Remote work is more prevalent than ever, with nearly 60% of employees being able to work remotely at least part of the time, according to a recent McKinsey survey. That means small businesses now need to place remote workers from different states (and even different countries) on their payrolls. Use this guide to learn how to set up payroll for your remote workers and manage one of the most tedious functions for payroll departments—taxes.
Types of remote employees
With a global team, you may be wondering how to set up payroll for remote workers in your payroll system, especially when different states and countries have their own laws. The first step is to identify what type of employees you have. You’ll want to classify your remote employees based on their role, as well as where they live.
Employees vs. independent contractors
There are two types of worker classifications that you’ll use for your remote workers. You can either hire them as employees or hire them as independent contractors (aka 1099 contractors). Here are the key differences to know:
- Employees: As defined by the IRS, an employee performs a service for an employer who determines what to do and how to do it. There can be full-time employees and part-time employees.
- Independent contractors: An independent contractor, aka a freelancer, is self-employed. Many companies with remote employees prefer hiring independent contractors because they are in charge of their own taxes.
If you have employees, the law requires you to withhold payroll taxes from their paychecks, such as federal and state income taxes and Federal Insurance Contributions Act (FICA) taxes. 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.
When you pay an independent contractor to complete a job or project, you don’t have to withhold payroll taxes from their paycheck. Because independent contractors determine how they work, they have to pay self-employment taxes.
Knowing whether to classify remote workers as employees or contractors is important for determining how to pay them and which payroll tax laws you need to adhere to. If you misclassify an employee, they may face a hefty tax bill.
Location
Now that you have categorized your remote workers as employees vs. independent contractors, you should further classify them using location. Where your employees live also determines how you will set up your payroll accounting.
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. The two types of locations you’ll have are:
- Resident: If a remote employee resides and works in the same state as their company, employers will pay state and local taxes, state unemployment insurance taxes, and withhold state income taxes. Depending on the city or town, you may also have to withhold local taxes from your employee paychecks.
- Nonresident (out-of-state/international): How employers set up payroll will be different when it comes to out-of-state and international remote workers.
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 taxes in the state they live in and only have to file one tax return.
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 to follow local laws.
Many companies will hire independent contractors to get around this, as they can register as self-employed workers. When paying international remote workers, companies might also face expensive bank fees, transfer fees, and exchange rates when wiring money.
How to set up payroll for remote workers
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 to follow local laws.
Many companies will hire independent contractors to get around this, as they can register as self-employed workers. When paying international remote workers, companies might also face expensive bank fees, transfer fees, and exchange rates when wiring money.
How to set up payroll for remote workers
Track employee time
Because remote employees can be anywhere in the world, business owners have less oversight and control.
That’s where 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. Here are some to consider:
- Cloud-based time trackers: Online tools that allow you and your employees to track and manage their time and tasks from any device with internet access
- Employee-based trackers: Software for employees to monitor and track activities, productivity, and performance.
- Desktop monitoring trackers: Tools or software programs that enable employers or administrators to monitor and record the computer activities of employees
With the right time-tracking software, a company won’t have to worry about missing hours or timesheet errors.
Pay remote employees
Once you have the time for your remote workers, it’s time to pay them. 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 also the most convenient option, as deposits are automatic for an employee’s wages.
- Checks: Physical paychecks were once the most common payment method for employees but are less common thanks to direct deposit.
- Mobile apps: 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.
If you go the direct deposit route, you will need an employee’s banking information, such as their routing number and bank name. Employers should be aware of setup fees, monthly fees, and transaction fees.
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 out of ink.
4 steps to set up payroll taxes for remote employees
Whether you have remote or in-house employees, you must withhold federal, state, and local payroll taxes from every employee’s paycheck. Companies will use Forms W-4 and I-9, which cover an employee’s tax withholding allowance and employment eligibility.
If your remote workers are independent contractors, you’ll need Form 1099-MISC and Form W-9. Form 1099-MISC reports miscellaneous income, such as freelance work, for the tax year. The W-9 collects an independent contractor’s information, such as name, tax identification, or Social Security number.
