The Manager’s Guide to Payroll and Taxes for Remote Workers

The Manager’s Guide to Payroll and Taxes for Remote Workers

If you have hired or are considering hiring remote workers, this guide into payroll and taxes will be invaluable for your business.

Remote teams are the best. End of story. But payroll and taxes for them are not…

Companies that have the entire world as their hiring ground have a serious competitive advantage over those that hire only in their vicinity.

It’s not that we haven’t heard all the BS excuses managers come up with against remote teams.

In fact, there have even been times when our founder Alex has considered switching back to a co-located team.

However—in the end, we decided to commit long-term to build Groove as a fully distributed company, and here we are. We believe we’re a better team and a better business for it.

However, that doesn’t mean that building a remote company is without its challenges. Some are easier to deal with (collaborating across time zones), others are harder to get right (making sure you hire the best people).

For me, the issue that truly stands out (and that stops many teams from going remote) is the question of paying remote employees and dealing with taxes across state and country borders.

That’s why we rolled our sleeves and dug deep to go through the available information and come up with this guide for you.

If you’re considering or already working with a remote team, this article will help you understand the fundamentals of payroll and taxes when dealing with a remote workforce.

Disclaimer: (you knew it was coming)

We’re not lawyers. Nope, not accountants, either.

Most of what we share below is based on our personal experience and knowledge (i.e. it is NOT expert advice).

Moreover, this article is meant to serve as an overview—there are way too many edge cases depending on where your company is based (state and country-wise) and where your employees live (again, state and country-wise).

Therefore, if you get any ideas and want to implement any plan based on what you read, it would definitely be a good idea to consult a real professional before you do anything too drastic.

Types of (remote) workers

The type of working relationship you have with your employees plays an important role in the tax liabilities both of you will have.

For your business, it determines which taxes you have to withhold and/or pay, which benefits you have to provide, whether you have to pay for overtime, and so on.

Generally, no matter where in the world your employees live, your relationship would fall into one of the following categories:

Remote employees could be hired as full-time workers, contractors, or sole proprietors

  • Full-time worker: Sometimes, that means you have to open a branch of your company in their location (especially if they live abroad) and comply with all local laws and regulations. That may apply even if you’re only hiring across a state line in the US—your business may suddenly need to pay sales tax, etc.
  • Contractor: This is usually the preferred way for remote companies to hire people because it passes the responsibility of dealing with taxes, etc. to the employees. However, the US (and most countries) have rigid rules on when a worker should be classified as a full-time employee vs. a contractor. Misclassifying a worker might result in a hefty tax bill for the employer (I go into more detail on this below).
  • Company / Sole proprietorship: In this situation, employees set up their own company and use it to invoice the work they do for their employer. This is probably the most straightforward way to hire a remote employee (especially when working with someone in a different country), but setting up a company is not always available or easy for employees. In some countries, it can be very costly to set up and operate a business.

In any case, choosing the structure of your relationship with remote workers should not be a matter of just picking the arrangement that is simply the easiest for both sides.

Whichever option you decide to go with, you should make sure you’re not on the wrong side of the law, so that the IRS (or their equivalent in your country) don’t come knocking on your door.

Here are the specific points you should consider.

How to pay remote workers

We’re lucky that technology and disruption in the finance industry have created a world in which we can move money around the globe in minutes and often at a very low cost.

Therefore, the most important factor when picking a payment method/provider is where your employees live.

However, it is important to remember that payroll is not just about transferring money into the employee’s account—especially if you have full-time employees, and not just contractors.

It also includes the employer’s responsibilities around withholding, filing, and depositing various taxes (typically income, unemployment, and health insurance) with the respective state or federal authorities.

That’s why you also have to consider the type of working relationship you have with your workforce when deciding how to do payroll.

Paying remote workers based in the US

The simplest cheapest way to do this would be to set it up yourself.

If you only have a handful of employees and they are not full-time workers, all it takes is setting up payments with your bank.

Remember, though, that even if you’re only working with contractors you still have some tax obligations to consider, most notably generating 1099 forms for each worker you’ve paid more than $600 in a given year.

This can be a joy if you get a kick from doing paperwork, but for most people this approach quickly spirals into a logistical and compliance nightmare as their remote workforce grows.

