Guide to Payroll and Taxes For Domestic and Global Remote Teams

For the last five years, team managers and business owners all over the world were debating whether a distributed team is a productive way to work on long-term projects and sustain a global corporation.

Then, 2020 came, and, as the saying goes “the choice made us”. Amid the pandemic, remote work is no longer optional — business owners either give up offices fully or switch to halfway measures introducing remote workdays.

Embracing remote work opens a ton of exciting opportunities to business owners — cutting operating costs, expanding the team and hiring abroad, and improving the flexibility of workflows and processes. However, business owners shouldn’t ignore the huge challenges that come with payroll and taxes for remote employees. Although remote work is awesome, having to comply with all international and state compensation laws isn’t.

This post is a full guide to structuring payroll for remote teams based both within and outside the US.

3 Types of Remote Collaboration

One of the things influencing the payment procedure a business owner should adopt is the depth of a contractor’s involvement in the project. There are three distinct types of remote employees:

1. Full-time remote teammate

Recently, the practice of hiring full-time employees based in a different city or country to work for the company remotely has become increasingly more popular. Statistically, 16% of employees have already switched to full-time remote-only hiring.

If you are running a team of remote full-time employees, you’ll need to ensure strict compliance with local state and employment laws (e.g. state income tax law in the US).

2. Contract-based remote employee

Hiring a contractor is another common type of remote collaboration. It’s a favorite type of collaboration for most employers since the employee will be the one to assume tax responsibilities.

If you want to onboard a new hire as a contractor, you need to make sure that the type of collaboration meets the following criteria defined by the IRS:

• Receive no long-term job training. 
• Get no benefits from the company: health insurance, vacation pay, and others.
• Have a set date for terminating contractor services — if you hire software developers for a non-defined time, the court will see it like employment, not contractor-based collaboration.
• No control over the work process, assessing only the result of provided services.

3. Service-based relationship

In this type of collaboration, a professional working remotely is a part of a different company or a sole proprietor. In this case, the payroll is set up by exchanging invoices between the company and a sole proprietor. 

This is the safest and easiest-to-manage collaboration type for business owners — however, waiting for an employee to deal with the hurdles of signing up for sole proprietorship takes time. 

Domestic and International Remote Employees

The protocol for handling payroll and taxes for remote employees depends on the type of collaboration between a business manager and remote teammates. Most commonly, teams use one of these 5 remote employment strategies:

• Domestic remote employee. This type of collaboration happens whenever an existing employee chooses to telework from a different state or region of the same country or if an employer creates remote job openings and hires professionals from the local talent hub.
• International remote employee. Another type of remote collaboration is hiring an employee residing in a different country to work remotely. In some cases, the company has a global office in the region that’s responsible for payroll — in others, the main headquarters assume the responsibility.

When working with international professionals, business owners need to consider the prospect of shifting payroll to the employee’s country or handling all processes directly from the host country.

Payroll and Taxes For US-Based Remote Teammates

Assuming you are an American-based business owner, hiring professionals at home to work remotely is the most straightforward thing to do. While running a team of employees based in a single country is easier than being in charge of a distributed workplace — there are payroll hurdles to consider when your entire office is going remote.

Being mindful of employee relocation

The first issue business owners face when letting teams work remotely is that employees are no longer constrained to stay in a single state. Chances are, your teammates will move over time — that will complicate the taxation process.

The employee tax rate system is not uniform across the country. In some states, employees have to pay additional fees, be it a sales tax or reimbursing employees for phone and Internet bills. That’s why team managers need to be aware of payroll taxes for employees working out of state.

To avoid confusion and keep track of tax fees across different states, consult this official guide on tax provision across US states.

Keeping track of paperwork

Even if a business owner runs a team of remote contractors, there are quite a few legal obligations you need to be aware of. Generating 1099 employee tax forms for all remote members of your team is an example of one of the most time-consuming tasks a payroll manager needs to handle.

Note: Form 1099 is a document filed by an employee to report his earnings and tax returns.

The good news is, there are plenty of guides on generating and filling a 1099 form. Other than that, remote business managers often rely on employee payroll software like PayPal Payouts to automate payroll and taxes for remote employees.

Choosing a payroll platform

Last but not least, business owners need a comfortable way to pay remote employees. There are a lot of factors to consider when choosing a payment method: processing fees, security, transaction delivery period, and more.

The good news is, when you are hiring a home-based remote employee, the range of payment options is wide. Here are a few tools remote teams use to distribute compensations:

• Direct bank deposits.
• Checks signed by the employer company.
• Third-party payment gateways: PayPal, Venmo, etc.
• Freelance work platforms — Upwork and others.

COVID-19 and Tax Law Updates

At the time of writing (December 2020) the US is still in the COVID-19 pandemic.

Considering that the concerns for public health constrained a lot of teams to switch to remote work without having enough time to build a proper infrastructure of payroll and taxes for remote employees, the Department of Labor encouraged state governments to be more flexible in taxation and employment law.

