How To Set Up Payroll Processing for Remote Employees

A remote workforce offers many benefits for both companies and workers. Companies with a remote workforce report increased profits and productivity, higher retention rates, and more engagement. Workers report improved work-life balance, financial savings from not commuting, and the ability to better prioritize and focus on key tasks.

However, a fully remote or hybrid workforce also poses some challenges for companies. Issues like data protection, team communication, and goal setting need to be planned for so the team can function well without compromising security.

Another challenge to hiring a remote workforce is payroll processing. Tax laws vary between states and countries, and payroll providers moving to a remote workforce need to plan for these and other international payroll complexities.

These issues used to create difficult or even insurmountable barriers for small-business owners and startups. But leaders today have access both to a global talent pool and to the tools they need to make a remote workforce successful.

With Upwork Full-Time, you can engage independent talent in over 165 countries, and later convert to a permanent hire. And with Any Hire, you can get auto-generated contracts that comply with local employment laws, while also managing payroll and benefits processing.

How is payroll for remote employees different?

Owners often choose their headquarters and business locations based on that site’s legal and tax benefits. For example, electric vehicle (EV) manufacturers often choose California as a base because state incentives and high gas prices create the perfect EV market. Meanwhile, some other industries steer clear of California because of the strict labor laws and higher local tax obligations.

When it comes to payroll laws and taxes, many companies have, in a sense, outgrown their physical location. Companies with only in-office employees can choose sites with laws and tax incentives that suit their needs. But remote payroll requires compliance with regulations in the cities, states, and countries where employees live.

It gets even more complicated when you include digital nomads. These professionals move frequently but may choose one location for their legal address (i.e., their domicile), or they may change it often. For example, a digital nomad traveling across Europe may use Nevada as a domicile because of its favorable tax laws. Nevada is one of nine U.S. states with no income tax. Or, someone may change their legal address every time they move.

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How to set up payroll processing for remote employees in 6 steps

Variations across different jurisdictions can quickly make payroll processing a complex matter. However, experienced payroll providers can streamline the process and help you develop an effective strategy. These six steps provide an excellent starting point.

1. Set your limitations for remote work
2. Classify remote workers correctly
3. Determine how to pay remote workers within the U.S.
4. Determine how to pay remote workers outside the U.S.
5. Choose an effective payroll processing software
6. Pay remote employees

1. Set your limitations for remote work

Companies must determine the jurisdictions they will hire from and the ones workers can choose. Deciding where you draw the line now can save you money in the long run.

For example, the high minimum wage in SeaTac, Washington, could present problems for a customer service company paying $18 per hour. SeaTac's minimum wage is $19.06. An employee domiciling there would need to receive that as minimum wage.

2. Classify remote workers correctly

Companies must determine which of these three categories each remote worker falls into. Internal policies may treat each type differently, and there are legal consequences for getting it wrong.

1. Independent contractor vs. employees. This classification affects health insurance and other benefits for in-house workers versus those classified as contractors. It also determines the taxes assessed on payments―if any―to each group and the forms issued. Using the customer service example above, the company must pay $19.06 for remote workers living in SeaTac but may not have to do so for independent contractors. In-house employees also receive W2s, while contractors receive 1099s.
2. Part-time vs. full-time employees. Internal policies may decide how companies determine classification. For example, some companies use 32 hours as the threshold for full-time versus part-time employment, while others set the number at 40 hours. For insurance benefits, the IRS considers 30 hours per week to be full time. Employers must still handle payroll taxes for part-time employees but may have no obligation to pay certain benefits.
3. Resident vs. nonresident. Is the worker a resident of your municipality, state, or country? The answer does not matter as much for independent contractors but adds new complexities for remote employees. Depending on the type of employment and the country, a nonresident may still need to pay taxes on their income. Companies must understand these laws to ensure compliance and avoid penalties.

3. Determine how to pay remote workers within the U.S.

Paying remote workers in the U.S. doesn't differ much from in-office workers. Note that permitted payment methods can vary across different states. Common options include:

• Electronic bank transfers
• Mobile payments
• Debit cards
• Checks

Local tax laws

You may need to register with applicable tax agencies across the U.S. Some states have municipality tax agencies and some do not. Tax agencies determine how much to withhold and may require you to file payroll forms. Some agencies require you to file zero returns even when you no longer have employees in their jurisdictions.

Labor laws

Minimum wage is not the only factor determining how much you can pay. For example, federal laws allow employers to pay people with disabilities less based on their estimated productivity than other workers. Some states and municipalities do not allow it; these laws precede federal ones.

Let's say a customer support company outsources its transcription service. The transcription company has two employees with disabilities who work from home in Washington. Due to injuries, both workers type 40 words per minute, compared to 60 words per minute for in-office employees with no disabilities.

• Employee 1. She is a Seattle resident. According to Seattle laws, the company cannot pay her less than the city's minimum wage (even if she produces fewer complete transcripts per shift).
• Employee 2. He is a resident of a rural Washington community with no separate labor laws. His employer may pay him less than the state's minimum wage because Washington allows this for certificated workers with disabilities.

4. Determine how to pay remote workers outside the U.S.

Global payroll management is a complex task. Companies can reduce complications by outsourcing contract work to international freelancers or choosing employees who domicile in the U.S. while traveling abroad. When these options are unavailable, companies must choose experienced payroll providers to handle the following concerns.