Federal taxes
One of the most significant federal taxes that applies to all remote workers is the Federal Insurance Contributions Act (FICA) tax, and it’s composed of two parts:
- Social Security tax is 12.4% of taxable wages, with both the employer and employee responsible for contributing 6.2%.
- Medicare tax, on the other hand, is 2.9% of taxable wages, with both the employer and employee responsible for contributing 1.45%.
Additionally, employers must withhold federal income taxes from employees’ paychecks. The amount of federal tax withheld from an employee’s paycheck is determined by their tax bracket and the number of withholding allowances claimed on their W-4 form.
Employers must deposit the taxes withheld from employee paychecks, along with the employer’s portion of Social Security and Medicare taxes, to the appropriate federal tax agency on a regular schedule.
State taxes
State taxes can vary widely depending on where the employee is located and can impact both the employer and the employee.
As an employer, it’s important to determine which states have taxing authority over your remote workers. Most states have specific rules that determine whether certain types of payroll taxes apply to nonresident employees, so it’s crucial to be aware of these regulations and to ensure that you’re withholding the correct amount of state taxes from your employees’ paychecks.
Local taxes
When it comes to payroll for remote employees, it’s not just state and federal taxes that employers need to consider. Many local governments also have their own unique tax requirements to take into account.
For example, cities like New York have a local income tax that employers must withhold from employee paychecks. In some cases, local taxes may only apply to residents of that specific city, while in others, they may apply to anyone who works within the city limits.
Tips for setting up remote employee payroll
To ensure your remote team gets paid on time without any issues, consider these best practices for managing payroll for your remote workers.
Integrate payroll 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.
You’ll want to consolidate time tracking, workers’ compensation, and health benefits. In particular, 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.
Many employers also offer health and disability insurance as an employee perk to retain and attract top talent. Integrating your human resources and payroll services can ensure you’re withdrawing the right amount of deductions each pay period. This way, there will be little room for error or confusion when deducting health insurance from a remote worker’s paycheck.
Automate where you can
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. Automating payroll makes it easier to keep accurate records and follow any tax and labor laws.
Organize your payroll records
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.
Agencies often require businesses to hold onto payroll information for at least three years. A payroll service can neatly store each employee’s records in its online database.
Stay up to date on payroll laws
The last thing a business wants is to be in the middle of a lawsuit for breaking a payroll law. That said, businesses should have payroll 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 you need to follow.
This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.
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The ultimate guide to prepping your taxes
It’s that time of year again: Typically, by midnight on April 15, taxpayers must e-file or mail their federal and, if applicable, state tax returns for the previous calendar tax year without penalty. Well before the deadline, though, it’s wise to do your prep work, hunting down the necessary documents, finding a tax pro or software to help you through the process, and learning about any new tax deductions or credits you might be eligible for.
It can definitely be a challenge to get organized, but by following certain steps, you can be ready to file properly and on time. Here, we’ll help you along with important tips, including:
- When is tax-filing season?
- How do you prepare for tax season?
- Should you hire a tax pro?
- Which tax documents do you need?
- By when do you need to file taxes?
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Tax season typically begins in January. So, for tax year 2022, January 2023 marks the start of the season. You should receive a Form W-2 by January 31st or, with any mail delay, soon thereafter. The same deadline applies to certain 1099-MISC forms for independent contractors. Each financial institution that paid you at least $10 of interest during the year must send you a copy of the 1099-INT by January 31st as well.
Waiting until the last minute to prepare for tax filing is never advisable. If taxpayers work for one employer, their taxes may not be complicated, but if they have side gigs or they’re self-employed, tax returns can take a while to fill out.
The due date for individuals to file their taxes is usually April 15th of a given year or, if that falls on a weekend, the next following weekday. However, Tax Day is Tuesday, April 18, 2023, for tax year 2022. This is due to the fact that the 15th is a Saturday and the observance of the Emancipation Day holiday in Washington, D.C. on the 17th. For this reason, the date that returns are due has moved forward an additional day to the 18th.
