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How do taxes work for remote employees?

Work from home is here to stay. According to research from Ladders, 25% of workers in North America will be fully remote by the end of 2022. And those figures are projected to increase from there. Business owners often struggle with employee payroll taxes and remote workers increase the compliance requirements. Let’s take a look on how to handle taxes for remote employees.

What taxes do remote workers pay?

Like any employee, remote workers are responsible for paying the following taxes:

  • Federal income tax
  • State income tax (where applicable)
  • Social security tax
  • Medicare tax
  • State unemployment tax (where applicable)

Are these taxes different for remote workers?

While most taxes work the same for remote workers and in-house employees, there are a few differences.

Federal Income Tax

Federal income tax works the same for both remote and in-house employees. The amount taken from employee wages for federal income tax is determined by the tax tables and how an employee fills out the Federal W4.

State Income Tax

State Income Tax is the biggest challenge when it comes to taxes on remote workers. All employees, whether remote or on location, are required to pay state income tax in almost all states. There are a handful of states that do not require state income taxes withheld from employees. These states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

The tricky part about state income taxes for remote workers is often times the employee is performing work in a different state than the state that the business operates. When this is the case, state tax must be withheld and submitted to the state in which the employee performs the work.

For example, company A does business in Maine and has a remote employee that lives in Massachusetts. The employer would need to withhold Massachusetts income tax for this employee, not Maine income tax. Should this employee move midyear and work some of the time in Massachusetts and some of the time in Connecticut, the employer would need to withhold both Massachusetts and Connecticut state income taxes. Different states have different rules surrounding state taxes based on how much time or how much money is earned in that state. Be sure to check with your payroll provider and the state laws in which the work is being done to make sure you are staying tax compliant.

FICA Taxes

FICA taxes are made up of both social security and Medicare taxes. Employers are responsible for withholding these taxes from both remote and non-remote employees. Additionally, employers are required to match the amount that they withhold from employees for FICA taxes. The amount that employees pay for FICA taxes is the same for both remote and in-house employees. The current total amount for FICA tax is 15.3% and is equally shared between employer and employee.

Unemployment Taxes

Federal Unemployment Tax, or FUTA, is a 100% employer paid tax and does not effect any type of employee. State Unemployment Tax, or SUTA, is 100% employer paid the majority of the time. However, there are three states that require employees to contribute to SUTA. These states are Alaska, New Jersey, and Pennsylvania. Should a business have remote employees that work in one of these three states, even if the business operates in a different state, that business must withhold SUTA taxes on those employees and submit them to that state.

How should I handle these employees?

Offering a work from home option is a great way for your business to attract top talent and retain its’ best employees. Knowing the state and local laws in which your remote employees are working is key to staying compliant. Have policies in place regarding your remote employees and their work location. Working with a payroll vendor is a great way to ensure your tax withholdings are setup correctly.