Local corporate laws

Some countries make it easy to expand employment to their shores, but others may add a few hurdles. Review the laws of local markets carefully before choosing them.

For example, foreign companies doing business in the UAE generally need either a local majority shareholder or a local subsidiary. Foreign organizations often create limited liability companies or find an employer of record to meet local requirements.

Local labor laws

Payroll teams must research differences between company policies and local labor laws, especially overseas. For example, the U.S. has no federally mandated parental leave or paid holidays.

Consider these differences abroad. Birth parents in British Columbia receive up to 17 consecutive weeks of parental leave. Similarly, countries in the European Union provide at least 20 paid vacation days. EU governments commonly offer 30 days, with France being a good example.

Companies with remote employees must comply with the expected benefits in these locations. Even when not mandated by law, companies may struggle to attract top talent if they offer fewer perks than local companies or other international competitors.

Double taxation

Double taxation happens when expatriates pay taxes in their countries of origin and the countries they work in. Some countries do not tax the worldwide income of their citizens, but the U.S. does.

Americans typically pay Social Security taxes, even when living and working overseas. Employers must research applicable tax treaties and agreements when doing business abroad. These treaties may help workers avoid paying double income tax.

Some countries also offer special visas that only tax income earned from sources within their borders. Consequently, ex-pats working remotely for overseas companies do not pay taxes. Some visas may stipulate taxation but at a reduced rate.

You may reduce your remote workers’ taxable incomes by redesigning compensation packages. Benefits may receive better tax treatments in some jurisdictions over monetary compensation. Examples include health insurance, qualifying retirement contributions, and company equity.

Payment currencies

Companies must determine what currency they will pay workers in and whether workers have a say. For example, an American employee in London likely prefers payment in GBP. In contrast, an American worker in Mexico will typically choose USD over pesos.

You also need to review regulations that affect currency and the potential for losses in income as rates fluctuate. Who will absorb the losses or gains? This may vary based on local laws where remote workers call home.

Payment methods

Some U.S. financial institutions require account holders to maintain U.S. residency. Betterment, a popular robo-advisor with a savings and checking account, is one example. If workers domicile in another country, these financial institutions may attempt to close their accounts upon discovery or refuse to issue new cards.

Companies must review local requirements for payment methods. They must also consider the potential for additional fees tied to wire transfers, which can reach upward of $30. Remote contractors are often more open to unconventional payment options like PayPal, Cash App, and Monese.

5. Choose effective payroll processing software

Companies can streamline their remote payroll process by using the right app. The payroll system can automate many complex processes workers would otherwise need to handle manually. Automation also reduces the likelihood of errors, which protects the company from legal and compliance issues across state lines and national borders.

Platforms like Upwork Any Hire provide a streamlined way to manage payroll for remote workers. Here are some of the many features it brings to your organization.

• Find remote workers. Choose an easy and proven method for growing your remote workforce. Upwork Any Hire makes it fast and easy to find workers almost anywhere in the world who can meet your needs.
• Maintain compliance. Avoid the stress of manually tracking local laws. Upwork simplifies contract management by auto-generating compliant contracts. It also updates the agreement as laws change.
• Manage benefits and pay. Use one centralized dashboard to manage your global team. Upwork Any Hire makes it easy to review tax documents, manage payment preferences, and confirm locations.
• Leverage liability protection. Secure legal protection for potential errors. If government agencies come knocking with questions about your hiring practices, Upwork provides liability protection and offers support throughout the inquiries.
• Do it all yourself. Avoid the additional costs of outsourcing or hiring an international payroll professional. You can manage the entire process via Any Hire for a fee. Submit payments for your workers every two weeks and we handle the rest.

You will need payroll software even if you hire professionals for the job. Independent contractors may prefer to use apps they already know. Sticking with familiar software significantly reduces the learning curve and may save you the cost of buying additional payroll systems. If you hire employees, you may need to provide software and credentials for logging in.

6. Pay remote employees

Every remote payroll solution works differently and offers unique features to manage compensation for your team. Here are some final payment considerations when running payroll.

• Address confirmations. Some workers still prefer physical checks over direct deposits. Follow up with these persons regularly to ensure you have the correct address before sending a check.
• Payment frequency. Always pay employees on time and in the currency detailed in their contracts. Research standard payment schedules if you are unfamiliar with local laws. Your payment software may also need to account for time zone differences.
• Employee portals. Consider adding an employee portal if using a payroll platform. This feature lets staff access their pay stubs and other essential documents from anywhere in the world. Portals also make it easier to submit W2s and other documentation they might need for taxes.

Upwork Payroll works for businesses with remote employees

Remote work has revolutionized the way companies attract the best professionals worldwide. It has also provided new opportunities for people who want flexibility at work. While there's no denying remote payroll introduces several complexities, the benefits of remote and hybrid work far outweigh the costs.

Our apps and payroll services boost these benefits by minimizing the obstacles small businesses must overcome when hiring remote talent. You can also trust Upwork Payroll agents to manage the payroll process from start to finish, whether you have employees, freelancers, or a mix.

Get started with Upwork Payroll to manage your remote workforce today.

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Upwork does not provide tax or legal advice. Each reader and company should take the time needed to adequately analyze the laws that apply to their business endeavor.