We offer this this 2023 update to our popular 2021 Payroll and Tax for Remote workers article based upon new information from tax advisors TurboTax, Charles Schwab and Wolters Kluwer. Payroll and other assorted taxes can always seem convoluted for both employers and employees. Those of us working virtually now as well as aspirant remote workers looking for that first remote job know that tax and the treatment of expenses can make the difference between eking out a small profit, or choosing the simplicity of remaining employed as a stalwart and steadfast employee.
Let’s cut to the chase by taking a quick look at federal taxes from the perspective of the remote working employee.
2023 Increase in Standard Deductions due to Inflation
The WallStreet Journal analyzed President Biden’s Proposed Budget to find that there was an increase in the amount of standard deductions allowed on account of inflation. In comparision to 2022, the allowable deductions for all filers (regardless of filing status) was boosted by 7%. The standard deduction by filing status is:
- $13,850 for unmarried (single) income tax filers
- $20.800 for heads of the household filers
- $27,700 for married people who file their income taxes jointly
2023 Work at Home Employees can not Deduct Non-reimbursed Expenses
According to Turbotax, regular employees working from home can not deduct from their federal tax obligations, employee expenses related to setting up a home office and other work-from-home expenses.
2023 Independent Remote Working Contractors, Freelancers and Gig Workers
There are tax advantages to the independent contractor working from home. What are they, you might ask?
Self employed health care premiums
Of the allowable tax deductible expenses, we highlight one mentioned by Forbes as it is highly revelant to our remote jobs readership base. Remote workers, freelancers, gig workers and independent contractors can deduct 100% (yes, that’s right) of the premiums paid to your health insurance provider. Business owners and independent contractors can deduct 100% of their health insurance premiums not only for themselves, but also if you have other members of your family (and dependents) listed on your coverage. One hundred percent of the premium can be deducted regardless of whether you select to use the standard or itemized deduction opinion. And guess what? There is an added bonus. If you are still paying for your young adult’s health insurance (up to age 27), 100% of the health insurance premium you pay can also be deducted, even if they no longer reside in your household or can not be listed as a dependent.
Up to $1 million deductions for business expenses
Unlike employees working at home, independent 1099 contractors and self employed freelancers and gig workers can deduct up to $1 million ($1,080,000 to be exact) for expenses incurred in 2022 that was directly related to their business. These qualifiable expenses could have been money that was used to purchase computers, devices, printers, scanners, chargers, faxes (are they still used?), desks, file cabinets, chairs, postal meters, and so forth. Basically, any piece of equipment that was used for your business.
Be mindful, though. The amount of deductions can not exceed the amount of income generated from your business activity. In addition to business equipment, independent tele-work contractors can also deduct expenses related to accessories and supplies: paper, stamps, envelops, labels, printer ink, for example.
Home office deductions
In addition to the deduction for the expenses incurred related to business activity, independent contractors can also deduct a portion of their rent, mortgage, property taxes, home owners insurance, heat/electricity/water (utility bills), and depreciation. Generally, there are two ways to calculate the home office deduction. The first and easiest method is to take up to $1,500 as a flat deduction. The second method, which is more time consuming and records intensive but may generate a higher amount of deduction.
In any event, the many 1099s the second option can in fact turn out to be the largest work from home expense that can be deducted from your overall federal tax obligations. Extensive record-keeping, receipt management may very well be worth the time and effort.
As a precaution, to legally file for a home office deduction, the independent contractor must have a dedicated space from which to conduct his/her business. No, you can not take a deduction if you routinely work on the couch in front of the television in your comfy living room, the countertop in the kitchen or situated by the table in the dining room. And, no you can not take a home office deduction when you decide to work on the pool table in the game room, near your entertainment center. Remote freelancers and gig workers can not claim the same space where the family eats, relaxes, sleeps or entertains. A home office is just that. The principal location where you conduct professional business. Its the square footage where you may meet your own freelancers, engage with clients or customers.
