Guide to Taxes for Remote Work
In covid times remote work is a reality. Companies and employees have been enjoying remote work policy for a while. But naturally, the benefits of not driving to a physical office (employees) or paying a fortune for office rent (employers) don’t come without additional headaches.
One of the most significant issues is remote work taxes. All taxpayers have to pay taxes, but how do you do that when working remotely? Keep reading the article to learn about remote work taxes and the issues you may face.
Remote Employee Types
Both remote employees and their employers pay taxes. Remote employees pay income and payroll tax, while the employer is responsible for withholding payroll taxes each month. It’s critical for employers to understand the difference between remote workers.
Based on the classes of remote workers businesses hire, they must withhold specific taxes, provide benefits, pay for overtime, etc. And here are remote employees that affect taxation.
It’s critical to comply with state or foreign country laws to ensure you’re not breaking any rules. But overall, the employer must provide the same benefits and pay taxes as they would pay for traditional employees in a physical workplace.
Sole Proprietor (A Business)
In this case, you either work with an already existing company or enable employees to create another business in a foreign country. It’s a straightforward way to hire a remote employee (or a team) from another country.
This option isn’t always available. In some situations, it’s costly to launch and operate a business. But if that’s the case, an employee sends an invoice to their employer, and employees pay taxes as a corporation.
It’s probably one of the best options for remote companies to hire remote workers considering remote work taxes. Remote employees hired as contractors deal with the responsibility of filing taxes, and they also don’t get traditional benefits.
It’s worth mentioning that the US, like most other countries, has strict rules on when an employee must be classified as a full-time worker or a contractor. Worker misclassification can lead to significant tax bills.
Choosing An Option
The decision on what type of worker relationship to choose shouldn’t be based on the convenience of the arrangement alone. Yes, it’s critical to ensure a smooth process, but it’s also important not to end up on the wrong side of the law.
When choosing a type of worker to hire remotely, check the federal, state, and local laws. For example, if you have a remote worker based in another state, it’s your responsibility to ensure payroll taxes go to the right state — more on that further in the article.
Another important detail is that companies should check with the IRS rules and tax agencies in other countries if the HR department is thinking about hiring foreign employees.
Taxes For Remote Workers
For employers, the main concern is where the employee is located. Even if the worker lives in the same country, it doesn’t mean an employer won’t have to comply with another state’s remote work taxes laws.
The situation is even more complicated when the worker is located in a different country. This section of the article is focused on taxation based on the worker’s location.
Employees Based In Another State
Typically, the US working people owe two main tax types to the country:
- income tax;
- payroll tax.
The employer withholds payroll tax from the paycheck, but workers still may owe this tax to the IRS. Income tax is based on all sources of employees’ income. They have to file their tax return and pay everything they owe to the IRS.
But the main idea is that employees pay taxes in the state where they live and work. So, if your business is located and registered in California, but you hire a worker from Massachusetts, you have to register with the relevant tax agencies and deposit taxes in Massachusetts, not in California.
The easiest way of dealing with the taxation headache, in this case, is using the services of an accountant or a payroll company. Most payroll companies take care of all issues related to paying salaries and dealing with taxes.
The situation is a bit easier when working with contractors. Note: even though the business won’t have to deal with paying taxes on behalf of their workers, it doesn’t mean the absence of paperwork. A company will have to issue 1099 forms for contractors.
Employees from Foreign Country
If it’s complicated to hire remote workers from other states, one might assume it’s an even bigger challenge to hire foreign employees.
Typically, companies have to open additional branches in the target country (although there are a few exceptions to the rule). The branch has to comply with all local laws related to employment. The remote work taxes laws include:
- minimum pay;
- overtime pay;
- benefits, such as health insurance, paid leave, etc.
Most businesses working internationally prefer hiring contractors. According to this business model, foreign workers register as self-employed individuals or freelancers in their country. They have to file and pay income tax and other possible taxes themselves.
How To Lower Remote Employees Taxable Income
Remote employees have a few options to lower their taxable income:
- Hiring through EOR. What is EOR? It’s an Employer of Record organization, and there are several such agencies worldwide. It takes the responsibility of hiring remote employees in compliance with local laws and tax regulations. It’s a great option for both an employer and their employee.
- Worker classification. Employees should make sure they are employed according to their country’s/state’s laws. Classification impacts a variety of factors, including what taxes workers must pay.
- Self-education on tax laws. Different countries, states, and even cities have different taxation systems. Pay closer attention to claimable deductions and credits that lower remote workers’ income.
These are 100% legal options to ensure you don’t overpay in taxes.
Take the first step to your new remote career!