Before filing, here’s how to prepare for tax season.
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Taxpayers can either prepare and file their taxes on their own or hire a professional. If they choose the latter, they can go to a tax preparation service like H&R Block or contact a local accountant or other tax pro. Some people feel more secure with a professional who can guide them through the process, know the latest deductions, and perhaps help them avoid IRS audit triggers.
The costs for a professional vary, and the more complicated a return is, the higher the costs will be.
The IRS has a tool where taxpayers can find a tax preparer near them with credentials or select qualifications. Doing so will mean paying a fee. How much? According to the National Society of Accountants,in 2020-2021, the average price tag for preparing and filing an itemized Form 1040 with Schedule A, Schedule C (this is for sole proprietors of a business), plus a state tax return, was a not insignificant $515. For a simpler return, the average fee is typically closer to $200.
Or you could use software which is likely to cost less but require a greater investment of your time. For instance, TurboTax’s 2022 prices range from $59 and up, depending on whether you need additional features, like those for people who run their own businesses.
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You might also want to try this alternative: IRS Free File lets you prepare and file your federal income tax online for free. There are two options, based on income.
- You can file on an IRS partner site if your adjusted gross income was $73,000 or less. This is a guided preparation, and the online service does all the math.
- Those with income above $73,000 who know how to prepare paper forms and can do basic calculations can fill out and file electronic federal tax forms. (There is no state tax filing with this option, however.)
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Gathering the right papers is an important part of preparing for tax season. By the end of January, you should have received tax documents from employers, brokerage firms, and others you did business with. They include a W-2 for a salaried worker and what are known as 1099s for freelancers and contract workers.
Employers will send the documents in the mail or electronically.
Investors might receive these forms:
- 1099-B, which reports capital gains and losses
- 1099-DIV, which reports dividend income and capital gains distributions
- 1099-INT, which reports interest income
- 1099-R, which reports retirement account distributions.
Other 1099 forms include:
- 1099-MISC, which reports payments in lieu of dividends
- 1099-Q, which reports distributions from education savings accounts and 529 accounts.
If taxpayers won anything while gambling, they’ll need to fill out Form W-2G. If they paid at least $600 in mortgage interest during the year, they’ll receive Form 1098, whose information can be used to claim a mortgage interest tax deduction.
A list of income-related forms can be found on the IRS website.
Last year’s federal return, and, if applicable, state return could be good reminders of what was filed last year and the documents used. That can help you pinpoint any missing tax documents.
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Wondering whether to take the standard deduction or itemize deductions? The higher figure is the winner.
The vast majority of Americans claim the standard deduction, the number subtracted from your income before you calculate the amount of tax you owe.
For tax year 2022, the standard deductions are:
- $12,950 for a single filer
- $25,900 for a married couple filing jointly
- $12,950 for a married couple filing separately
- $19,400 for a head of household.
Those age 65 or older or who are blind can claim an additional standard deduction of $1,400 or $1,750 if using the single or head of household filing status.
Individuals interested in itemizing tax deductions can look into whether they’re eligible for a long list of deductions like a home office (and, if eligible, whether to use the simplified option for computing the deduction), education deductions, healthcare deductions, and investment-related deductions.
The IRS notes that you may benefit from itemizing deductions if any of these apply:
- Don’t qualify for the standard deduction
- Had large uninsured medical or dental expenses during the year
- Paid interest and taxes on your home
- Had large uninsured casualty or theft losses
- Made large contributions to qualified charities
- Have total itemized deductions that are more than the standard deduction to which you otherwise are entitled.
Then there are tax credits, a dollar-for-dollar reduction of the income tax you owe. So if you owe, say, $1,500 in federal taxes but are eligible for $1,500 in tax credits, your tax liability is zero.
There are family and dependent credits, healthcare credits, education credits, homeowner credits, and income and savings credits. Taxpayers can see the entire tax credits and deductions list on the IRS website.
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Details count (a lot) when filing your return, and one important point to include is the Social Security number for any children and other dependents. If you omit this, you may lose any dependent credits, like the Child Tax Credit, that you qualify for.
