Remote Workforce Trend Complicates Payroll Withholding

Is Your Payroll Provider Up to the Task?

Most businesses outsource their payroll functions, and for good reasons. Paying employees is complicated and getting more complex every day, particularly now that we have entered the age of the remote worker.

Various withholdings for employee benefit plans and state and local taxes have in recent years imposed more complexity on the payroll function for most companies, and the stakes are high. Making errors in withholding amounts can subject a company to significant penalties.

But there’s a new wrinkle that raises the stakes even higher – the dramatic increase in remote work brought about by the COVID-19 pandemic. Employers who never had employees working in separate locations now have workforces spread throughout different cities and even different states.

Complex New Withholding Requirements

The result is a significant increase in state and local tax withholding requirements, as well as varying workplace regulations. Adding to the complexity is the fact that some employees are working “hybrid” schedules, where they work from home three days a week and in the office two days a week (for example). Employers must track each employee’s hours carefully to calculate the local withholding amounts accurately.

It’s important to note that if you hire a person in a different state, you might have to register in that state and may pay workers’ compensation and payroll taxes in that state. There’s a lot on the to-do list for employers who have a new mobile and remote workforce. Some states have reciprocity with each other for this kind of situation, others don’t.

Many businesses like manufacturers that have sales representatives working in other locations have dealt with these types of payroll issues for years. But there’s a class of employers that have always had their employees in the office and have never experienced the payroll issues related to a remote workforce. These issues are not new, but the number of employers dealing with them is far greater than ever before.

Employers are not curtailing remote hiring because of the payroll complexity, but the managers who deal with these issues – mostly in the Human Resources and Finance departments – are saying, “What do you mean we hired someone in Kansas? I need a month to set that up.”

In addition to payroll issues, some companies hiring remote employees may find they need to amend employee handbooks because some provisions may be illegal in other states even though they are legal in a company’s home state.

Employers must ensure that their payroll providers are knowledgeable and capable of doing the tracking, the calculating, and the assignment of appropriate payroll withholding amounts in this environment of remote work.

During the worst of the COVID-19 pandemic, many companies had employees working remotely and did not yet have the proper tracking in place. In light of the public health emergency, most states enacted transitional rules relaxing their normal withholding requirements. But those rules have largely expired, and employers now have the burden of figuring things out or being subject to penalties for withholding errors.

Asking the Right Questions

If you need to address these issues for your company, start the process by asking:

  • Where are my employees?
  • How big an issue is this – are we in two cities or 20 cities?
  • How is our recruiting impacting the issue?
  • Can I track where my employees are easily during a pay period?
  • How do we put this data together for payroll purposes?

Involve your HR department in the discussion, as well as your CFO or controller and your current payroll provider.

Time for a Change?

If you conclude that your payroll provider isn’t up to the task, it’s time for a change.

Changing payroll providers may increase your costs for payroll, but if it ensures error-free withholding compliance and protects you from related penalties, it may be worth the cost. Moreover, you may need to consider implementing a new payroll platform, introducing more costs but potentially saving money in the long run.

Reach out to your trusted advisors to help you navigate the journey to a remote workforce, including your Rea advisor and your legal advisors. The remote workforce isn’t going away. All indications point to a permanent shift on the American employment landscape, and the benefits of embracing remote hiring are many.

But doing it right will save you headaches and money in the long run. Contact your Rea advisor.

By Joseph Popp, JD, LLM (Dublin Office)