As remote work gains popularity, employers must ensure policies comply with local regulations and employment laws. This includes state tax registration and compliance, apportionment rules, withholding requirements, etc.
Commuter employees live in one state and commute to another to work, which creates unique income tax circumstances. It would help if you also had policies on reimbursing remote employee expenses.
Payroll Taxes
As remote work continues to reshape the modern workforce, individuals and businesses are navigating the complex tax implications of remote work, requiring a careful examination of jurisdictional regulations and potential changes in tax obligations for both employers and employees.
Payroll taxes are the federal, state, and sometimes local income taxes employers deduct from employees’ paychecks. These taxes include employee income tax withholding, employer’s share of FICA (Social Security and Medicare), and possibly state or local employment taxes. It’s up to employers to calculate, withhold, and deposit payroll taxes.
Employee income tax withholding is determined based on an employee’s claimed number of withholding exemptions and the information they provide on their W-4 forms. The IRS publishes standard tables for determining withholding per pay period based on an employee’s salary and deductions. The IRS also offers an online Income Tax Withholding Assistant to help determine the correct withholding amount for each individual.
There are different payroll tax rates for different types of wage payments and various schedules (weekly, biweekly, semimonthly, monthly). An HR manager or owner must consult the appropriate table to determine how much to withhold for each employee’s taxable wages. The IRS provides an overview of the different rate structures in Publication 15, Circular E, and the Employer’s Tax Guide.
When calculating payroll taxes, remember that payroll taxes are regressive, meaning low- and moderate-income taxpayers pay more in taxes on average than high-income taxpayers. Payroll taxes can be a significant part of an employee’s take-home pay, especially when they are in the bottom two-thirds of the income distribution.
Self-Employment Taxes
Many people who work independently in America’s gig economy are surprised to discover they must pay self-employment taxes. This tax applies to individuals who are sole proprietors, independent contractors, freelancers, and gig workers such as Lyft or Uber drivers. Unlike wages withheld from employee paychecks, these individuals must pay the total Social Security and Medicare tax on their earnings. However, as with income taxes, the 15.3 percent self-employment tax can be offset by deductible business expenses such as a home office or health insurance.
To calculate your SE tax, add all your net earnings from self-employment—the total from your 1099-MISC forms plus the amount reported on a Schedule C from a small business or rental property, for example—and subtract your eligible business expenses. Business expenses include advertising costs such as flyers, billboards and car wraps, cellular and internet bills, and office supplies. For a complete list of allowable deductions, visit the IRS website for an overview.
You may be required to make quarterly estimated tax payments depending on how much you earn. A professional tax preparer can help you determine whether this is the case. It’s also important to consider your tax liability when pricing and planning your finances throughout the year, including deciding between saving money or investing it back into your business.
Unemployment Insurance
Whether due to decreased demand, financial setbacks, or global health concerns, businesses sometimes must let employees go. When that happens, the former employee may be eligible for unemployment insurance benefits. As a business owner, you must understand how this process works and your responsibilities if an employee files for UI.
Workers who are eligible for UI must meet both federal and state requirements. To qualify, the worker must have earned wages in a qualifying period and be unemployed through no fault. The law also requires the worker to be available and willing to work. In addition, some states require that the employer pay state-level taxes to fund its UI programs. These taxes are known as FUTA and SUTA.
In addition to FUTA and SUTA, some states offer additional benefits for temporary periods of high unemployment. Generally, the benefit provides extra weekly money for workers who exhaust their regular benefits. It can also be used to compensate employees who lose their jobs during a natural disaster or for workers who were temporarily laid off because of a pandemic.
Generally, you must accept an approved unemployment claim from a former employee, but there are some exceptions. For example, you can dispute a claim based on willful misconduct or failure to follow instructions. If you dispute a claim, your legal team can present evidence at a hearing to prove that the employee was fired for good reason or that they voluntarily quit.
Social Security
Social Security is a government-run insurance program. Workers pay into it through payroll deductions on their paychecks listed as OASDI (for Old Age, Survivors, and Disability Insurance). Generally, people with W-2 jobs pay 6.2% of their earnings into the system. The employer pays an additional 6.2% on behalf of the employee. Social Security taxes are capped at $160,200 in 2023 and adjusted yearly for wage increases. Those earning more than that amount contribute their money to the system individually.
In 2011 and 2012, the worker share of the Social Security tax was reduced from 6.2 percent to 4.2% to provide a temporary economic stimulus. This reduced contribution comprised money from the federal government’s general fund.
Employers must verify that each employee has a valid Social Security number and card since the IRS uses them to report wage information on Forms W-2. The Internal Revenue Service’s Publication 15 (Circular E, Employer’s Tax Guide) provides instructions on recording an employee’s SSN and name. Employers should ask employees to show their cards or give them the number and exact name printed so they can copy it for wage reporting purposes. Also, check this webpage to learn how to use the Social Security Administration’s free online verification system.