Managing payroll for remote employees
Small Business Guides
5 min read
Your business may be part of a growing trend where employers choose to hire remote employees. There are lots of advantages to this approach, but it’s important to understand how it will work in practice – especially when it comes to payroll. So how do you handle payroll with remote staff?
One business, many locations
It's increasingly common for businesses to use remote workers. There are good reasons for hiring employees who don't work in your office:
- If your staff work from home then you don't need such large premises, so you save money.
- Without the daily commute, remote staff can be more productive – if they are managed properly.
- Salaries vary from one location to another, so you might save on your payroll bill.
But there's a downside to having remote employees too. Depending on where they live, they might be subject to different payroll legislation. This can be an issue for staff who split the working week between their home and your office.
There are other potential hurdles too. In this guide we'll cover what they are, and how to manage payroll for remote workers.
Make sure you know the rules for each type of worker
Not everyone who works for you remotely will be classed as an employee. Some may be sole traders with their own businesses. Others may be consultants or contractors, serving several clients.
If you know the rules for each type of worker, you can plan your payroll properly. But if your staff member says they are a contractor, don't simply take their word for it. It's easy for someone to claim to be an independent consultant, for example. But in some states they will be classed as employees if they spend most of their time working for you. If you have any doubts, talk to your accountant.
Remote worker or new branch manager?
When you hire a remote worker, are you hiring a new employee who will be working from home? Or are you opening a branch of your business in a new location?
The difference might be clear to you, but the tax office might think your remote worker is running a separate branch of your business. If so, you may have a lot of paperwork to deal with. As a rough guide, someone is a remote employee if they:
- supply completed work directly to your office
- don't transact locally with the public or other businesses
- work solely for you.
Make sure you double-check this, as the rules vary from one state to another. They aren't always clear, so get professional advice before you hire a new remote worker.
It's increasingly common for businesses to use remote workers. There are good reasons for hiring employees who don't work in your office.
Understand your obligations
If you're sure that the people you're employing are classed as remote workers, what are your payroll obligations?
The main one is that the income tax you withhold from each employee must be based on where they work. That sounds simple, but it can quickly become complex.
Let's say your business is based in one state, but your employees work in another. Generally you must comply with the income tax laws of their state when paying them. That means you must withhold income tax at their local rate.
There are exceptions. Some states may have reciprocal taxation agreements with others. In that case your payroll calculations will be simpler. However, it's not just income tax rates that vary. Different tax rules may apply to:
- 401(k) and IRA schemes
- health care plans
- minimum wage laws
- overtime laws
- and other benefits.
You'll also need to make salary payments into your employees’ bank accounts. If some of your employees live in other countries, you need to take extra care. Try to find a way to transfer money without losing out due to exchange rate fees.
Finally, it's not enough that you withhold the right amount of tax for each remote employee. You also have to ensure the right amount of tax is paid to each separate tax office. The logistics can quickly become hard to manage.
Make sense of the numbers
If you hire remote workers, it can lead to payroll complications. Yet the potential business benefits are significant, so it's often still worth doing. The important thing is to minimise the work involved.
As with any member of staff, you have choices when it comes to managing payroll for remote employees:
- Outsource payroll to a dedicated payroll company
When you outsource payroll, this takes the complex work away from you. You hand the work over to a company that's used to managing remote employees. You will have peace of mind, but you will have to pay for the service. And you will have to give up some control over your business and its financial data.
- Hire someone in-house to do the work
If your organization is large enough, it can make sense to hire dedicated payroll staff. They can look after the complexities of your remote workers' payroll. The advantage here is you keep all your financial data in-house. This can give you insight into the way your business is running, and it reduces the risk of data loss. Just make sure you use good online accounting software to manage your payroll. It will save a lot of time and reduce data entry.
- Ask your bookkeeper or accountant to do the work
Both will charge for the service, but that may be a price worth paying. Make sure your accountant or bookkeeper uses the same accounting software as you. That will make it easy to share data, by giving them secure, remote access.
Prepare for payroll to get great results
Managing payroll for remote employees requires effort and planning. So make sure you have a strategy in place before you start the hiring process. Understand the issues involved and think about how you'll approach them.
Although this guide only covers payroll, there are other things you should consider. Contract law and employment regulations are just two of them – ask your lawyer for advice.
Like anything else in business, the more you prepare, the better the result will be. Talk to your accountant or a financial advisor before you start, and get the right payroll system in place. Then you can enjoy the benefits of remote employees – without worrying about payroll.