Remote work isn’t exactly new. There have been work from home employees for generations now. Recent years have seen their numbers skyrocket, both because collaborative technology has improved by leaps and bounds, and because phenomena like the COVID-19 pandemic have forced a widespread reshuffling of the workforce.
If you own an LLC or other small business, and if you have employees on your payroll who work remotely, you may have some questions about how remote work taxes. Here’s a guide to help you understand all the ins and outs of remote work finances.
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Foundational Concepts
Before we get into the specifics of remote worker taxation, however, it’s important to make sure you have your legal bases covered.
- Ensure you know how your business is classified in the eyes of the law. The default position is Sole Proprietorship, but if you’re going to employ anyone outside yourself, it’s best to register as an LLC.
- Every LLC must have its own Registered Agent, someone who will receive all official tax correspondence from the government. Common question: Can I be my own Registered Agent for an LLC? It depends on your state, but generally hiring a third-party service is best.
- Also ensure you have an employer identification number, or EIN. You can request one for free on the IRS website. This number is necessary both for processing payroll and for filing your LLC’s taxes.
With these preliminary points out of the way, we’re ready to take a closer look at how remote workers are taxed and some remote work tax implications.
Taxing Employees Who Work Remotely
When you have a more traditional work environment, one in which your employees all congregate in the same office each day and they all live and work in the same state, taxation is pretty clear cut. As an employer, you simply need to withhold state and federal income taxes that apply to your area. You may also need to withhold FUTA and other payroll taxes.
If your employees all work remotely but are in the same state as your LLC, taxation works in much the same way. It’s when you have remote employees who work in different states that things get a little complicated for remote employees and state taxes.
Generally speaking, the state where your employee lives and works is the one that taxes them. As such, you’ll need to coordinate with the labor and employment agencies within each of these states to make sure you’re following all the right guidelines.
Here’s an example: Let’s say your LLC is in Arizona, but you have an employee who works remotely from their home in Oregon. As an employer, it’s your duty to withhold all state and local taxes that apply in Oregon, holding these taxes back from the employee’s salary and benefits. You may also need to pay unemployment or other special taxes for that area.
Dealing with Different Types of Remote Workers
Of course, it’s important to recognize that there are different types of remote work, and each one can bring its own unique tax complications. Here’s a quick rundown.
Commuter Employees
If your organization is based close to the state line, you may have some employees who live in one state but commute into your office periodically. These employees may work “remotely,” in a sense, and both employer and employee may be subject to tax obligations on both sides of the line. Some states offer reciprocal agreements to help avoid the burden of double taxation, which often looks like one state offering a tax credit to pay for the tax liabilities elsewhere. Again, this is something you’ll want to double-check, as the specifics can vary from one place to the next.
Independent Contractors
You may also have some individuals who work for you as independent contractors, which is to say, on a 1099 basis. These workers are not considered to be employees in the eyes of the law, which means they are responsible for paying their own personal income taxes, to the state of their residence, on the basis of independent business ownership.
Employees Temporarily Working Out of State
We’re mostly reflecting on employees who work remotely on a permanent basis, but what about those who are out of state temporarily? In some cases, these employees must file non-resident tax returns. However, different states have different stipulations to consider.
What About Taxable Employee Benefits?
Something else for business owners to consider: If you offer taxable employee benefits, which include different types of stipends, that adds a new wrinkle to your tax reporting. Specifically, you’ll need to report the additional taxable income to whichever states require it. For some remote workers, this means reporting the additional taxable income to multiple states. This has a pronounced effect on taxable wages, withholdings, etc.
The conversation about stipends is important because, in many cases, employers will need to reimburse their remote employees for the tools, supplies, and resources they need to do their work. Stipends represent one of the best ways to do so. For example, you might allow remote employees a specific stipend to cover the costs of their home Internet expenses, their cell phone bills, and even the setup costs associated with their home office space.
Choosing a benefits company that can help you administer these stipends, while also managing tax liabilities and withholdings, is highly recommended for the convenience of the employer.
For Remote Teams, Taxation Can Be Complicated
There are countless advantages to remote work, not just to the employee but to the employer. However, there can also be some complicated considerations with regard to taxation. Ultimately, the extent of this complication can vary quite a bit from one state to the next. Before your employees go remote, it may be worth going over some of these details with an accountant or a business tax expert. Finally, ensure that you have the right legal foundations in place, classifying your business as an LLC; doing so can make all of these other issues a little easier to handle.
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Author Bio: Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels related to content and social media marketing.
