Guide to Paying Hybrid, Out-of-State and Remote Employees
Working with remote, hybrid and out-of-state employees is a rising trend that offers exciting benefits like wider customer reach, more efficient business operations and more access to skilled professionals. Before accessing these advantages, you need to understand the tax implications imposed by your remote employees’ states and your own.
Workers may have concerns about what taxes they owe, how much and whether they should pay in themselves. As their employer, it’s your duty to inform them about these factors. Whether you have full-time in-office employees who drive to work from another state, remote workers in-state, or out-of-state or hybrid workers, this guide explores all the essential information you need to pay them correctly.
How to Pay Remote Employees
To pay remote employees, it’s essential to understand two key terms first:
- Nonresident state: This denotes a state that an employee commutes to for work when they are not a resident of it.
- Resident state: This is the state in which your employee resides.
By knowing what these two terms mean, you can gain a better understanding of tax laws surrounding workers working in resident and nonresident states. How you pay remote workers depends on whether or not they work in the same state where you conduct business.
Tax Implications for Remote Workers in Your State
If you have remote employees who reside within the state your business is registered in, you’ll need to withhold state income taxes from their earnings and submit state unemployment insurance (SUI) tax in your state. Depending on your state, you may also need to withhold local income tax if their location requires it.
Payroll Taxes for Remote Out-of-State Employees
Hiring employees who work from home in another state involves three main steps:
- Registering with your employee’s state tax agency: As an employer, you’re required to withhold your workers’ income taxes. When working with out-of-state employees, you should register with the state and local tax agencies, including their state’s labor and unemployment agencies.
- Following their state’s labor laws and payment requirements: To avoid legal issues in the future, it’s best to stay well-informed about the state laws of your remote employees. Learn critical information like what the minimum wage requirement is in their area, whether you should withhold local taxes, if you should provide a pay stub, what labor laws say about paid and unpaid breaks, and if there are workers’ compensation insurance requirements you need to meet.
- Withholding income taxes while filing the necessary documents and payments: Lastly, you’ll need to gather the correct paperwork for reporting withheld income tax and send in this payment along with any state unemployment taxes you might need to send to tax or unemployment agencies in your remote worker’s state.
How Does Income Tax Work for Employees Who Commute From Another State?
Does your employee commute from another state to work in your state? In this case, there are two main ways to pay income tax depending on their situation.
The first is a reciprocal agreement. A reciprocal agreement is when two neighboring states agree that if any residents work in the other state, they are allowed to pay taxes only to the state they live in. If your employee’s state has a reciprocal agreement with your state, it means they’ll be able to withhold income taxes in their home state and only file one tax return each year. This may be more convenient than paying taxes in both states.
If your states are without reciprocal agreements, this means you’ll need to pay income taxes in both the resident and nonresident states. Fortunately, some states might have a rule in place that allows nonresidents to apply for a tax credit that can cover the cost of double taxation.
You may be able to help your employees pay taxes by offering courtesy withholding from their paychecks. This can spare employees from having to deal with a huge bill during tax season. Working with seasoned accountants who can manage your payroll tax management processes can help you achieve this with more accuracy and efficiency.
Here’s a quick example of income tax implications for nonresident employees who commute from another state to work in Georgia. If you have a worker who is a resident of another state and works in your primary workplace in Georgia, receives income from your Georgia-based business, and is required to file a federal income tax return, then Georgia law may require them to file a Georgia income tax return.
Alternatively, if they are a legal resident of another state and their earnings from a Georgia employer are 5% or less of $5,000 or 5% or less of their wages in all places for the year, they may avoid filing a Georgia income tax return.
Tax Implications for Hybrid Payroll
Some businesses or employees might find it more convenient to have hybrid work arrangements for working in-office and remotely according to a given schedule. Hybrid workers have tax implications similar to those of other types of remote workers mentioned above. For example, you’ll still need to withhold the income tax of hybrid employees like you would with fully remote workers. Still, double taxation may occur for hybrid workers if their home and workplace are in different states.
It’s also important to take into consideration whether the state has any unemployment and workers’ compensation insurance requirements. If your employee is working in different states throughout the year, you must check what the tax obligations are in those states beforehand.
How to Inform Your Remote Employees About Taxes
Your remote workers may have expectations about the salary they receive when working with your company, so they must understand the tax implications of their position. The tax challenges related to remote work might impact their financial situation negatively, which may have an impact on how employees view your perspective of the remote team.
When discussing remote workers’ pay, be sure to inform them about the tax laws of their state and yours and how much money they should expect to receive on payday. Your remote and hybrid teams might also appreciate it if you provide them with guides and other tax resources to understand everything you discuss with them about the matter.
Consult With Marshall Jones and Outsource Payroll and Bookkeeping Services
Remote, hybrid and out-of-state employees can create various benefits and opportunities for your business in the long run. When you fully understand and manage the different tax implications correctly, you will be able to keep them informed and content.
We recommend working with a full-service accounting firm like Marshall Jones to manage payroll taxes for remote employees. Working with our knowledgeable outsourced team will allow your business access to multistate payroll processing and accurate monthly financials delivered on time. For excellent payroll and bookkeeping services, contact the experts at Marshall Jones for a consultation today.
