Payroll & Tax for Remote Workers – What You Need to Know
Payroll and tax can always seem complicated for both employers and employees. It can seem especially daunting for remote workers, whether you’re a remote job seeker or a business looking to access the global talent pool. But don’t let payroll and tax for remote workers scare you.
It’s not that complicated. Plus, you probably have more options than you think. Establish systems and you can realise all the benefits of remote work. Whether that’s working from anywhere as an employee, or increasing your business productivity and hiring a global, cost-effective team.
This article on payroll and tax for remote workers outlines your options.
Payroll & Tax for Remote Workers – The Basics for Both Employers and Employees
The starting point is the same, whether you are a remote job seeker or recruiter, wherever you are in the world. Remote workers can be classified and paid as contractors, or as direct employees.
The great benefit of hiring remotely is hiring people who live in foreign countries. Automattic are 100% remote and have 1200 employees from 75 countries speaking 93 languages. Imagine the creativity in that remote office! But maybe you’re imagining the tax complications?
Or consider the payment gateway Stripe. They created a 100% remote engineering hub to access the “99.74% of talented engineers living outside the metro areas of our first four hubs.” For employees, work from home usually equates to work from anywhere, with the freedom to live anywhere, or live and travel anywhere. It creates a premium work-life balance. But how do you get paid? And where do you pay tax?
Remote Workers as Contractors
The easiest option is for a remote worker to be a contractor. With this you have a contract for services, rather than a contract of employment. Both employer and employee have fewer rights, so there is less long-term security on either side. However, there are significant tax advantages.
With this model, remote workers are responsible for their own taxes and there is no payroll. Instead, workers send a monthly invoice, based on the contract or agreement. A contracting option is fast and easy for employers to set up. Some remote workers prefer the tax benefits, others want more job security and employee rights. Also consider that in some countries it’s illegal to work as a contractor and only contract for one company, so the remote worker would be required to also do additional work.
Remote Workers as Direct Employees
Direct hiring is the traditional option and it’s used in almost every non-remote job. When hiring an employee, remote or not, employers must comply with all the local payroll and tax laws. The remote worker is added to your payroll and you pay taxes based on the country (or US state) of where the employee lives.
This option is easy and secure for remote workers. But businesses must register as employers with the tax agencies of every country or state their employers are based. Imagine a company like Automattic, registering to pay tax in 75 countries! In the short-term the process is time consuming and off-putting, especially if you’ve never employed an internationally-based remote worker before. However, in the long term it’s the more recommended option, plus there are new solutions to help you (see below).
Guide to Payroll & Tax for Remote Workers as Contractors
With this approach, the responsibility for tax is firmly upon remote workers. It’s worth remembering that while hiring remotely maybe new for a business, working remotely can also be new for an employee. This unfamiliarity can be off-putting, limiting the talent pool. It’s advisable to keep your options open until making the hire, as every employer and employee has their own preference.
Remote Contractors Pay Their Own Tax
Contracted employees are responsible for their own tax. This requires them to be registered as a contractor in the country they are legally resident. They must then report their earnings, usually via a personal tax return, and then pay all the tax that is due. Contractors pay tax after they have earned it.
The exact process is different per country. For example, in the UK, contractors have until January of the following year to pay tax accrued between April 6th and April 5th. Whereas in Spain, contractors file a tax return each quarter and must pay their tax immediately. Always the onus is on the contractor. Businesses do not need to research or comply with local tax regulations where the employee lives.
It’s a great system if you’re a small business and want to access talent from around the world, without any setup costs. This contracting option is fast and easy to set up. However, when you’re making multiple hires in the same country, there can be tax and other benefits to establishing a local entity.
Remote Contractors in the US
Employers in the US don’t get off that easily. They must still register all their US-based contractors and report their pay to the IRS.
1. Contractor completes a W-9 form. Each US-based contractor must complete the official “Request for Taxpayer Identification Number and Certification.”
2. Employers completes a 1099 form. With the information from the W-9 form, employers complete the 1099 form for every contractor paid more than $600 in a tax year.
Remote Contractors Outside the US
Working as a contractor gives many remote workers a tax advantage. They can file legitimate business expenses. Often they can charge more, because the employer does not need to make any payroll contributions (tax or insurance) to the state. But it’s not that straightforward. The UK introduced IR35, a set of tax rules preventing remote contractors from working for only business, and therefore going off payroll to pay less tax.
It may seem that contractors take home more more money than employees. But they also take on risks, including unpaid holidays, no sick pay, less insurance, and limited long-term job security. So they need to charge more in response to this insecurity. As a remote contractor it’s essential you understand the local tax laws in the country or state where you are registered.
