Ask HR: Where Do Remote Employees Pay Taxes?

Mark Klein, partner and chairman of the New York law firm Hodgson Russ, predicts continuing conundrums as companies in bigger, often more-expensive cities lose talent to other states. No longer tethered to their employer’s business location, many workers have transferred their residency to another state. One way to ensure that you remain compliant in these states while benefiting your entire remote team is to offer a remote work employee stipend. This enables you to give your employees a taxable allowance for their remote work expenses, such as internet access costs, cell phone bills, and home office setup costs. 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. Remote workers that receive Form W-2 from their employers don’t have self-employed status.

Now, that we have cleared the air for remote working employees, from the perspective of an employee as well as independent contractors tele-commuting, let’s take a look at the tax implications for the employer. If you have employees working abroad, you must withhold U.S. income tax from their pay unless you are required by foreign law to withhold foreign income tax. Some employees may qualify for a foreign earned income exclusion if they meet certain tests.

Payroll factor

Whether due to a disinterest in addressing the issue or questions over standing, the U.S. As with many states’ business taxes, the CBT is imposed upon the “privilege of doing business” within the state. The employer maintained its principal place of business in Maryland but employed one telecommuting employee in New Jersey. The employee worked from New Jersey writing software code for the company, which was incorporated into a web application provided to TeleBright’s clients. Apart from the one employee telecommuting from the state, TeleBright had no other connections with New Jersey. Taxpayers that move to a new state should plan carefully, making certain to establish residency or “domicile” in their new home state, and making sure that they have severed all tax ties to their original state.

If your employee works in a different state than where your company is registered, that’s where things get more complicated. Your organization will need to register with local and state tax agencies for each state where you have employees. Your payroll and HR managers will also need to speak with that state’s labor and unemployment agencies to make sure they are following proper protocols and procedures.

Greater Flexibility offered by Remote Payroll Solutions

Offering an employee stipend is one of the easiest ways employers can cover the cost of remote work while remaining compliant with state tax laws. Independent contractors that move from one state to another while working remotely from the same employer must establish a domicile or obtain a permanent residence to avoid double taxation. The evolution and expansion of remote working provides tax professionals with an opportunity to put these skills to work and drive value for their businesses and clients. The issue of paying for remote workers’ expenses, whether because of legal obligations or as a way to attract and keep talent in a tight labor market, isn’t going away as the pandemic recedes.

how do taxes work for remote employees

Consequently, your employer is responsible for reporting your income and withholding unemployment or social security tax to the state where you live. This rule only applies if you live in a state that levies a state income tax on its residents. The same rules apply to full-time employees who live in the same state where they work and go to the office at least a few times per week and remote workers that do most of their work from home.

Determining Residency Status: Key to Understanding California State Tax Withholding for Remote Employees

“The amount of net worth that has moved out of the big cities has been staggering; COVID-19 has opened people’s eyes,” Klein said. “Even in high-level corporate professions, lawyers and bankers are now just as effective working remotely as they were in an office. Yet the shift from the office building to the home office carries complicated tax consequences for firms and businesses that have yet to fully adapt to this new model of working. You’ll also want to draft a company policy for remote work expense reimbursement in accordance with your local laws. Get unlimited advice, an expert final review and your maximum refund, guaranteed with Live Assisted Basic.

Businesses can save money, time, and resources by hiring a remote payroll solution. More importantly, however, the tax implications related to employing remote workers and remote employees to fill remote jobs can be handled by those with expertise to guide you accordingly. They can be critical lifesavers for the business owner’s piece of mind and bottom line. This option can seem complicated and you may occasionally feel that you may have lost control of a critical aspect of your business. But, once you put a competent payroll provider and tax advisor into play, you will ultimately feel an overwhelming sense of calm and peace. Direct hiring is the traditional option and it’s used in almost every non-remote job.