Keeping track of payroll taxes is one of the many challenges employers must manage. It’s difficult enough when all your employees are in the same place. A distributed team of remote workers can make payroll taxes even more complicated.
To meet your financial obligations, you need to consider the local tax laws in all the states and countries where you employ remote workers. The more globally distributed your workforce is, the more tax laws you will have to keep in mind.
Use this guide to payroll taxes for remote workers to better understand your tax obligations as an employer.
What states do remote workers pay taxes in?
Remote workers can struggle to understand where they need to pay income tax. Generally, income tax is based on where the employee is when they complete work, not where their employer is based.
If an employee works from home in Maine for a company with offices in Virginia, for example, they will typically pay state income taxes to Maine, not Virginia. Their federal income tax is also based on physically working in Maine.
State income taxes for remote workers can get more complicated, though, since the following eight states do not charge personal income taxes:
- South Dakota
Remote workers living in any of these states only have to file federal tax returns, provided they do not perform work in any other states. If the remote workers receive additional compensation, like equity, they may owe separate taxes on that equity.
Find out more about how taxes affect the costs of hiring in different states.
How taxation works for different types of remote workers
Remote workers in your state
The simplest remote work arrangement from a tax perspective is if you hire a permanent employee who works from home in the same state as your organization. In this case, your payroll taxes for that worker will be the same as the taxes for an employee who lived in-state and worked in-person at your local office.
The key detail is that the state where the employee physically works and the state where they live are the same. This means there’s only one state to consider when it comes time to withhold state taxes and pay your payroll taxes.
Remote workers in a different state
If your remote employee works from home in a different state than your organization, your tax obligation as an employer may be more complicated. Typically, you must withhold income taxes for the state where the remote worker lives and works, not where your company is based. Your payroll taxes for the remote employee will also be due to the state where they work.
You may also need to contend with an additional complication called the “convenience rule.” Seven states—Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania—use the Convenience of the Employer rule, which allows them to tax income earned by employees working remotely from other states for employers within their borders.
For example, a New Jersey resident working from home for a New York-based company may be subject to both New York and New Jersey income tax, even if they never step foot in New York. As an employer of remote workers in one of these states, you will need to withhold the applicable taxes.
You may also work with remote workers who are independent contractors, not employees. In this scenario, your tax obligations are different. Independent contractors pay independent contractor taxes made up of income tax and self-employment tax. These workers can also write off expenses as independent contractors.
The important thing to note about working with remote workers who are independent contractors is that you generally do not have to withhold any taxes on their behalf. You also will not typically owe payroll taxes for these workers. Just make sure you have the remote independent contractors fill out Form W-9 with their legal name and taxpayer identification number and report the payments to these workers (if greater than $600 in a year) with Form 1099-NEC.
If managing all these different remote work scenarios and tax obligations sounds daunting, turn to Oyster’s global employment platform. Wherever your remote workers are in the world, Oyster helps you manage all the payroll and compliance headaches. Oyster’s platform is the solution you need to tackle remote worker taxes with ease.
What's the cost of hiring in different States?
With different taxes applied in different states for both employers and employees the costs of hiring vary. Check our our State-specific hiring costs calculators linked to below for more information:
- Costs of hiring in Arizona
- Costs of hiring in Arkansas
- Costs of hiring in Colorado
- Costs of hiring in Connecticut
- Costs of hiring in Florida
- Costs of hiring in Georgia
- Costs of hiring in Illinois
- Costs of hiring in Indiana
- Costs of hiring in Kansas
- Costs of hiring in Louisiana
- Costs of hiring in Maryland
- Costs of hiring in Massachusetts
- Costs of hiring in Michigan
- Costs of hiring in Mississippi
- Costs of hiring in Missouri
- Costs of hiring in Montana
- Costs of hiring in Nevada
- Costs of hiring in New Jersey
- Costs of hiring in New Mexico
- Costs of hiring in New York
- Costs of hiring in North Carolina
- Costs of hiring in Ohio
- Costs of hiring in Oklahoma
- Costs of hiring in Oregon
- Costs of hiring in Pennsylvania
- Costs of hiring in South Carolina
- Costs of hiring in South Dakota
- Costs of hiring in Tennessee
- Costs of hiring in Texas
- Costs of hiring in Utah
- Costs of hiring in Virginia
- Costs of hiring in Washington
- Costs of hiring in Wisconsin
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.