Also know that if you are divorced, only one parent can claim children as dependents.
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On the subject of children, tax time is a good time to review and update beneficiary designations. While it won’t change your tax-filing calculations, it will potentially reduce the tax burden your beneficiaries may pay on what they inherit after you die.
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As you get ready for tax filing, it’s wise to check your progress towards your retirement fund (hopefully you have one). Money that you put into a 401(k), 403(b), or other tax-deferred account reduces your taxable income. In other words, it helps minimize your tax bill. The contributions you make aren’t taxed until you decide to withdraw funds.
If you feel you can afford to contribute more, know that for 2022, the limits for tax deferred contributions are $20,500 for 401(k) accounts, with an additional $6,500 for catch-up contributions for taxpayers who are age 50 or older. Check the IRS website for more details.
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Another tax-filing tip: If you’ve reached retirement age, make sure you take any distributions that are necessary. For instance, if you’ve celebrated your 72nd birthday and have funds in a 401(k) or IRA, you must make your RMD, or required minimum distribution, by December 31st, or face a penalty of 50% of the RMD total. That’s a pitfall most people would want to avoid.
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Taxpayers who do not have taxes withheld from their paychecks can pay estimated taxes every quarter to avoid owing a big chunk of change come Tax Day.
In 2022, quarterly estimated taxes were due on April 18th, June 15th, and September 15th, with the fourth due early in the next year, on January 17th, 2023.
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What happens if you discover, at tax-filing time, that you can’t pay the full amount you owe? One option is to pay as much as you can and then set up a payment plan with the IRS for the rest. This is a method that gives you a longer time frame in which to pay what you owe. Depending on whether you have a short-term or long-term IRS payment plan, there may be setup fees.
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Here’s an important tip: prioritize filing electronically, especially if you anticipate receiving a refund. Electronic returns can typically be processed more quickly than paper ones, which means you’ll get your infusion of cash that much sooner.
Another benefit of filing this way is that your return is much less likely to have errors. Electronic returns tend to have just 1% with errors. But for “hard copy” paper returns, that number ratchets up to about 20% with mistakes.
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What if you don’t quite have your act together and your tax-filing materials ready to roll on time? It happens. If you need more time to prepare your federal tax return, you can electronically request an extension until October 16th, 2023, to file a return. This involves filing IRS Form 4868.
To get the extension, you must estimate your tax liability and pay any amount due by April 15th to avoid penalties. That’s right: Getting an extension to file doesn’t mean you shouldn’t be paying your taxes in a timely way.
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Filing a tax return can be enough to keep you busy without worrying about getting scammed. But unfortunately, there are fraudsters out there, trying to take advantage of the season. For instance, you might get an email, phone call, or even a text message that says it’s from the IRS. They may say there’s an issue with a return of yours and that they need to speak with you ASAP. Don’t fall for it: The only way the IRS will ever communicate with you is via U.S. mail, unless you are involved in some kind of litigation with them.
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Now that you’ve learned more about tax filing, here are some reasons to get started sooner rather than later on your return.
- Avoid deadline anxiety. For some people, procrastination can lead to a lot of stress as the filing date approaches. They risk having to pull the proverbial all-nighter to get their return done on time or wind up blowing the deadline. By starting sooner, you can chip away at the process of pulling materials together and completing forms and breathe a little easier.
- Dodge processing delays. If you file earlier, you are likely to slip in before the deluge of returns hits the IRS’ offices. You might even get your refund (if you’re due one) sooner.
- Take the time to plan. Perhaps you know you’re going to owe money. Or you’re not sure if that’s the case. In either scenario, starting the tax-filing process earlier will give you time to see what you may owe and then figure out how to pay any funds that are due.
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“Tax prep” isn’t a phrase signaling that big fun is on the way, but putting off the inevitable isn’t the best choice. Prepare for tax season as early as possible by gathering documents and information, choosing a preparer or getting ready to DIY, and learning about tax credits and deductions.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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