Tax filing tips for remote workers living in different states amid COVID

Setting up payroll for remote workers [2021 guide]

Tax filing tips for remote workers living in different states amid COVID

Remote work is becoming more prevalent today, especially with the COVID-19 pandemic forcing governments to issue shelter-in-place orders and requiring businesses to close their doors.

Companies now need to place remote workers from different states and even different countries on their payroll. Use this guide to learn how to set up payroll for remote workers.

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  • How to start payroll for remote workers

How to start payroll for remote workers

With a global team, you may be wondering how to add remote workers to your payroll system, especially when different states and countries have their own laws. Follow these steps on how to start payroll for your remote team.

1. Identifying/classifying your workers

The first step is to identify what type of employees you have. There are two types of worker classifications: employees and independent contractors.

  • Employees: As defined by the IRS, an employee performs a service for an employer that controls what will be done and how it will be done. There can be full-time employees and part-time employees. Employers are required by law to withhold payroll taxes from their paychecks, such as federal and state income tax and FICA taxes. Businesses with a remote workforce should make sure they’re following employment laws because different states and countries have their own tax laws and regulations. Depending on the area your remote workers live in, you’ll be responsible for different payroll taxes than the ones you pay for your in-house staff.
  • Independent contractors: An independent contractor, also called a freelancer, is self-employed. Many companies with remote employees prefer hiring independent contractors because they are in charge of their own taxes. When you pay an independent contractor for completing a job or project, you don’t have to withhold payroll taxes from their paycheck. Because independent contractors control what work they do, they have to pay self-employment tax. If you’re unsure whether a remote worker is considered an employee or a contractor, submit IRS Form SS-8, and the IRS will determine for you.

Knowing whether your remote workers are considered contractors or employees is important because it will help you determine how to pay them their classification. If a company misclassifies an employee, they can face a hefty tax bill.

2. Employee location

Where your employees live also determines how you will set up your payroll. The benefit of hiring remote workers is that you can access a larger pool of workers worldwide. However, when it comes time to pay taxes, where they live can make things tricky.


If a remote employee resides and works in the same state where their company is located, employers will pay state and local taxes, pay state unemployment insurance taxes, and withhold state income taxes. Depending on the city or town, companies might also have to withhold local taxes from their employee’s paychecks.

Non-resident (out-of-state/international)

When it comes to out-of-state and international remote workers, how employers set up payroll will be different. For out-of-state employees, employers will withhold income taxes in the state in which that employee lives and works.

However, some states might have reciprocal agreements with neighboring states. This means employees can withhold their income tax in the state they live in and only have to file one tax return.

For out-of-state workers, companies might also have to register with their employees’ local labor and unemployment agencies and comply with their labor laws.

International employees can come with their own set of challenges. In some cases, foreign countries might require businesses to open a local branch when hiring international workers and follow local laws.

Many companies will hire independent contractors to get around this, as they can register as self-employed workers.

When it comes to paying international remote workers, companies might also face expensive bank fees, transfer fees, and exchange rates when wiring money.

Whether they’re remote or in-house employees, federal, local, and state payroll taxes need to be taken every employees’ paycheck. There are two tax forms employers need to be aware of when paying remote workers: Form 1099-MISC and Form W-9.

  • Form W-9: This form, called Request for Taxpayer Identification Number and Certification, collects an independent contractor’s information. It includes their name, business name and entity, and business’s tax identification number. For sole proprietors, this form will also ask for their Social Security number.
  • Form 1099-MISC: This form, titled Miscellaneous Income, is used by employers who paid an independent contractor $600 or more in a calendar year. Form 1099-MISC is used to report miscellaneous income, such as freelance work. This form is sent to both the IRS and the independent contractor, who will use it to file their state and federal tax returns. However, this form will be replaced in 2020 by IRS Form 1099-NEC (Non-Employee Compensation).

In most cases, remote companies hire independent contractors, as they are responsible for completing their own taxes and will use the two forms above. However, companies with full-time remote employees will use Forms W-4 and I-9, which go over an employee’s tax withholding allowance and employment eligibility.

4. Choosing a payroll method

Once companies determine their employee’s employment classification and collect the right tax forms, they must choose a payroll method. It’s important to choose the right payroll method because you want to make sure you pay your employees correctly and follow all employment laws.