Upskilling, job skills and education expenses
Many if not all independent contractors are charged with keeping their job skills up-to-date; or risk the loss of clients, customers and income. Upskilling and obtaining new skills each and every year is critical to what we do. That is why this next credit is important. The IRS allows taxpayers (up to a certain income bracket) to obtain a credit to reduce their taxable income. It is called the “Lifetime Education Credit” and is different from the American Opportunity Tax Education Credit. With the Lifetime Education Credit, individuals must first obtain a Form 1098-T (Tuition Statement) from an accredited institution by January 31st. The maximum amount that can be deducted from taxes each year is 20% of $10,000. Allowable expenses incurred from post secondary and accredited institutions are: tuition, fees, books, materials and supplies can be deducted. Plus, these credit is allowed whether the independent contractor, spouse or child takes the courses.
Now, that we have cleared the air for remote working employees, from the perspective of an employee as well as independent tele-commuting contractors, let’s take a look at the tax implications for the employer.
Payroll & Tax for Remote Workers – The Basics for Employers
Before we begin this section, we’d like to share that tax filing can be complicated, it does not have to constrain you or limit your options. It is not entirely impossible to hire remote workers or remote contractors. Plus, as you embark along this journey for increased productivity, lower costs and greater work life balance of your workforce, you’ll see that the change was well worth it. Plus, you will not be alone. Remote first employers and employers just beginning to embark on this exciting excursion of utilizing a 100% remote work force have many more options than once can imagine. There are ready-made payroll and tax systems and solutions already in place where you can realize all the benefits of remote work. Whether that’s working from anywhere as an employee, or increasing your business productivity and hiring a global, regional and/or locally-based cost effective remote team.
This article on payroll and tax for remote workers outlines your options. 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 a remote staff is you expand your opportunity to employ people who live in foreign countries or who live in rural regions of the US where the cost of living is lower and where intense competition for top performing talent is not as great. For instance, the company Automattic is 100% remote. They employ 1200 employees remote workers from 75 countries who speak 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? Who is responsible for paying taxes?
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- The best practices for leading a new remote work team
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. Payment for services provided will be based on actual service deliverables and not necessarily based upon the process and the time taken to complete the work. 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 for other clients.
Remote Workers File Tax Forms
Another item we would need to mention as an update to our original article on payroll and tax implications for remote workers and remote employers is: remote workers may be required to file taxes in multiple states. Why? Because there are several states that require filers to pay state income taxes if they earned money within that state, regardless of where they actually live there.
Tax advisor, Wolters Kluwer, presents a list of states that require nonresidents (people who tele-commuted, worked from home or worked from anywhere) to file a tax return if they earned income from an employer located in that state: Alabama, Arizona, California, Connecticut, Georgia, Hawaii, Idaho, Iowa, Kentucky, Massachusetts, Maine, Minnesota, Missouri, Montana, New Jersey, New York, North Carolina, Oklahoma, Orgeon, Pennsylvania, Vermont, Virginia, West Virginia, and Wisconsin. In each of these instances, a remote worker would need to file a tax return when the following conditions are met:
- the remote worker earned above a specific filing threshold;
- the remote worker’s income exceeded his/her nonresident’s standard deduction;
- the remote worker’s income exceed his/her nonresident’s personal exemption.
The good news is that on the flip side, there are some states that don’t charge state income taxes, namely: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Employers Required to Reimburse Remote Workers for Certain Expenses
Innoworks reports that these six states require employers to reimburse their remote workers for work-related expenses: California, Iowa, Montana, Massachusetts, New York and Illinois.
Remote Workers and Business Receipts
Back in 2017, before COVID-19, the US Tax Cuts and Jobs Act made changes to the US Tax Code to eliminate the deductions (exceeding 2% of adjusted income) typically used to lower one’s taxes. Accountants and tax advisors recommended to independent contractors and small business owners to keep hard copies of business receipts to record expenses incurred while conducting business or providing a service. At the end of the tax year, these receipts were tallied and the amount was deducted from the tax liabilities owed to the government. This new rule was put into effect back then and is not set to expire until year 2026. At the end of the tax year, these receipts were tallied and the amount was deducted from the tax liabilities owed to the government.
