to remote employees and taxes due to coronavirus. In case you haven’t already checked, be sure to follow up on your current location of your remote employees.
Did your remote employees move to their hometown during this lockdown? If yes, then where did they move? It is important to document this information for multistate tax purposes. The word ‘nexus’ is bound to come up in this discussion.
Simply put, a nexus establishes the power of a state to tax you or your business. Hence, if you have your offices in State X and your remote employees in state Y, then state Y may claim a nexus. Hence, taxes must be paid to state Y.
Other laws that you should check in this regard are the following.
Sick and Family Leave Pay
The Families First Coronavirus Response Act issued in March 2020 mandates that the employer provides sick leave and family leave to employees who are directly affected via COVID-19. The law also provides employers with tax incentives.
Moreover, you are required to provide sick pay up for a maximum of 10 days to an affected employee. Furthermore, an employee, mostly female, who needs to take care of a child because of the pandemic, is also entitled to a family-leave payment equivalent to a 10-week payment.
Employee Retention Law
To avail of the employee retention credit, you must pay your employees from March 2020 to January 2021, given that your organization is directly affected by COVID-19. To add, the credit is equivalent to half of the qualified wages.
The Minimum Wage Law
The minimum wage law states that you must pay a higher of the two hourly rates i.e. state rate and federal rate, to your employees. You can learn more about the official minimum wage law here.
We get it. Managing remote employees and taxes is tough. However, the outcome is 100% worth the trouble you undergo. Having a pool of global talents can give your business an unprecedented competitive advantage.
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