  • Service provider: Many companies with both in-house and remote employees often rely on payroll service providers. Payroll service providers, such as QuickBooks, can do the heavy lifting by giving employers tools to handle taxes and payroll at an affordable cost. Cloud-based payroll software can run payroll, along with paying bills, tracking time, and keeping track of inventory. However, choosing the wrong service provider can cause problems. A bad payroll service provider can produce errors, be expensive, and leave business owners responsible for the service’s mistakes.
  • Manual: Businesses that don’t want to outsource their payroll can process it manually. In-house payroll keeps control in a company’s hands and allows them to take full ownership. However, payroll involves a lot of laws. This means a company will have to hire a seasoned accountant who is well informed with local, state, and federal tax and labor laws. In-house payroll will often require more technology and staff, which can add up the cost.

5. Tracking employee time and project/job cost

Tracking time is essential when you have a team of remote workers. Because remote employees can be anywhere in the world, business owners have less oversight and control. Using the right time-tracking solutions can verify that employees log the appropriate hours for specific projects and jobs and input their time off.

Without the right solutions, companies can end up overpaying or underpaying an employee. Companies can take advantage of a few time-tracking solutions, such as cloud-based time trackers, employee-based time trackers, and desktop monitoring software.

With the right time-tracking software, a company won’t have to worry about missing hours or timesheet errors.

Employers have multiple options when it comes to paying remote employees. Below are the most common payment methods employers can use.

  • Direct deposit: This option is typically the most common payment method for remote employees. Direct deposit is often the most convenient option, as an employee’s wages are automatically deposited into their bank account. To set up direct deposit, an employer will need an employee’s banking information, such as their routing number and bank name. Then, each pay period, their wages will be paid through an electronic funds transfer (EFT). Employers should be aware of setup fees, monthly fees, and transaction fees.
  • Checks: Paychecks used to be the most common payment method for employees, but they lost prominence once EFTs became more popular. To pay an employee with a paycheck, an employer doesn’t need an employee’s banking information, and employees don’t need a bank. Through paychecks, employees can go to a check-cashing service and receive their wages for a small fee. However, writing checks can be time-consuming, especially if you have a large remote workforce. Businesses can print checks to save time, but printers can break and run ink.
  • Third-party tools: Today, third-party tools are becoming more mainstream. PayPal, Venmo, Apple Pay, and Cash App make it easy for employers to pay employees. However, an employee will need a smartphone or computer and may have to pay fees when withdrawing money from their mobile wallet.

To make sure your remote team gets paid on time without any issues, consider these best practices for remote workers.

Integrate all payroll factors into one system

As a business owner, you have a lot on your plate. Rather than having a payroll system separate from the rest of your accounting software, it’s best to integrate them to improve efficiency.

  • Time tracking: Through time tracking, you can track a remote employee’s billable hours. Employees will also have the ability to input their own hours. By integrating time tracking, payroll will become faster, more accurate, and cheaper.
  • POS: Your point of sale (POS) system records when a transaction is completed. Integrating your POS system with your payroll service will keep all of your company’s finances together. You can then create invoices and schedule payments.
  • Workers’ compensation: Each state may have different workers’ compensation insurance requirements. Integrating workers’ compensation with your payroll will ensure this insurance premium is accounted for should a worker get sick or injured on the job.
  • Health benefits: Many employers offer health and disability insurance as an employee perk to retain and attract top talent. Integrating your human resources and payroll services can ensure the right amount of deductions are withdrawn each pay period. This way, there will be little room for error or confusion when deducting health insurance from a remote worker’s paycheck.
  • Business operations: Operating a business comes with a lot of moving parts. Streamlining your business operations with your payroll system can keep these parts in one place. Not only will it be easier to keep track of business operations, but doing so can save time and boost efficiency.
  • Expense management: Companies are responsible for a lot of expenses. It’s important for remote workers to keep track of business expenses to prevent fraud or other malpractices. Integrating expense management with payroll can help businesses sort transactions into tax categories and keep track of purchases.

Automate when possible

Automating your payroll is essential to saving time and increasing efficiency. By streamlining payroll and benefits, you can import time clock data, make correct payment calculations for each remote worker, and process the right deductions.

Direct deposit is a key item to automate, as it allows employers to seamlessly deposit an employee’s wages without having to write checks. When you automate payroll, it will be easier to keep accurate records and follow any tax and labor laws.

Keep payroll records organized

Depending on the size of your remote team, it can be easy to get disorganized. A disorganized payroll can lead to missed or late payments.

Keeping your payroll records organized isn’t only important for paying your employees on time and at the right pay rate. The Department of Labor often requires businesses to hold onto payroll information for at least three years.

A payroll service can neatly store each employee’s records in their online database.

The last thing a business wants is to be in the middle of a lawsuit for breaking a payroll law. With that said, it’s important that businesses have staff or use a professional payroll service that is up to date with payroll laws.

Some common payroll laws focus on minimum wage, paying employees promptly, collecting and filing taxes, and overtime pay.

