If you have ever attempted to hire or are considering hiring remote workers, this guide will highlight the best ways for you to navigate payroll taxes for remote employees smartly.
Many people have moved over to remote work in the last year, and some have forecasted staying remote for the foreseeable future. The pandemic sprang this move to remote work on many businesses. Since then, many companies are still scrambling to understand how to manage and work on their payroll and taxes. Struggling to adjust to a remote-first world? Check out our blog on managing remote employees here.
The shift to remote has created a situation where companies that previously were bound to finding talent in one location now have the entire world as their hiring ground. But while this seems like a tremendous competitive advantage, there are some specific regulations, rules, and information you should be aware of before hiring someone out of province, state, country, or continent.
If you're a fully distributed company, you've probably contended by now with how you will go about paying and managing payroll taxes for remote employees. But, there are still things that may be a bit of a mystery. That's why we decided to sift through the information available put this guide together!
You may already be working with a remote team or are considering it. No matter the situation, this comprehensive guide can help you understand the intricacies of running payroll and taxes when dealing with a distributed or remote workforce. Need more guidance on working remotely? Our guide provides 7 best practices to find success, fast.
NOTE: Be advised that most of what we have compiled is based on general use cases and various sources. This article is meant to serve as a summary, and there are many edge scenarios that companies may encounter that differ from the content shared here. Things such as your company's location (state/province and country-wise) and where your prospective or current employees live. Contact the Knit team to discuss your specific accounting and payroll needs.
The different types of (remote) workers
There are many different types of worker/employer relationships, so to begin understanding what your duties and obligations are as an employer, you'll have to understand what kind of working relationship you have with your employees. This will impact the tax liabilities both of you will have.
On your end, as an employer, understanding this relationship will properly determine which taxes you have to withhold or pay, which benefits you are expected to provide, whether you equip your employees with overtime pay and more.
In most cases, no matter what country you are operating in or where your employees reside, your relationship with them would fall in one of these three buckets.
Full-time employee: In some cases, you may need to open a second office or a branch of your business in their location and comply with all local labour laws and regulations. This may also apply to those out of state in the US or another province in Canada: your company may need to pay sales tax and specific deductions.
Contractor: For many companies hiring remote workers, this is the preferred relationship. The reason being is that it passes the burden of responsibility of dealing with taxes, deductions and benefits on to the employees. Still, the US (and most other countries) have firm rules on when workers can be called a full-time worker vs. when they are a contractor. Using the wrong classification can lead to a slap on the wrist or a tax bill for the employer. Read more about employee classification here.
Company / Sole proprietorship: In some cases, employees must establish their own company and use it for invoicing or billing their employer for any work they do. Generally, this can be the most straightforward way to hire remote workers, especially for working abroad. While common, setting a company can come with its own challenges and depending on their location, it may not be easy for some employees to do. In some countries, it can be quite expensive to set up and operate a business.
Understanding the different classifications of employee/worker relationships is the basis of understanding payroll taxes for remote employees. Choosing the nature of your relationship with your remote workers is not about picking what is the most convenient or easiest for both sides. Whatever relationship structure you choose must be compliant with the labour and tax laws of the country you operate in and those of the country your remote worker resides in.
Each country's laws differ. Read on to learn more about these nuances.
Paying remote employees
Thanks to technological advancements in the finance industry, we're currently in a world that allows us to move money around the globe cheaply and, most importantly, quickly. This technology is getting even better, with lower fees on transfers than ever.
When considering payroll and taxes for remote workers, the most crucial factor should be their location. Never forget that payroll is not merely about transferring money from your account to your employee's. It also includes your responsibilities and duties regarding withholding, deducting, filing, and depositing taxes (including income, unemployment, benefits and retirement) with the respective state/provincial or federal bodies.
Depending on the relationship structure you have with your employees, your payroll needs will be different.
Paying remote employees residing in the US
To set up payroll for your remote workers, you could set it up for yourself. If you are in the position to do so and only have a few employees working under you (that are not FT employees), all you need to do is set up some easy payments with your bank. The only downside is that you may not have all the necessary information to deduct and remit as local laws govern.
Remember that although you may be working with contractors, you still must be aware of your obligations under tax laws. One such notable responsibility is having 1099 forms generated for every remote or distributed worker that you have paid more than $600 in any given tax year.
If you're the type that loves doing paperwork, this could be a fun weekend project for you. If not, it's probably best to engage the help of an external expert or a company that can help take on the heavy lifting of helping you remain compliant. If you have dreams of growing your business, starting this process off early and correctly can be in your best interest.
Some companies adopt tools like PayPal Payouts, which simplify paying multiple people while also keeping costs low. Tools exist out there that can ease the process of paying several people while keeping costs down. These are useful, but mostly only work in situations where you do not have any full-time workers. On the other hand, they do not do the hard work of dealing with taxes, unemployment insurance, retirement and more.
Generally, small businesses tend to outsource this to their external accountant. Hiring a dedicated expert can be costly; bringing Knit into your company to help manage payroll and benefits and more, no matter where your company is located.
Paying employees who live abroad
Luckily, most of the available options for your non-remote worker are available for your remote team, too.
Firstly, the most well-known is a bank wire. These are easy enough to set up and manage, but costs can pile up. For example, you can expect a ~$30 standard fee for just one wire transfer. If you have more than one employee who lives abroad, you must multiply that $30 fee times each of these employees and the number of times you pay them in a given year (12 if you choose monthly, 24 if bi-weekly). The amount you pay in bank fees could top thousands of dollars.
Understanding exchange rates for your remote workers
Over and above bank fees, you have to turn your head towards exchange rates that will come with setting up payroll for your remote employees.
Most banks and money transfer services around the world often tack on a hidden cost in the form of exchange rates. While there are services that exist (think TransferWise or TransferMate) that help you send money at the global market exchange rate, you still will have to pay a flat commission fee on it.
Now that we've worked through payroll options, fees and employee/worker relationships, let's chat about taxes for remote workers.
Taxes for remote workers
Through this guide, you can probably see that the crux of managing payroll and taxes for remote workers is dependent on where they are located.
Similarly, with payroll, taxes for remote workers are also dependent on where they reside. Even if they're located in the same country as your company, you might need to abide by specific rules if they live and work in a different region or city, state than yours.
Navigating taxes for remote employees living in another country
Employing full-time workers in another country can come with its own set of challenges. In most cases (although there can be certain exceptions), employers may need to open up a local branch for their company in the country where they are hoping to hire. These branches of the company are expected to comply with all local labour and tax laws, including minimum pay, overtime, benefits (retirement, health insurance, paid leave, etc.)
Those companies that operate with a global team may simply choose to hire their employees as contractors vs. full-time. In this case, that would put the onus of managing taxes and local laws on the employee. As we mentioned above, these employees will have to register as self-employed or freelancers in their country and pay the appropriate taxes (income tax, etc.) independently.
Navigating payroll and taxes for remote workers doesn't have to be complicated.
Running a company comes with complexity, but you can take the guesswork out of hiring remotely. Even when it comes to any legal gray areas or any edge cases, it doesn't have to cause you or your team a headache. Depending on your needs and ability, you can choose the best structure for your employee/employer relationship, ensure compliance with taxes and keep your company above board. If you're a Canadian company, check out our payroll calculator blog to learn more.
Need a hand? We can help. Contact the Knit team to discuss your specific payroll and taxes for remote workers today.