Tax Implications for Remote Workers: What Small Business Owners Need to Know
Remote work has changed the game for small businesses. While you can now hire that perfect data analyst from Oregon or the stellar developer from Florida, managing taxes for out-of-state employees can feel like solving a Rubik's cube blindfolded. But it’s not impossible, let’s break down tax implications for remote workers into bite-sized pieces you can actually use.
Key tax considerations for remote workers
When employees work remotely from different states, you face a web of tax requirements that vary by location. For example, if your business calls Texas home but employs people in California and New York, you'll need to play by each state's rulebook.
State-specific tax requirements
Here's where things get interesting. Like real estate, state taxes are all about location, location, location — but not yours, your employees'. Here's what you need to know:
State tax withholding follows your employees home — literally. You'll typically need to withhold taxes for the state where they're working from.
Some states play nice with each other through "reciprocal agreements," meaning employees only pay taxes in their home state.
Thanks to COVID-19, some states created special rules about remote work that might still apply.
Remember, you might need to:
Introduce yourself to state tax agencies by registering your business.
Open state tax accounts.
File tax returns in several states.
Keep track of different tax rates (they're all over the map, literally).
Stay on top of ever-changing rules.
Federal tax obligations remain consistent
State compliance can be a pain, but federal taxes don't care where your employees work. Still, you'll need to:
Withhold employees’ federal income tax.
Pay your share of Social Security and Medicare.
Collect employees' portion of these taxes.
File quarterly federal returns.
Send out W-2s every January.
Keep your paperwork in shape.
Business registration requirements
Remote workers mean you also might need to deal with "foreign qualification,” which has nothing to do with international business — it's what happens when you need to register your business in other states. You might need this when:
The company has a physical presence (including home offices).
You sell a certain amount in that state
You pay people who live in that state.
Regular business meetings occur in the state.
When to seek professional guidance
As much as we support and admire the DIY spirit, there are times when calling in the pros just makes more sense. Consider getting help when:
You're hiring your first out-of-state remote worker.
You're expanding into new states.
You're dealing with complicated multi-state situations.
You're scratching your head over registration requirements.
State tax authorities are coming after you.
Your remote team is growing fast.
While managing these obligations might seem overwhelming, you don't have to figure it out alone. Our team keeps tabs on tax rules across all 50 states (so you don't have to), and we're here to help you stay compliant while keeping more of your hard-earned money in your pocket.