How Do International Taxes for Remote Workers Work?

Introduction

As an international employer, paying taxes is necessary to stay compliant and continue doing business in your chosen markets. Traditionally, employers did not have to worry much about tax management. Operating in one or more markets, employers used to fill in forms and report taxes to the relevant tax authorities for employees who primarily worked on the premises. This was mostly a straightforward process where employers withheld taxes, in-house or via outsourcing, for employees who worked for specific hours and according to established regulations for statutory benefits, social insurance, deductibles, allowances, and other tax considerations.  

Then came remote work.

The exponential shift to remote work in recent years, coupled with changing needs of employees and independent contractors, has resulted in equally dramatic changes in how, where, and why remote workers can or should be taxed. For those working remotely, taxes are writing new rules employers need to learn to follow. These taxes for remote workers are often hard to calculate and report.

For an international employer with remote distributed teams in addition to your on-premise employees, understanding how remote working and taxes function is the new normal. The older tax assumptions do not necessarily work in an increasingly remote-defined world. It would be best if you adapted so you can stay remote-compliant in a changing world of work.

The rapid shift to remote work, coupled with a string of regulatory complexities, makes understanding remote tax difficult for many employers. That is why an in-depth knowledge of why remote work tax differs from conventional taxes is critical. After the initial step of learning about these tax requirements, you will be ready to fill in your forms to report the required taxes for your remote workforce.

This is where our industry-leading guide comes in: to help you make sense of international remote tax and its role as a global employer for your business.

Why are remote worker taxes complicated?

Taxation in a remote-defined world is light-years away from conventional taxation rules. That is, while employers or remote workers eventually need to report taxes for all income earned during the prior year, employers and remote workers do not have access to any one-size-fits-all solution, even for local remote workers residing in one jurisdiction. (More about different scenarios for remote work tax in the next section.)

Taxation of remote workers is only part of why this tax class is so complicated. The root cause of why many employers find remote tax challenging is that defining a remote worker can also be challenging. As more and more employers hire foreign workers who reside abroad and work remotely, the question of whether to classify these workers as employees, independent contractors, or something else can be complicated. Employers are subject to misclassification risks, such as fines, if workers are not properly classified according to the employment laws and tax regulations of the relevant jurisdiction(s). The problem of definition is, then, practical problem employers need to solve before proceeding to handle more tax-related challenges.  

Consider, for example, how the U.S. Internal Revenue Service (IRS) makes clear to employers how important classifying workers is to avoid possible penalties. According to the IRS, workers whose income is taxable or not (and whose income should be withheld, or not, for social and healthcare insurance, deductibles, etc.) fall into four main categories:

• Common law employees who are under the full control of employers and who enjoy full statutory benefits according to U.S. labor laws
• Statutory employees who, despite being independent contractors, generate their primary income from a single employer
• Statutory nonemployees who are direct sellers, licensed real estate agents, and certain companion sitters
• Independent contractors who are not controlled in any way by employers except for when, not how, products or services are delivered according to a service contract

If you, as an international employer, have established the statuses of your workers, you need to fill in and report relevant tax forms for each worker class you have. For example, if you, as a US-based employer, establish one or more workers you hire as independent contractors, you must fill in Form 1099-NEC and Form W-9. If you are in doubt about your workers' status, you need to fill in Form SS-8 to let the IRS decide for you.

This brings up again the initial question of how international taxes work for remote workers.

Suppose you, as a US-based employer, have shifted your workers' work mode to remote. How can you still determine which of your remote workers is a common law employee, a statutory employee, a statutory nonemployee, or an independent contractor?

To make matters even more complicated, you may already have had some of your new (or old) remote workers (in or outside the U.S.) as on-premise employees, but you've asked them, or they've asked you to shift to remote work, with all that entails for work arrangements and control. So how could you decide which category your new (and old) remote workers fall into now and, next, which applicable tax forms and reporting procedures are required?

You're not alone in asking. Many U.S. employers have asked this question and more, who had to shift unprepared to remote work, only to hit a wall of pending mobile and remote taxes in 2020. Thanks to the Remote and Mobile Worker Relief Act of 2021, tax reporting for remote and mobile workers was deferred, but this was only a temporary fix for employers who faced handling a new world of remote taxes.

Many employers were searching for answers. What state do remote workers pay taxes in? Where do remote workers pay taxes? Employers encounter additional complexities by determining where remote workers are residing and which states they work from, or employers are based in.

What's more, the U.S. is only one of many jurisdictions you, as an international employer, may need to understand so you can determine your workers' status and report the required taxes accordingly. You don't need much imagination to see how much work is needed to adapt to a changing world of taxation.

Different scenarios of taxes for remote workers

The new normal of remote taxes does not stop at questions about who is classified as what and how much applicable taxes are required using which forms at which due dates.

The following are several types of workers that might be present in a remote workforce:

• Citizen-resident remote worker. This is a class of remote workers who are citizens and residents in a given jurisdiction you operate in as an employer. Depending on where you as an employer are located (and hence what laws apply to you and your remote workers) and what in-country remote-related laws are applicable, if any, you can determine who is classified as a remote employee or contractor, what exact set of laws are applicable, and how much you can withhold or remote tax purposes.
• Non-citizen, resident remote worker. This is a class of remote workers who are not citizens but are residents in a given jurisdiction you operate in as an employer. Once again, depending on where you are located and what set of laws are applicable to remote workers, you can determine whether you or your remote workers should report taxes and how much on due dates. The U.S., for example, has a complex remote working tax system that factors in, among other criteria, where remote workers reside and where employers are based. Reciprocal agreements states may have about remote work tax.  ‍
• Non-citizen, non-resident remote worker. This is a class of non-citizen, non-resident remote workers. Digital nomads have become more common post-pandemic. Several countries have rolled out remote worker programs to attract skilled workers thanks to new visa arrangements.

International remote tax: complex enough?

Hiring remote workers involves an array of complexities, including tax management. The growing shift to remote work, accelerated by COVID-19, has done remote work and taxes, and new normal international employers must adapt.

This new remote-defined world requires you, as an international employer, to consider how your distributed remote workforce is taxed. To do so, you need to know in depth what laws and regulations are applicable in each jurisdiction, whether your remote workers are correctly classified, and whether your home jurisdiction sets specific requirements to hire remote workers locally and abroad.

Take no risks managing taxes for your remote workers, and let our experts at Skuad help you adapt and stay remote-tax compliant.