What Is a Virtual Employee: Payroll and Tax Guide

A virtual employee is an online member of staff who works outside the office. These professionals leverage an internet connection and digital tools to perform tasks. If you’re running a business, a thorough understanding of what a virtual employee is will help you leverage this workforce to reduce costs and improve flexibility.

In this article, we’ll first discuss the differences between in-office and virtual staff. Then, we’ll show you how to manage payroll and taxes for virtual employees, and explore the benefits and drawbacks of having them in your team. Lastly, we’ll give you some tips on hiring and managing a virtual workforce.

What Is a Virtual Employee?

A virtual employee is a type of remote worker who does the entirety of their job online. These professionals are also referred to as online staff, and they typically work from their homes or coworking spaces.

Virtual workers communicate and collaborate with other staff members using digital tools such as video conferencing apps, project management software, and job-specific programs. They can contribute to the organization as part-time or full-time employees, and for project-based work.

Due to the nature of their work, virtual employees may reside in different cities, states, and even continents, in entirely different time zones.

For businesses, there are many benefits to hiring virtual employees. They can gain access to a global talent pool, which can grant them unique insights and ideas. Plus, there are cost savings associated with not having in-office staff.

Additionally, there are advantages to being an online employee, including improved work-life balance and enhanced flexibility compared to traditional employment.

Differences Between Virtual and In-Office Employees

There are several key aspects to consider when looking at the differences between virtual and in-office employees, so let’s see what they are.

#1. Work Environment

One of the biggest and most obvious differences between virtual and in-office employees is in their work environment.

In-office employees work in employer-controlled spaces and have access to the company furniture, internet, and necessary hardware. They have to commute to their offices, which typically results in reduced flexibility and more time spent on work-related activities.

Virtual (or telecommute) employees can work from their homes, coworking spaces, and other remote locations that have internet. They usually have more flexibility and independence when working, but may not have access to company equipment.

Employers generally need to invest more in software and other digital infrastructure when hiring virtual employees (since they use tools and platforms like Zoom, Slack, and more).

#2. Communication and Collaboration

Communication and collaboration are much quicker and easier in office settings. Communication happens instantly and spontaneously, as workers can ask quick questions and respond to them over the walls of their cubicles. Collaboration is also straightforward, as in-office meetings can be organized effortlessly, and managers can visit employees in person.

With virtual employees, communication is typically asynchronous, as it is common to wait for a response on a digital channel. Digital employees often rely on the written documentation provided for their tasks. Plus, managers need to regularly check in on them via emails, chats, and management tools, as they don’t have visual cues to spot when someone is confused.

It’s important to find balance and avoid extreme overcommunication, as nearly 70% of digital employees experience burnout due to online correspondence.

#3. Payroll and Taxes

Some of the biggest and most legally complex differences between in-office and remote team members can stem from payroll and tax considerations.

In-office employees are W-2 workers, so they have their taxes withheld from their paychecks based on the state laws. If virtual team members are classified as employees and reside in the same state, they are subject to the same rules and regulations.

However, when processing online payroll for virtual employees from different states, you generally must withhold tax for their state of residence. You also need to be aware of their state’s requirements regarding pay stubs, as they can differ from yours.

Finally, if an online worker is classified as an independent contractor, they will be issued payments with Form 1099, and it’s their responsibility to pay self-employment taxes.

#4. Productivity Tracking

When tracking productivity in offices, managers often directly supervise workers, employ on-site workflows, and practice check-ins. They can see when employees arrive and leave, and when they are working.

With virtual employees, the focus usually shifts from time tracking to output monitoring. While many companies use time tracking software (which can also take screenshots and monitor activity), the most effective method involves setting clear KPIs (Key Performance Indicators) and deliverables for employees to follow.

How to Manage Payroll and Taxes for Virtual Employees

Tax and payroll management for remote employees requires a thorough understanding of the laws and regulations, as it can be more complex than management for in-office workers.

Full-Time Virtual Employees

If your virtual employees are full-time hires, you typically have the same payroll and tax responsibility as you do for in-office employees.

This means that you’re responsible for withholding federal and state income taxes, FICA taxes (the employer’s half of Social Security and Medicare taxes), unemployment, and other applicable taxes from their paycheck. In most cases, state taxes will depend on the employee’s location, not the company’s.

You also need to be aware of reciprocity agreements between some states. This varies on a state-by-state basis. If two states have such an agreement, they allow virtual workers to only pay income tax in the state of residence, not the state in which they work. If there’s no agreement, employees must file a tax return in both states, which can result in a higher tax bill.

Some states also have the convenience of the employer rule. In essence, if a virtual employee works from home out of convenience, while still being able to work from an office, the expenses they incur because of it will be taxed.

Independent Contractors

Employers who classify virtual workers as independent contractors significantly simplify payroll and tax processing. The downside is that there’s a risk of noncompliance if using the incorrect type of employment.

If you hire remote workers as independent contractors, you don’t withhold taxes from their paychecks. You simply pay the gross amount that was agreed on beforehand, and the contractors pay self-employment taxes themselves, including the full amounts for Social Security and Medicare taxes.

For this, you’ll need to collect Form W-9 from the contractor, and you’ll give them Form 1099-NEC at the end of the year if you paid them more than $600.

