How to manage payroll with remote employees

The past few years have significantly changed the way many of us work. The U.S. census estimated that that the number of remote employees more than tripled between 2019 and 2021, and Upwork estimates that 36.2 million Americans will work remotely by 2025. 

It’s clear that remote employees are here to stay, and they have become key for many businesses to operate. But though remote work brings many benefits—including increased happiness, increased productivity, and decreased greenhouse gas emissions—it also brings some challenges for employers, specifically when it comes to managing payroll.  

The problem: 

When employees work in different states from the location of your place of business, payroll taxes can get a bit complicated. If you have remote employees doing significant work out-of-state, you may need to register your business in multiple states to withhold taxes for them.  

In one recent case, a Virginia-based business was surprised with thousands of dollars in taxes, registration fees and penalties because an employee worked remotely in California and Texas without telling their employer. Because the CEO didn’t know to register his business in those states, he could face an estimated total cost of $500,000 and hours of accounting and HR difficulties.   

When making a mistake with out-of-state payroll could cost you a fortune, it’s crucial to get it right. Here are some tips: 

The solution: 

1. Communicate with your remote employees. 

Make sure you know what states (and countries) your employees work in, and make sure they understand how important it is for you to have accurate information. Employees may owe income taxes in both states where they live and states where they work, so it’s key to make sure you’re following withholding rules for any states involved so that neither you nor your employee is caught off guard. 

2. Know the state-by-state variables. 

In many cases, payroll may follow the rules of withholding in your business’s state. But some states have a reciprocity agreement, in which the states agree that the employees only owe income tax in states where they live. Without this agreement, employers may need to withhold partial amounts for both the remote employee’s home state and the business state.  

There are other variables as well, such as the threshold for income or time worked that would require taxes to be submitted in that state, as well as whether or not the employee is working remotely for convenience or as a necessity. 

3. Check with your state Tax or Revenue Department. 

With so many differences at the state level, it’s important to know what the rules are in your area. Make sure you’re familiar with what state websites to check for information. You can find a listing of relevant state sites regarding taxes and business information on IRS.gov.  

4. Work with a tax professional, accountant and payroll provider. 

Payroll can be a challenging task in the simplest of situations with serious consequences for mistakes. When you add variables like remote employees doing multi-state work, it’s even more important to get it right. Rather than spending hours of your valuable time trying to find the answers and worrying about perfecting your withholding, consider working with professionals. Tax preparers, accountants and payroll providers will be more familiar with the complex laws and can help you stay in compliance while you focus on your business. 

Rather than needing to find a tax preparer, and an accountant and a payroll partner, consider working with a business who can provide all the services you need in one place. Padgett’s nationwide network of EAs and CPAs offer a suite of services including tax, accounting, payroll, and business advisory services. Find a location near you today!