How To Pay Remote Workers: A Compensation Guide For Employers
If you’re like many businesses, you have employees who work from home at least part of the time. Since telecommuters can be located anywhere, it can be challenging to know exactly how to pay remote workers. We’ll try to simplify the rules, requirements, and best practices here.
In this article, we’ll explain how to set compensation for remote workers, whether you need to pay a stipend for home office expenses, and what state law governs your payroll tax withholdings. After reading this, you’ll know how to correctly pay remote employees as you continue to provide the flexibility workers today increasingly desire.
How do I set compensation for remote employees?
When setting compensation, generally speaking, the biggest factor is location. For example, if you have nonexempt remote workers, you’ll need to make sure you follow the minimum wage rules in the state where they work.
For salaried employees, it can be a little trickier. There are generally two approaches employers take, which we’ll discuss next.
No matter what way you decide to approach compensation, be sure to document your work-from-home salary policy and share it with all employees to ensure consistent pay practices.
The most common approach to setting compensation is what’s known as geography-based pay. With this approach, businesses base salaries on the location of the company office employees work. What about remote workers who don’t work out of a corporate office?
Under the same model, these employees would, in theory, be paid based on where they work from. In some cases, that could mean earning more than they would at an office, for example, if your company is based in a rural area but the employee works in a city where the cost of living is higher. Other times, if an employee works from a location where salaries for their position are less competitive, that could mean a pay decrease.
One of the biggest drawbacks of this approach is that it can foster a culture of inequality; employees may resent their coworkers who earn more simply because of where they live. You’ll also have to readjust salaries as employees move.
Because of the potential downsides of location-based pay, some companies have moved away from geography as the basis and instead have adopted a national rate approach. In fact, as many as 60-75% of companies are moving away from the traditional model in favor of a national pay scale. For these businesses, it’s about paying one pay range, no matter where an employee lives. Reddit and Zillow are examples of companies that pay all workers the same based on their job rather than location.
Do I need to pay remote workers a stipend for equipment or technology?
When learning how to pay remote workers, you may be wondering if you need to cover the cost of the equipment employees will use to work from home since telecommuters need to have the right tools to be successful. For example, when an employee works from home, they may need equipment and technology such as:
- hardware and software
- internet connection
- cell phone
The approach to paying remote workers for these costs varies widely so you’ll want to create a policy that outlines common requirements and who covers them. In some cases, that may be determined by federal law or the state where you operate.
Under the FLSA, there’s no requirement that employers reimburse employees for expenses incurred when working remotely; however, you’ll need to be aware that you can’t ask employees to pay for these costs if it would cause their pay to fall below the minimum wage for hourly employees or salary threshold for exempt employees.
There are several states that have laws requiring employers to reimburse employees for certain remote work expenses. For example, in California, employers must reimburse remote employees for all necessary work-related expenses.
Even if you’re not required to pay remote workers for work-related items, either directly or through reimbursement, you may still want to in order to keep employees happy.
Generally speaking, most businesses provide employees with the hardware and software employees use from home. And many cover a portion of internet expenses, although typically not in full since most workers also use it for personal reasons. When it comes to furniture, while there is generally no requirement for an employer to equip a worker’s home office, if your employee needs an ergonomic chair or stand-up desk, you may need to provide it under the OSHA General Duty Clause that mandates you keep workstations free from all hazards, including ergonomic ones. Lastly, policies vary for cell phones but if your worker needs one to carry out their duties, then you’ll likely want to provide a company device or stipend for them to “bring your own device (BYOD).”
If you decide to reimburse employees for work-related expenses, be sure to set guidelines about things like which expenses are eligible, recordkeeping, and submitting receipts to avoid confusion and ensure fair application of your policy. Alternatively, you could opt to provide a fixed amount in the form of a stipend that covers the costs.
What pay requirements do I follow for remote employees?
If you have remote workers in a different state than where your office is located, you’ll need to make sure you’re paying them according to applicable state laws that govern several payroll topics, including:
- Pay stubs: A paystub isn’t required federally but your employee’s state may have a law about providing a pay stub or other sort of pay statement that you’ll need to follow.
- Pay frequency: While there is no federal law that dictates how often you pay employees, some states have specific requirements like weekly or biweekly.
- Pay methods: Some states regulate the permissible methods of wage payment such as direct deposit, pay card, or paper check as well as employee choice and consent.
To understand the rules where your remote employees are working, check with the Department of Labor in their state.
What laws govern payroll taxes for remote workers?
While all employers need to withhold federal income tax and the employee portion of payroll taxes (Social Security and Medicare), you’ll also need to worry about state tax withholding when you pay remote workers. Typically, you’ll need to withhold unemployment (SUI) and state taxes and deposit them based on where employees perform work. If your employee works in the same state where you’re registered, say New York, then you withhold state income tax and pay state unemployment insurance tax in New York. But if your company is based in New York, but your employee works from home in Connecticut, you would withhold income tax and pay state unemployment tax in Connecticut.
In that case, you’ll also need to register with your employee’s state tax agency since you’ll be withholding income taxes there. Depending on the laws, you may also need to register with a local tax agency.
Moreover, the employee’s home state may also require that you withhold additional money for things like state disability insurance if your employee works in one of the five states that have this type of withholding. In addition, you’ll need to determine if you have to contribute to a state-paid family medical leave program. For example, if you’re an out-of-state employer but you have employees performing services entirely within Massachusetts from their homes, you’ll need to make payroll withholdings and send them to the Department of Family and Medical Leave on behalf of the covered individuals.
Paying Remote Workers Correctly
As you can see, there’s a lot to consider when you pay remote workers, and getting their pay right is essential to ensuring employee satisfaction as well as compliance with state and local laws. To address the challenges, you may want to consider outsourcing payroll.
To help you decide if outsourced payroll may be a good fit for your business, read our blog on the pros and cons of this approach. Want to know what Complete Payroll Solutions can offer as your payroll partner? Visit our dedicated payroll page.
Editor's Note: This blog was originally published in April of 2022 and was updated in May of 2023 for accuracy and comprehensiveness.