However, it’s essential to avoid misclassifying workers, as that can result in severe penalties and legal consequences. The Final Rule, under the Fair Labor Standards Act, looks at economic dependence as the main criterion for classification.

If a virtual worker is economically dependent on a single employer and their business, has no other clients, and follows specific work rules and schedules, they must be hired as employees.

Benefits and Challenges of Remote Employees

There are many benefits to hiring virtual employees, but there are also some drawbacks and challenges associated with it. Let’s see what they are.

Benefits of Remote Employees

Let’s start with some of the biggest benefits employers get from leveraging virtual employment:

• Cost efficiency. The most direct benefit of hiring remote employees is the savings through the elimination of expenses. Employers don’t have to pay for office spaces, electricity, internet, equipment, maintenance, etc. This has an immediate impact on their bottom line.

• Access to diverse talent. Since employers aren’t restricted to hiring based on location, they gain access to a much larger talent pool. This can result in a more diverse and skilled workforce that can start working without relocating.

• Potential for higher retention. Many professionals value the flexibility of remote work. Since they don’t have to endure the stress of commuting and can balance personal obligations more easily, they typically have higher job satisfaction, which often results in lower turnover rates.

• Increased productivity. While remote workers need strong organization and time management skills, they don’t encounter office-associated distractions, such as impromptu meetings, chatting, and noise. This allows them to focus better and have a higher output.

Challenges of Remote Employees

Here are some challenges employers face when hiring a virtual workforce:

• Compliance complexity. As we’ve already mentioned, hiring employees from other states leads to additional legal and tax complexities. Companies that have virtual employees from states outside their own create a “nexus,” which requires them to keep track of rules and regulations in multiple jurisdictions, complicating payroll administration.

• Communication concerns. Communication is less consistent in a virtual setting, requiring more time and effort, resulting in overcommunication, which can become fatiguing. Moreover, larger teams can create smaller groups with their own communication channels, so critical details may not be documented company-wide.

• Difficulties in creating a company culture. Creating and fostering a distinct and cohesive company culture is challenging when the team never meets in person. Without significant efforts put into virtual team-building activities, this can lead to employees feeling isolated and burned out.

• Data security considerations. Since employees don’t work on company hardware and networks, there can be significant cybersecurity risks. Home or public Wi-Fi networks are susceptible to attacks, so companies must invest in and promote the use of secure devices, software, and protocols to prevent this.

5 Tips for Hiring and Managing Virtual Employees

Incorporating virtual employees into your operations requires more than providing them with access to the software and platforms that you use. Here are several tips that will help you hire top talent and manage them to achieve high outputs and retention rates:

1. Develop a robust onboarding process. Create a comprehensive digital handbook for new employees that outlines everything they need to know. It should cover everything from the communication protocols to the company culture. This helps employees get up to speed on day one and integrate into your team effortlessly.
   
   
2. Focus on soft skills when hiring. Soft skills are essential in any workplace, but even more so for virtual employees. When hiring candidates, look beyond their technical expertise and assess how good they are at self-organization, online collaboration, communication, and time management.
   
   
3. Monitor for outcomes and not hours. You should avoid micromanaging employees’ hours and instead focus on the work they do, whether it’s of high quality, and if it’s submitted on time. By allowing employees a degree of flexibility, you can improve their experience, foster trust, and help them build autonomy.
   
   
4. Invest in the right tools. Digital tools represent the foundation of remote work. To ensure optimal output, you want to provide your team with the best collaboration tools. Laggy video calls and suboptimal management platforms can result in confusion and reduced productivity. Premium versions of free tools are worth it in many cases.
   
   
5. Standardize the payroll system. If you have virtual employees in multiple states, you need to standardize and automate payroll processing as much as possible. Otherwise, handling multi-state compliance and keeping track of the requirements can result in a lot of administrative work.

Final Thoughts

As you can see, once you understand what a virtual employee is, you can cut the costs and gain access to a much broader talent pool. This can positively impact your bottom line and result in enhanced employee retention.

However, it’s important to keep in mind the additional legal and tax complexities. To help with this issue, you can use pay stub and Form W-2 generator from Paystub.org. With our tools, you can quickly and effortlessly create tax documentation for your employees, regardless of their state of residence.

What Is a Virtual Employee FAQ

#1. What is the difference between a virtual employee and a freelancer?

The difference between a virtual employee and a freelancer is that a virtual employee is considered a W-2 worker, while a freelancer is an independent contractor. As such, a virtual employee is entitled to employment benefits, while a freelancer manages their own benefits and taxes.

#2. Can virtual employees be full-time W-2 staff?

Yes, virtual employees can be full-time W-2 staff. If that is the case, they are receiving the same salary and benefits as in-office employees, with the only difference being their work location. Employers must also consider a virtual employee’s place of residence when withholding state taxes from their paychecks.

#3. Do virtual employees need the same benefits as in-office staff?

Virtual employees need the same benefits as in-office staff if they are classified as W-2 workers. While they may not receive discretionary benefits (e.g., in-office snacks and beverages), they are typically entitled to benefits like health insurance and retirement contributions.

#4. How do I generate a pay stub for a virtual employee?

To generate a pay stub for a virtual employee, it’s best to use dedicated software, like our pay stub generator. The process is the same as creating these documents for in-office employees, and you should send a digital pay stub electronically to the worker.