Note: This article is intended to educate small businesses on the international income tax landscape for remote employees. It is in no way intended to provide financial advice. For detailed financial advice please contact your tax consultant.
With 70 percent of global employees working remotely at least once a week, remote working—or telecommuting—is one of the key workplace trends in 2019.
As a result, small businesses must navigate the muddy waters of deducting payroll taxes based on international business tax regulations while hiring or sending employees abroad to work remotely.
Since international tax regulations differ from country to country, some key challenges that small businesses must address include:
- Avoiding double taxation
- Classifying remote employees as independent contractors or freelancers
- Deducting Social Security and Medicare
- International tax forms for a remote employee
Small-businesses owners not well-versed in international business tax regulations will see the above items as an obstacle.
Tax software helps small businesses easily address the key questions, as it automatically calculates payroll deductions based on international business tax regulations, such as Social Security deductions.
In other words, small-business owners and finance managers that implement a tax management solution will be more cognizant of international business tax regulations and better able to deduct payroll taxes for remote employees to avoid tax penalties.
In this article, we focus on factors for considering international business tax regulations for remote employees. How can accounting software help you manage remote employees based on international tax regulations?
Before we jump into the international business tax obligation for remote employees, it’s important to understand what a remote employee is and how their tax obligations are different from self-employed, freelancers, and contractual employees.
What is a remote employee?
A remote employee is a full-time employee (FTE) that does not work from the onsite location of the office but virtually from home, from a coffee shop, or while traveling on business trips. Such an employee is still based on the payroll and compliance regulation of the company.
A remote work environment offers a win-win situation for both the employee and the small-business owner. Employees get flexible working hours, while small-business owners enjoy reduced infrastructure costs, as they don’t require a costly, expanded office setting to seat employees.
Aside from where they sit and how they interact with your other employees, remote employees hired internationally are no different from any other on-premise employee. They’re part of your payroll, and your small-business HR, compliance, and payroll policies apply in equal parts to on-premise employees and remote employees located abroad.
Even if your remote employees work abroad, they are not classified as self-employed or contractual workers.
Here are some factors to consider for international business tax management for remote employees.
3 factors for considering international business tax management for remote employees
There are multiple international business tax factors to consider while hiring remote employees. Some of these factors include employee classification, double tax avoidance, and Social Security and Medicare deductions.
1. Accurate employment classification is key to avoiding tax penalties
If your small business is planning to send employees to work abroad for a short period of time, make sure you classify them as salaried employees. Contractual workers will need to deduct their taxes based on the tax regulations in the country that they reside.
Moreover, the IRS has separate tax forms for regular and remote employees versus contract-based employees. Deducting taxes from payroll becomes a bit tricky for small businesses to understand if you are hiring both regular and remote workers.
For example, self-employed independent contractors will be filling out 1099s, while regular or remote employees fill out W2s for calculating payroll taxes.
Unless you have a business registered in the location abroad, payroll taxes for your remote employees will be deducted based on that country’s income tax regulations.
To move out of the ambit of international business tax for remote employees, you would need to provide a certificate of non-residency to the concerned tax department for that country.
For U.S. remote workers, the IRS provides Form 6166 so that they can prove their temporary stay in a country abroad and avoid international business tax obligations.
- Choose the right tax forms for employees for remote workers versus self-employed or contractual workers based on countries’ employment classifications. For remote employees, you need to provide their income details just for custom or immigration purposes and not for deducting taxes.
- Evaluate U.S. tax treatises that allow U.S. citizens to be taxed at a different, lower rate abroad depending on factors such as length of stay and employment classification.
2. Avoid double taxation
In other words, your small business might be taxed twice: once in the state where the remote employee works and once at your official business location.
So is double taxation applicable if you send your employees to work abroad remotely for a short term? What about hiring remote workers abroad? Will your small business have to deduct payroll taxes based on both IRS guidelines and the guidelines of the country of residence for the employee?
Well, there are two answers to these questions.
First, the United States has income tax treaties with countries to avoid double taxation such as deducting payroll taxes twice. So, if you are planning to send your employees to work remotely based on the countries mentioned in the treaty, they will be taxed at a reduced rate, or, in some country-specific situations, not be taxed at all.
Second, if your employees are temporarily working remotely abroad, their tax obligations will be based on IRS regulations and not the country in which they work remotely. Your business won’t be taxed twice since they are working remotely for a short duration.
- Register your business in the country from which you would like to hire remote employees to avoid double taxation. This will enable you to hire foreign remote workers with their payroll taxes subject to the tax jurisdiction of the country to avoid double taxation.
- Examine international business tax regulations concerning double taxation to ensure you won’t qualify for double taxation in case you send remote employees abroad for a short term.
3. Claiming Social Security and Medicare deductions
Another critical point that small-business owners should keep in mind while working with remote employees is the need to deduct Social Security and Medicare from payroll taxes.
Social Security deductions are based on length-of-stay. The IRS lays out clear guidelines under Totalization Agreements with other countries for avoiding double taxation on Social Security for employees working abroad (or remotely).
If your remote employee is subject only to U.S. Social Security tax benefits, small-business owners require a certificate of compliance from the Office of International Programs of the Social Security Administration.
If your remote employees are working permanently abroad in a country with which the United States has a Totalization Agreement, they are exempted from U.S. Social Security taxes to avoid double taxation.
Similar to Social Security deductions, Medicare tax deductions for remote employees depend on their length of stay.
If it’s a long-term stay of more than one year, they may be eligible for the deduction based on the foreign country and its respective Totalization Agreement. Short-term stays mandate that remote employees report their taxes to their U.S. employer.
- Consider the Totalization Agreement guidelines to avoid double taxation on Social Security and Medicare while calculating payroll tax deductions.
- Evaluate the term of stay for remote employees to check whether they are eligible for foreign Social Security and Medicare deduction to ensure accurate payroll deductions.
How tax management software can help with international business taxes for remote employees
Accounting tools automate the entire process of financial management from accounts payable to receivable. Whether it is managing payments from vendors, taxes, receipts, or any number of other needs, accounting tools help digitize your financial documents and automate your financial needs.
Accounting tools also automate the use of international business tax guidelines to help you deduct taxes from your remote employee’s payroll.
Key features of tax software with features specific to international tax for remote teams include the following:
- Payroll integrations help to integrate tax software with payroll software for managing pay slips, bonuses, and Social Security and Medicare deductions based on IRS guidelines.
- Tax management helps you deduct sales tax and manage your overall business tax obligation based on state or international business tax guidelines.
- Financial compliance management helps deduct payroll and sales tax based on international and IRS tax guidelines.
Example of tax management software
Next steps and additional resources
By now you should be familiar with some of the factors that you should keep in mind for international business tax management for remote employees. The following graphic explains what you need to know and how tax management software can help:
Check out these additional resources to understand international business tax for remote employees
- GetApp’s accounting directory to choose top-rated apps
- Managing remote teams with a remote work policy