Setting Up Payroll and Taxes for Remote Employees in 2023

A new year often means new opportunities for a better business year than the previous one. And with 2023 on the horizon, new projects & opportunities could require adding new workers to your remote team. After all, your talent acquisition strategy should aim to expand your talent pool, and doing so as a remote company with flexible working schedules is much easier.

However, the legal and administrative process of setting up payroll for a new member of your team can be quite daunting, as it requires collecting the right paperwork and staying up-to-date with relevant tax laws to make sure your employee is properly compensated and reported on. All this can easily confuse you, but we're here to help—read on to learn how to manage and structure payroll and taxes for your team of remote employees.

» Want to hire remote employees? See how to manage your global workforce

Key Considerations Before You Get Started

Before you choose your payroll software and start setting up the entire payroll structure of your organization, you first need to understand that you'll be primarily working with two types of workers: full-time remote employees and independent contractors. Let's understand the differences between them:

Full-Time Remote Employees

Full-time remote employees are those who work for the company on a permanent basis and receive regular compensation. They usually have set working hours and follow the employer's policies. Full-time employees are often considered 'employees' in the eyes of the law, which means you'll have to withhold income taxes and social security contributions from their salary. In addition, you'll also be responsible for providing them with all the full-time employee benefits.

Independent Contractors

Independent contractors are workers who don't receive regular salaries or additional benefits associated with working for the employer. They're often hired on a project-by-project basis and paid according to their services. Unlike full-time employees, independent contractors aren't considered 'employees' in the eyes of the law and are thus not subject to withholding taxes or social security contributions from earnings.

So, setting up the payroll process is easy for independent contractors—the real difficulties come with setting it up for your full-time employees. Some key factors to consider before you set up the payroll process for your remote employees include:

• Checking the employee's location and ensuring compliance with their laws
• Researching the fees for bank transfers and fund transfers
• Looking into exchange rates if your employee accepts payments in another currency
• Finding a payment method suitable for them, whether it's a direct deposit or through an e-wallet

Setting Up Payroll for Remote Employees

To avoid legal issues and minimize stress while managing payroll, you need to know how to properly set up the system in your organization. As you can see below, this depends on your employee's country and state of residence.

Remote Employees Residing in the U.S.

If your remote employee resides in the U.S., you need to comply with local, federal, and state-level tax legislation and collect the correct employee information, such as their social security number, address, and other necessary data. If the employee is in the same state as your business, the company should withhold state income taxes according to the state's jurisdiction.

On the other hand, if they reside in another state, you'll have to comply with the employee's local regulations.

Remote Employees Living Abroad

If your remote employee resides in another country, you need to be aware of the country's jurisdiction and comply with it by determining how much tax needs to be collected from the employee and remitted to the government. Usually, this requires establishing some form of legal entity in that country, like opening an LLC or an LP.

To avoid this administrative hassle, the easiest solution for handling full-time employees working abroad is hiring them as independent contractors or partnering with a global employer of record. Another alternative is to outsource a multi-country payroll provider to pay for its international employees.

» Outsourcing payroll: see if HR functions still do it

Setting Up Taxes for Remote Employees

Taxes are a critical part of managing payroll for your remote workers. As previously mentioned, the local and federal laws vary depending on the employee's location, so you need to make sure you comply with the taxes associated with each of your remote employees. Usually, the employer pays local taxes in the country/state where the employee works in addition to registering with local and state tax agencies. Let's dive into more detail regarding taxes.

Remote Employees Residing in the U.S.

For remote employees living in the U.S., you need to collect and pay local, state, and federal taxes. This means withholding income taxes from your employee's wages on a semi-monthly or monthly basis and filing appropriate tax forms with the IRS (Internal Revenue Service). In addition to potentially registering your business in every state where you have a remote worker, you'll also need to familiarize yourself with the state's laws and calculate the relevant taxes at a state level.

Remote Employees Living Abroad

If your remote employee is living outside the U.S., you need to comply with foreign taxes and regulations. This might include setting up a legal entity in that country, registering for social security, and understanding the tax implications of paying an employee abroad. It's worth mentioning that most countries have a double-tax agreement, ensuring workers only pay taxes in the country they're currently residing. Nevertheless, this tax rate can vary vastly, so you have to make sure you have the right info.

» Tax ID vs. EIN: see the difference

Properly Set Up Payroll and Taxes for Remote Workers

Setting up the payroll process and properly managing taxes can be challenging, but if you're familiar with the relevant laws, the underlying challenges will be easy to overcome.

Nowadays, the majority of remote businesses use good payroll software to manage salaries for remote workers. These tools will save you a lot of time when processing payroll and taxes, in addition to helping you stay compliant with all relevant laws. Also, adopting an automated payroll solution will provide a way to properly set up the entire payroll infrastructure.

» Need help setting up your payroll for remote employees? Read TBR's payroll software reviews to find the right solution for your remote business needs.