Here are a few changes the government agency recommended:

• Allowing remote workers to receive unemployment insurance benefits under COVID-related conditions.
• Exempting the income tax in some states (as was the case for New York).
• Providing state-based unemployment insurance (thus freeing employers from paying UI fees).

Hiring International Remote Teams: Benefits and Challenges of Globalization

Now is the hard time for small businesses in many sectors (there’s plenty of data to back up this statement). That’s why company owners need to look for new ways to reduce operating costs without jeopardizing growth and scaling.

Shifting the focus from hiring remote employees locally to building international teams is a lifesaving strategy for many business owners. Let’s take a quick look at the benefits of globalizing your team:

• Exploring new markets and pinpointing opportunities. Globalization helps business owners to look for other ways to increase revenue than fighting for each customer in highly competitive markets. These days, when businesses are shifting their activities online, finding ways to connect with international clients is a sensible strategy for company managers.
• Faster skill transfer and highly productive collaboration. Globalization allows business owners to access practices, strategies, and skillsets that are not as widespread locally. For example, Eastern European tech hubs have a wide range of custom software development tools and practices — introducing those to the project is a powerful way to stand out among competitors and bring diversity to the workplace.
• Fighting talent shortage. The lack of an affordable and skilled workforce in top tech hubs has been a dominating issue in the tech community. To that end, looking for skilled professionals in countries where fewer large-scale corporations are based, helps business owners close job openings and cust salary costs.
• Reducing operating costs. When hiring tech professionals abroad, it’s easier to find affordable and skilled talent. To see how drastically hourly rates of tech teams vary by locations, take a look at our post covering software developer salaries all over the world,

Tax and Payroll Challenges For International Remote Teams

The benefits of expanding tech teams internationally are non-negotiable. However, when entertaining the idea of opening a global office abroad, business owners need to consider payroll and taxation related challenges that come along with onboarding employees from a different country.

1. Timely tax law compliance

Unfortunately, there’s little comprehensive and up-to-date information on tax legislation in top international tech hubs (Argentina, Ukraine, Mexico). That’s why business owners risk not meeting tax payment deadlines, missing out on errors in financial documentation, and other non-compliances.

Staying vigilant of the changes in payroll taxes for employers and upcoming deadlines is challenging for a company that has no entity in a country it sources talent from.

2. Interpretation and comprehension shortcomings

Another factor contributing to taxation and payroll compliance challenges is the language and time zone barrier that complicates the communication between business owners and international tax institutions or payroll vendors.

As a result, managing a team of international remote workers can add to the plate of a business owner’s worries and reduce working productivity.

3. Data security

Instead of submitting tax-related work in person or through an employee from the main branch, a business owner will have to entrust a vendor to deal with the team’s sensitive financial data or use government-backed e-rooms.

That puts company managers at the mercy of the quality of state security practices which, in some international talent markets, is considerably lower than in others.

3 Ways to Handle International Remote Team Payroll

There are three ways to streamline payroll and contract labor taxes for international remote teams. Let’s take a closer look at these strategies:

1. Creating an in-house team for managing international workers

To make sure the payroll for international remote employees is under control, business owners can assemble a department that’ll handle tax and financial documentation of a global team.

Security, confidence, and full control of all processes are the benefits of managing international worker payroll in-house. On the other hand, such teams are not easy to assemble since business owners will need to find people with a firsthand understanding of tax laws in a specific country.

2. Hiring a global vendor to handle taxation and payroll

Reaching out to companies that specialize in overseeing the payment and tax services for global teams is a smart solution since it saves business owners a lot of productive time and reduces work-related stress.

Here’s how global vendors streamline and facilitate the administration of payroll and taxes for remote employees:

• Keep track of tax legislation changes and stay in touch with the representatives of government agencies.
•  Use custom or reputable tools and technologies to automate taxation and payroll.
• Consult the headquarters on best practices of distributing salaries, employee benefits, bonuses, etc.
• Provide business owners with detailed reports on payroll and taxes for remote employers.

3. Hybrid approach

Last but not least, some business owners opt for the mix of the two strategies described above. Although the team has a few specialists allocated to overseeing international employee payroll, the bulk of the operations, as well as local representation of the company is a vendor’s task. 

This is a smart way to keep control over the business’ financial operations and having a trusted local representative. 

Conclusion

Although switching from office-based to remote work is challenging for company owners, this is the new reality businesses across the globe are facing. Understanding and accepting the responsibility that comes along with managing teams remotely starts with establishing clear payroll and taxation protocols.

Whether you are hiring tech talent in the US or abroad, make sure to consider onboarding a team of professional financial advisers to streamline payroll and taxes for remote employees and give recommendations in case of emergencies.

When hiring a tech team abroad, open access to local expertise and a link between the headquarters and a global office is crucial.

That’s why an increasing number of business owners hire employers of record — you can find out more about the job role in our full guide.

To hire an employer of record and expand your business abroad, reach out to Bridge. We offer real-time financial support and provide business owners with a custom team management platform. Get to know Bridge better by finding out more about our product and service. To get free employment law advice from a global recruitment specialist, leave us a message!