Pay, Tax, and Work Laws for Remote Employees
If your business is considering hiring remote employees who will work outside your business location—either in the U.S. or internationally—you will need to take a look at your work, pay, and employment tax policies and procedures. Here’s a look at some of the issues that may affect remote employees working in the U.S. and abroad.
How the Coronavirus Emergency Affects Your Remote Employees
Here are some new laws affecting your business and your employees working from home, and some continuing to work remotely throughout 2020. Several new laws help businesses and employees during this emergency.
Sick Pay and Family Leave Pay
The Families First Coronavirus Response Act (March 2020) includes provisions to help employers give sick leave and family leave benefits to employees. It directly affects small and midsize employers (with fewer than 500 employees), and it gives tax credits to help you pay for these benefits.
If you have remote employees who can't work for coronavirus-related reasons, you must give them sick pay up to ten days (80 hours). If the employee is off work to care for a child, they are also entitled to family leave pay for up to 10 weeks.
You can use the tax credits for leaves taken between April 1, 2020, and December 31, 2020, and you can get the credits quickly by deferring your employer part of Social Security taxes, reported on Form 941, the quarterly wage and tax report.
Employer Retention Credit
Your business can get an employee retention credit for keeping employees (including remote workers) on your payroll after March 12, 2020, and before January 1, 2021 if your company has been affected by the coronavirus. The credit is equal to 50% of qualified wages, and you can get the credit quickly by reducing payroll tax deposits or requesting an advance on Form 7200.
Remote Employees in Your State
If your remote employees are located in the same state as your business location, you can follow the same state laws for income taxes and employment taxes. But you do need to check on income taxes in the localities where remote employees work. Local income taxes are imposed by localities (counties, cities, municipalities, school districts, or special districts) in 11 states.
State Laws and Taxes for Remote Employees
If you haven't already done so, you'll need to find out where remote employees are working from during the coronavirus emergency. Some teleworkers may have moved during this time, and you must document their work locations for state tax purposes.
If you have remote employees in multiple states, you’ll need to check the employment laws and tax laws in each state. You will need to know about state income taxes to know when to withhold these taxes from remote employee paychecks. Some states, for example, have a 30-day threshold before the employee is required to comply with income taxes different from their state of residence. Municipal taxes may also differ depending on the employee's location.
If you have employees in a state, are you “doing business” in that state? The principle behind this is nexus, or connection. Nexus is the legal term for whether a state has the power to tax your business. This usually means that the business has a physical presence in the state, which can mean property, sales, or employees. If a company has its offices in State A and employees working remotely in State B, State B may claim that a part of the company’s income taxes must be paid to that state.
The tax nexus laws in each state are different. Consider getting help from a tax professional or employment attorney who is licensed in the states where you have remote employees to determine your tax responsibilities.
If the state’s hourly minimum wage rate is higher than the federal rate ($7.25 as of February 2020), you must pay the higher of the two rates. The U.S. Department of Labor website can help you learn all state minimum wage laws.
All states require employers to purchase workers’ compensation insurance and to compensate employees for workplace injuries or illnesses. Some states allow you to buy your own workers’ compensation insurance, to purchase the state insurance, or to self-insure. The National Federation of Independent Businesses has a state-by-state comparison of workers’ compensation laws.
Some states mandate employee or employer participation in disability insurance programs that pay employees for non-work related short-term disabilities.
- California, New Jersey, and Rhode Island fund their programs through employee payroll deductions, so you will have to register to withhold deductions from remote employees working in these states.
- New York and New Jersey require covered employers to pay disability benefits to eligible full-time and part-time employees. The employer may purchase private insurance, state insurance, or apply to be a self-insurer.
The federal government and individual states have unemployment tax laws that work together to provide employees with benefits if they have lost their jobs. Most employers pay both federal and state unemployment taxes, and most states have their own laws.
The state agency that administers unemployment taxes is different from the agency that pays unemployment benefits.
Other State and Local Laws Affecting Remote Employees
Local zoning regulations might require a remote employee working from home to get a zoning variance from the locality. Additionally, some states require that employees be paid on a specific schedule (weekly, bi-weekly, semi-monthly, or monthly). Nine states also require minimum paid rest periods for adult employees in the private sector. Here are the states and their requirements.
The federal overtime requirement is to pay employees 1.5 times their normal hourly pay for work over 40 hours in a workweek. Some states have more generous overtime regulations. California, for example, requires overtime pay for excess hours in a day. A state’s workforce agency is the place to check on overtime requirements.
Laws and Taxes for Remote Employees Working Abroad
Federal Income Taxes
If you have employees working abroad, you must withhold U.S. income tax from their pay unless you are required by foreign law to withhold foreign income tax. Some employees may qualify for a foreign earned income exclusion if they meet certain tests. This exclusion has a maximum that is adjusted for inflation each year.
State Income Taxes
Some U.S. states require individuals who work outside the state to pay state income taxes unless they can prove they are no longer state residents. Colorado, for example, requires proof of non-resident status, while other states (those who have state income taxes) may have more lenient regulations.
If remote employees are required to pay federal and/or state income taxes, you will need to withhold those taxes from their paychecks.
Social Security/Medicare Taxes
If you pay remote employees to work outside the U.S., their wages are generally subject to Social Security and Medicare tax if you are an American employer that is not a foreign affiliate company. Some countries will impose a Social Security tax on wages of remote employees, but the U.S. has totalization agreements with some countries, like Canada and France, to avoid double taxation.
Remote Employees—Not Independent Contractors
It is important to know the difference between a remote employee and an independent contractor. Misclassifying workers as independent contractors could make your company liable for unpaid employment taxes. The IRS offers more guidance on understanding the employee vs. independent contractor designation and it might help you sort out the difference so that you can accurately pay and tax your employees under the right work regulations.
IRS. "New Employer Tax Credits." Accessed Aug. 6, 2020.
IRS. "COVID-19-Related Tax Credits: How to Claim the Credits FAQs." Accessed Aug. 6, 2020.
IRS. "Deferral of Employment Tax Deposits and Payments Through December 31, 2020." Accessed Aug. 6, 2020.
IRS. "Employee Retention Credit." Accessed Aug. 6, 2020.
Tax Foundation. "State Individual Income Tax Rates and Brackets for 2020." Accessed Aug. 6, 2020.
Tax Foundation. "Working from Home Brings Greater Exposure to State Tax Codes." Accessed Aug. 6, 2020.
U.S. Department of Labor. "Minimum Wage." Accessed Aug. 6, 2020.
Connecticut General Assembly. "Paid Leave Programs in California, New Jersey, and Rhode Island." Accessed Aug. 6, 2020.
Official Site of the State of New Jersey. "Department of Labor and Workforce Development: Division of Temporary Disability and Family Leave Insurance." Accessed Aug. 6, 2020.
New York State, Workers' Compensation Board. "Employers/Businesses: Complying with the Disability Benefits Law." Accessed Aug. 6, 2020.
IRS. "Federal Unemployment Tax." Accessed Aug. 6, 2020.
U.S. Department of Labor. "State Payday Requirements." Accessed Aug. 6, 2020.
U.S. Department of Labor. "Overtime Pay." Accessed Aug. 6, 2020.
Internal Revenue Service. "Publication 54 Tax Guide for U.S. Citizens and Resident Aliens Abroad." Page 8. Accessed Aug. 6, 2020.
Colorado Department of Revenue, Taxation Division. "Part-Year and Nonresident." Accessed Aug. 6, 2020.