As more and more companies shift to remote work, small business owners need to be aware of the tax implications of having a remote team. This guide will cover the basics of taxes for remote teams and tips for small business owners to stay compliant while saving money.
Before anything else, let's discuss the three types of remote workers:
A full-time worker is an employee who works for a company on a regular schedule, typically at least 30 hours per week. They are considered part of the company's traditional workforce and are usually eligible for health insurance, paid time off, and retirement plans. They are also considered employees for tax purposes, and the company is responsible for withholding taxes from their paychecks and making contributions to Social Security and Medicare.
A contractor is an individual that provides services to another company on a contract basis. They are not considered part of the company's traditional workforce and are not eligible for the same benefits as full-time employees. They are considered self-employed for tax purposes and are responsible for paying their taxes, including self-employment taxes. They receive pay by the project or the hour rather than a fixed salary.
A sole proprietor is an individual who runs their own business and is the company's sole owner. They are not considered part of a company's traditional workforce and are not eligible for employee benefits. They are considered self-employed for tax purposes and are responsible for paying their taxes, including self-employment taxes.
There are differences between paying remote workers in the US and international workers. Here's a look at what you should keep in mind.
For remote workers based in the US, small business owners must follow the laws and regulations of the state where the remote employee resides. You may have to withhold federal and state taxes from their paychecks, make contributions to Social Security and Medicare, and issue a W-2 form to the employee at the end of the year.
There are also several ways to pay remote workers in the US, such as direct deposit paper checks and online payment platforms.
Direct deposit is the most common method of payment for remote workers. It involves transferring the employee's pay directly into their bank account. This payment method offers a convenient and secure way for remote workers to receive their pay and allows easy tracking of payments.
Some remote workers may prefer to receive a paper check mailed to their home address. This method can be less secure than direct deposit, as checks can be lost or stolen in the mail.
Remote workers can also receive payments through online platforms such as PayPal, Venmo, or Zelle. These platforms allow for fast and secure electronic transfers and the ability to track expenses.
Regarding payment methods, there are fewer options for international remote workers. However, it's still fast and easy to pay remote workers from anywhere in the world with the right choice.
International money transfer service such as Western Union or Moneygram is a good option for businesses that want to pay remote workers in their local currency.
International bank wire transfers involve sending payments directly to the remote worker's bank account. To get this done, you'll need the employee's bank account information, including the account number, routing number, and the bank's SWIFT code. The business will also need an account that can process international wire transfers.
International bank wire transfers can take several days, and fees may be associated with the transfer. The costs will vary depending on the country and the bank used. It's also important to note that the exchange rate may fluctuate, affecting the amount the employee receives.
Many online payment platforms, such as Paypal, Transferwise, and Payoneer, can accommodate international payments. For example, Paypal allows businesses to send payments to remote workers in more than 200 countries and regions. It also offers a variety of options for receiving payments, such as bank transfer, credit or debit card, or PayPal balance.
Taxes for remote teams are based on the location of the employee, not the company. Here's a look at how you would pay taxes if you were paying remote workers in the United States vs. remote workers based internationally.
Taxes are typically more straightforward to file when remote workers work in the same state as their employer. Remote workers will need to file taxes in the state where they reside as long as they are considered a resident.
Meanwhile, employers are responsible for withholding state taxes and filing state taxes. Some states have specific rules for remote workers, so it's essential to check with the state's tax laws or consult with a tax professional.
If you have employees working remotely from different states, you will need to follow the tax laws of the state in which they reside. Businesses will need to withhold federal income taxes and payroll taxes (Social Security and Medicare) from the remote employee's pay, just as they would for any other employee. Also, they need to issue a W-2 form to the remote employee at the end of the year, which they will use to file their taxes.
Employee benefits to remote workers - such as health insurance, retirement plans, and even home office expenses - are also essential to consider. Some small business owners may be eligible for healthcare tax credits—based on state laws. This credit can help offset the cost of providing health insurance to employees and is available to businesses with fewer than 25 full-time employees.
Retirement plans, such as 401(k)s and SEP IRAs, let you provide benefits to remote workers and save money on taxes. Contributions to these plans are tax-deductible.
Besides benefits and small business taxes, remote workers must be aware of their responsibilities during tax season. They may need to file taxes in the state where they work and live. Some states have what's known as a "convenience rule," which requires employees who work remotely from another state to pay taxes in both states.
Small business owners must follow the laws and regulations of the country where the international employee resides. It can be more complex, as different countries have different tax laws and regulations.
In some cases, the business owner may have to withhold taxes from the employee's pay, make contributions to a local social security system, file taxes in the country where the employee is based, and handle currency conversion rates and banking fees. They must also comply with international labor laws and regulations, such as minimum wage laws, overtime pay, and vacation time.
Managing taxes and payroll can seem intimidating, especially for small business owners doing it for the first time.
A good tip is to use tax and payroll software that can help you automatically calculate deductions and credits and can also help you file your taxes electronically. Some popular payroll services are OnPay, Gusto, and ADP Run.
An alternative option is to hire a tax professional to help you navigate the tax code and ensure you take advantage of all the deductions and credits available. Fiverr has financial consultants, tax preparation services, and business tax services that can help you handle taxation and payroll.
Regardless of the method you pick, keep accurate records of all your income and expenses and any deductions or credits you're eligible for. A proper form will make filing your taxes more manageable and ensure you get all deductions and credits. In addition, stay up-to-date about any changes in the tax law of the states you work and live in so that you can plan accordingly and take advantage of any new deductions or credits.
Taxes for remote teams can be complex, but small business owners can save money and stay compliant by understanding the basics and taking advantage of the available deductions and credits. Small business owners can keep their taxes in order by using a payroll service while providing valuable benefits to remote employees.
It is advisable to hire a tax professional who is familiar with the tax laws in the US and internationally to ensure that you're complying with all necessary regulations and taking advantage of any credits or deductions available to you.
If you need to consult a professional, Fiverr has tax and payroll experts that can help you stay compliant.