Even if a remote contract worker can not utilize these non-reimbursed expenses for the reduction of a potential tax liability, it doesn’t mean that this information is not valueable. It should still be collected and tallied so that the remote worker can calculate the true cost of ‘doing business’ and / or ‘providing a service online. That means any out-of-pocket expenses you incur while working from home that aren’t reimbursed by your employer cannot be deducted from your taxes.
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 any potential tax liability is firmly placed upon remote workers. It’s worth remembering that while hiring virtual teams maybe new for a business, working virtually 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
The advantage to hiring remote gig, freelancers and remote contractors is that contractors 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.
- Contractor completes a W-9 form. Each US-based contractor must complete the official “Request for Taxpayer Identification Number and Certification.”
- 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
Hopefully, in reading this article, as a business owner interested in hiring remote workers as remote contractors or remote working employees who work from distributed locations, work from home or work from anywhere; you can see that the challenges can be daunting. But not overwhelming. We are now truly working and living in a global economy. As a result, businesses are no longer confined to one country or region; they have the opportunity to expand their reach and tap into new markets. The good news is that there are innovative companies who have stepped up to the plate to fill an unmet need.
It is where global payroll solutions come in. Businesses can save money, time, and resources by hiring a remote payroll solution. More importantly, however, the tax implications related to employing remote workers and remote employees to fill remote jobs can be handled by those with expertise to guide you accordingly. They can be critical lifesavers for the business owner’s piece of mind and bottom line. This option can seem complicated and you may occasionally feel that you may have lost control of a critical aspect of your business. But, once you put a competent payroll provider and tax advisor into play, you will ultimately feel an overwhelming sense of calm and peace.
Plus, you’ve got more pressing goals to reach…. like growing your business!
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. In reviewing the most recent recommendations from Charles Schwab, this rule remains to be true. The key for employers is to remember to withhold taxes from out-of-state (nonresident) employees’ earnings. The state of New York, for example, requires employers to withhold state income tax from nonresidents’ wages. 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 remote staff, your direct employees will often be based elsewhere. They certainly will be if you want to access the global talent pool and take advantage that many rural remote workforce. 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.
Remote Payroll Solutions Account for Time Zone Differences
One of the biggest challenges for businesses with employees in different time zones is managing the complexities of scheduling and communication. With a remote payroll solution, remote first employers can avoid the hassle and wasted time associated with trying to coordinate between multiple time zones.
In addition, by outsourcing to a remote payroll solution, businesses can ensure that their employees are always paid on time, no matter where they are located. Some of these payroll solutions for remote employees are offered by fresh startups for remote workers and employers. These innovative companies provide 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.
Cost Savings associated with Remote Payroll Solutions
Another benefit of hiring remote payroll solutions is cost savings. When you outsource your payroll to a remote solution, you no longer need to maintain an in-house staff or pay for expensive software licenses. It frees up money that can be reinvested into the business or used to hire additional staff. In addition, by using international payroll services, businesses can avoid incurring travel costs associated with sending employees to different locations.
Greater Flexibility offered by Remote Payroll Solutions
Another advantage of engaging in global payroll services has greater flexibility. With payroll solutions, employers can quickly scale up or down depending on their needs. This flexibility allows businesses to react quickly to changes in the market and adapt their workforce accordingly. Additionally, by outsourcing your payroll function, businesses can free up valuable time and resources to focus on other business areas.
There are many benefits associated with hiring remote payroll solutions. Businesses that outsource their payroll function can reap several rewards, from cost savings to greater flexibility. In addition, when done correctly, the global impact of hiring remote payroll solutions can be positive for businesses and employees.
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.
We are now in a global economy. As a result, businesses are no longer confined to one country or region; they have the opportunity to expand their reach and tap into new markets. It is where global payroll solutions come in. Businesses can save money, time, and resources by hiring a remote payroll solution. And when done correctly, the global impact can be positive.
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. We are a 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.
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