Some companies adopt tools like PayPal Payouts, which simplify the process of paying multiple people while also keeping costs low.

This works well in the cases where you don’t have any full-time workers, otherwise dealing with taxes, unemployment insurance, etc. is going to be just as messy.

Most small businesses usually outsource this to their accountant or to a payroll expert or agency. Hiring a dedicated professional can be expensive, which explains the quick growth in popularity of services such as Gusto (we use it, too!), which simplify and automate many of the processes around payroll.

As more and more modern payroll providers enter the market and offer affordable prices, there is no reason not to start using one as soon as possible

Paying international remote workers

Most of the options available for local employees also apply to your international crew—using bank wires to pay them is certainly an option, however, you may find the cost exorbitant.

~$30 is a standard fee for a single wire—multiply this by the number of employees you have who live abroad and the times you pay them in a year (12 if monthly, 24 if bi-weekly) and you could easily be paying thousands of dollars just in bank fees.

Some companies choose to use platforms like Upwork to pay their employees, even if they don’t hire through them.

Many of these services provide additional benefits such as escrow accounts that provide security to both employers and workers, but the cost they charge (starting at 20% of the first $500 paid to each employee through Upwork) tend to offset the advantages.

Exchange rates and remote employees

Another thing you should consider when hiring internationally is how exchange rates affect your remote employees.

Most banks and many money transfer services incur a hidden cost in the form of an unfavorable exchange rate. Services like TransferWise and TransferMate allow you to send money at the market exchange rate and pay a low flat commission on it.

Additionally, TransferMate integrates with the most popular accounting and payroll software, so it’s even easier and faster to pay your remote team with it.

We’ve looked at some payment options, however, no discussion of payroll for remote employees would be complete without looking at how taxes even work for them.

Taxes for remote employees

As with payroll, the main issue here is where your employees are located.

Even if they’re based in the same country as you, you might have to follow specific rules if they live and work in a different state or region, as is the case for the US.

Taxes for remote workers based in another state

On a general level, workers in the US owe two main types of taxes—income and payroll (even when those are withheld and paid by their employer).

The main principle is that workers pay taxes in the state where they live and work.

So, if your company is based in Michigan, but you’re employing a full-time remote employee who lives in New York, you (as the employer) need to register with the relevant tax authorities and deposit taxes in New York.

Payroll companies (and providers such as Gusto) will handle all this for you—that’s why it’s a good idea to use one.

Employing contractors makes things a bit easier, but even if your company isn’t responsible for withholding taxes, there’s still some paperwork involved, for example issuing 1099 forms for your contractors.

Therefore, even in this case, it’s still a good idea to work with a payroll provider and make sure you have all your bases covered.

Taxes for remote workers based in another country

Hiring full-time workers in another country creates a whole new set of challenges.

Generally (although there are exceptions), you’d have to have to open a local branch for your company and comply with all local laws regarding employment—such as minimum pay, overtime, benefits (health insurance, paid leave, etc.)

Most companies that operate with global teams (Buffer being one example) choose to hire their remote workers as contractors.

That means the employees have to register as self-employed or freelancers in their home country and pay income tax and any other work-related taxes on their own.

Don’t let the complexity of payroll and taxes stop you

Hiring remotely can get complicated because of all the edge cases and legal gray areas.

While the best structure for your business to hire, manage taxes, and pay remote employees depends on the unique characteristics of your business, there are a few guidelines every business should follow:

  • Look for simplicity: Paying a few dollars for a service that saves hours of your time and (potentially) thousands in taxes and fines is worth it.
  • Make sure the arrangement is beneficial to both sides: You don’t want to put your employees into a situation where they have to pay thousands in fees and/or taxes.
  • Don’t optimize at the cost of violating laws: It is guaranteed to come back and bite you when you least expect it.

Compared to the benefits you can get, hiring remotely is definitely worth the hassle. Nothing can give your business the same advantage as having access to global talent.

The best people don’t live in one place, even if that place is called Silicon Valley.

Being able to pick the best team from a pool of talent that spans the whole world will give you benefits that far offset the (short-term) costs you have to make to find out the best ways to set up your team.

All it takes is courage and a bit of research.

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