Digital technology has made it more attractive for companies to bring on remote employees capable of working almost anywhere. Keeping track of remote employees for payroll reporting purposes can be somewhat confusing.
Understand that making payroll for remote employees is really not the issue. Workers have to be paid regardless of where they live and work. Small businesses pay their remote workers the same way as on-site workers are paid: by paper check, direct deposit, or payroll card. The two biggest payroll concerns for remote employees are income tax withholding and employee reporting.
Withholding Federal and State Income Taxes
The general rule for withholding state income taxes is as follows: employers withhold income taxes according to where work was performed. So if a remote worker lives and works entirely in New York despite his employer being located in South Carolina, that worker's income taxes would be withheld according to New York law and paid to New York State.
By contrast, consider a remote employee who works in multiple states. Taxes must be withheld and paid for each of those states. Having said all that, there are two additional factors that may complicate withholding.
Different States for Work and Residence
This first complication doesn't really affect remote workers, but it still bears explanation. It deals with employees who work on-site but reside in other states. This is a common problem for companies located near the borders of the respective states. In most cases, cross-border workers pay income tax in the state in which they work rather than their state of residence.
The other side of that coin is the employee who lives in the same state as the employer but works exclusively across the border in another state. Because the worker's state of residence is identical to the location of the employer, state income taxes must be withheld and paid in that state. Additional withholding may also be applicable in the state in which the employee actually works.
Employee Tax Reporting
The other issue at play here involves where employees file their state tax returns. Once again, the general rule stipulates that workers file state returns in their states of residence regardless of where they work. But a non-resident filing is usually required to account for income earned in a non-resident state.
The good news is that most states offer tax credits to account for taxes paid in other states. There's certainly no guarantee as state tax laws differ. Better yet, there are a small number of states that have reciprocal tax agreements. These agreements stipulate that a worker who works exclusively in a state other than the one in which he or she resides will only have to pay income tax in that state.
We Understand Complex Tax Laws
If you've not had a lot of experience with remote workers, you may be confused by all the information presented here. That's understandable. Remote work is something that is just beginning to emerge in this country, and something state and federal tax laws have not caught up to yet. The most important thing for you to know at this point is that BenefitMall understands complex tax laws dealing with remote and cross-state workers.
Our comprehensive payroll service solutions include complete tax withholding, reporting and payments. We can completely take over your payroll department and alleviate you of the responsibility of having to figure all this out. Working with us eliminates all your tax withholding and reporting headaches.