Different states might have their own laws regarding payroll, so check with your local government agency to see what laws need to be followed.

Setting up payroll for remote workers

Setting up payroll for remote workers can be a challenge, especially if you don’t know a lot about payroll laws and how to pay employees. With this guide on how to set up payroll for remote workers, you can ensure your remote team gets paid for their hard work.

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Working remotely from different states? You could face additional state taxes next year

Tax filing tips for remote workers living in different states amid COVID

  • Whether you worked from your living room or an out-of-state relative’s abode, you could be on the hook for state taxes if you didn’t update your withholding.
  • Seven 10 people polled by the American Institute of CPAs were unaware that working remotely in other states could affect the amount of state taxes they owe.
  • Be upfront with your employer about where you’re working during the pandemic. Keep track of where you worked remotely this year, and update your state tax withholding accordingly.

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Remote workers — especially those who have been hopping to different states — could be on the hook for additional taxes when they file their returns next spring.

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It's been nine months since the coronavirus pandemic first gripped the U.S. and led to many workers punching in each day remotely. The longer you've been away from your home base, the greater the odds are that you could have new state tax obligations.

The situation becomes even more complicated if you've been waiting out the pandemic from your vacation home in a different state from where you're primarily domiciled.

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In that case, you could have multiple reporting and payment obligations in different states.

“What matters is that you stay there from Monday through Friday and you work there,” said Lewis Taub, CPA and director of tax services at Berkowitz Pollack Brant.

“You have this escape house, and it's helped you create a problem from a tax point of view,” he said.

Many remote workers might not understand that they're on the hook for more state taxes until they file their returns in the spring.

Indeed, 47% of people who worked remotely were unaware that each state has its own laws related to telecommuting, according to a survey from the American Institute of CPAs.

The organization polled 2,053 adults in October.

Seven 10 weren't aware that working remotely in other states could affect their state tax bill, the AICPA found.

Meanwhile, as many as 3 4 workers have punched in from out-of-state for up to 60 days, according to the survey.

“If you're working in multiple states during the year, it causes complexity,” said Eileen Sherr, CPA, director for tax policy and advocacy at the AICPA.

“When these people file, they will owe money if they haven't had any tax withholding in that state, so they need to change their withholding, so they don't have a big payment in April,” she said.

A patchwork of state laws

Taxpayers who work in one location but reside in a different state could face a tax hit in both places.

States have come up with solutions to mitigate the effect of double-taxation on workers.

For instance, some states have reciprocity agreements with their neighbors to avoid taxing workers' income twice. Maryland, Pennsylvania, Virginia, West Virginia and Washington, D.C., have such an agreement in place, as do Pennsylvania and New Jersey.

Other locales offer a credit to offset the income taxes workers pay in a different state. This is the case in Connecticut, where many residents normally hop on a train to their jobs in New York City.

A group of seven states follow the “convenience of the employer” rule, which taxes telecommuters where their employer's office is located, according to the Tax Foundation.

Those states are Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York and Pennsylvania.

In the worst case, remote workers could be on the hook for two or three state tax returns because they've been working on the go.

If you're earning money in a state where you're not a resident, you could be required to file a non-resident tax return there, as well as pay taxes.

“Different states have different rules for when you need to file,” said Sherr.

For instance, employers must start withholding state taxes if an employee has been in Arizona for more than 60 days.

Meanwhile, employees who work in New York even one day are required to file a return, according to the Mobile Workforce Coalition.

© Provided by CNBC States have different rules around telecommuting and tax obligations.

You might want to keep quiet about your roaming, but the reality is that states can detect taxpayers who are skirting the law.

For starters, if your employer knows where you're working, your Form W-2 and state tax withholding would be an indicator of your location, according to Sherr.

“It is also possible that states could audit the taxpayer and ask for documentation, credit card bills, cell phone records and utility bills,” she said.

Procrastination perils

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Get ahead of the issue by being upfront with your employer about where you've been.

This way, your state-level withholding will be accurate, and you can head off taxes and penalties in 2021.

Get your recordkeeping in order, too. “I'm calling clients in New York to count their days,” Taub said.

Whether you're crashing in your vacation home or you've been roving state to state in an RV, you should keep track of the states in which you've worked remotely and the amount of time spent there, according to the AICPA.

Be specific about your location. Cities and counties can levy income taxes, too.

Make an appointment with your tax professional to get ahead of the problem while you can still act.

“Dual state filing is complex,” said Dina Pyron, partner at Ernst & Young and global leader of EY TaxChat.

 “In general, people look at this and say, 'I don't know how to file in multiple states and get the right offsetting credits,'” she said.

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