Note that digital nomads still need to pay tax. In most cases, digital nomads continue paying tax in the country they are registered. They do not register as workers in each country they visit, which brings up the entirely new question about legality that’s covered in this article about digital nomad visas for remote workers. It’s complicated because it’s so new. Fortunately, most countries have shared agreements based on a principle of avoiding double taxation. So provided you pay tax somewhere, you’re 90% of the way to doing everything correctly.
Contracts for Remote Workers
Although contractors do not have a contract of employment, it is highly recommend to create a contract for services. This is essentially the same as a contract for any service you may purchase, whether it’s the terms and conditions in your SaaS subscription or a builder coming to fix your roof.
The contract can be simple. In plain English it needs to outline:
- The services the contractor will provide (very much like a job description in a contract of employment)
- Dates and duration of which the service will be provided (very much like dates of employment in a contract of employment)
- The compensation to be paid and when it should be paid (the “salary” although it should never be called as such)
- Terms for cancellation of the contract (what notice is required, any termination fees)
A simple contract protects both parties and should not increase or change your tax liabilities.
Guide to Payroll & Tax for Remote Workers as Direct Employees
This option can seem complicated and challenging at first, but it’s really not, especially thanks to some of the new payroll services available.
Tax is Paid Based on the Employee’s Location
The key complication with doing payroll and tax for remote workers as direct employees, is that tax is based on where the employee is resident. That’s the same as contractors, except now the onus is on the employer. In a traditional office all employees are based in the same country or state as their employer – they have to be, otherwise it would be an incredibly long commute!
When hiring remotely your direct employees will often be based elsewhere. They certainly will be if you want to access the global talent pool. So you will need to establish a foreign entity in the country or US state where the employee is based. This is essential as you must comply with local labour laws and taxes. For example, a UK company who hires an employee based in Australia, must then arrange payroll and tax in Australia. Or a New York-based company hires a remote employee in San Francisco, so they must comply with all the tax liability rules in California.
Note that if you arrange tax and payroll in your location, the employee is essentially an illegal worker, as they are not registered to live and work in your location. So don’t pass on the risk in this way.
Tax for Remote Employees is Arranged by the Employer
As with any other employee, the employer will need to withhold income taxes and pay insurance contributions (e.g. NI in the UK and SUI in the US). Payroll systems report each employees’ pay to the tax authorities and sends the applicable tax direct to the state. Employees see the tax deductions on their pay slip. Some will advise that it’s best to hire remote employees in the country you are already doing business, but that doesn’t access global talent. Plus, it can be financially advantageous to hire talent from a different country.
Easy Way to Handle Payroll and Tax for Remote Workers
Large companies typically have their own international HR teams, establishing and managing payroll in different countries. Medium-sized companies tend to outsource remote payroll to a payroll agency or accountant. In general, businesses of all sizes find it a lot more efficient to get somebody else to do all the heavy lifting. There’s also less headache and stress involved – you don’t want to be liable for a big tax fine, because you didn’t know the exact rules.
Now there are startups for remote workers and employers, providing cost-effective solutions in the form of mobile apps. Gusto provides payroll services across all 50 US states, so it’s easy for a US company to hire a remote, US-based employee and comply with all local employment laws. Zenefits is another option in the US.
For internationally-based remote workers you can find services such as Shield GEO, or other global employment organisations (GEO). Essentially, the GEO is a professional employer in a different country. They process payroll, withhold taxes and ensure compliance with all the relevant employment laws. There are many thousands of GEOs and as yet, none that covers every country in the world. It’s essential to pre-vet any GEO and have a clear agreement, as it’s not uncommon for GEOs to outsource locally or employ very opaque pricing.
One recommended option is Remote.com. They’re used by Gitlab, Loom and some of the biggest remote companies in the world. Although only launched in 2020, they aim to have legal entities in every country in the world – every continent is already covered.
Don’t Waste Money in Currency Conversion
Whether a direct employee or remote worker, there’s absolutely nothing worse than losing a hefty chunk of your pay because the employer isn’t smart about international currency exchange. Most banks take upwards of 2.5% on every currency transaction. Then there’s a one-off payment fee. Paypal is just as bad, costing remote workers 6 – 7% in fees. And in many cases it’s not visible, as the currency exchange markup is not clearly displayed.
Hiring a Remote Worker
Now you know the options and how to employ a remote worker, go out and access the world’s best talent. Search Remotely is the leading platform for remote recruitment, focused exclusively on remote jobs. It’s followed by hundreds of thousands of remote job seekers and provides step-by-step support for tailored remote recruitment.