By Nicole Sahin, Founder and CEO at Globalization Partners
Whether expanding their company to new global markets, or hiring talent that’s located in a different country, companies are increasingly faced with the dilemma of how to pay employees internationally. There is no doubt that it can be complicated. Companies must ensure that they are following the correct government regulations, laws and protocols – which differ depending on the job, length of employment and where you are in the world.
The legislative challenges involved in paying international employees remotely can be a headache for any business. In this article, I share some best practices in onboarding and paying international employees, and what organisations and their accounting departments must consider to ensure a smooth international payroll process.
Leapfrogging the Challenges of Paying Remote International Employees
One option is to use a global employer of record platform. You identify the talent, and that candidate is put on the already-existing payroll and benefits in the country where the employee lives. This eliminates the need for companies to navigate global HR, legal and tax issues.
Prefer to go it alone? Read on.
Navigating the Challenges of Paying Remote International Employees
Before taking the step to expand a business internationally, or even begin the process of hiring workers in other countries, it is important to understand the challenges associated with paying remote international employees. The consequence of breaking a country’s rules is, after all, the risk of a hefty fine or other further fees.
Whilst it can require considerable effort to keep to the rules and expectations of certain countries – it is beneficial to look at the most common issues that arise, to better understand what is at stake.
Corporate tax and structuring – determine first whether you want to set up a “payroll only” (if that option is available), a branch office or subsidiary, which impacts your corporate tax filings in-country. Once your in-country entity is set up, you can run payroll.
International payroll needs to comply with the laws of each specific country and requires paying the appropriate amounts of tax. However, there are several tax considerations at play. These include income tax, social security and payroll tax.
- Income tax: Requires withholding the appropriate amount of tax from an employee’s monthly salary, based on where they work, and any applicable regional, local or state income tax.
- Social Security: Many countries collect some form of social security tax from employees and employers. The amount of your company’s contribution can vary from country to country, as can the amount of the employee contribution.
- Payroll tax: In many countries, an employer needs to contribute to a payroll tax, such as unemployment tax and workers’ compensation, for each employee. The amount of the tax can vary considerably. It’s also worth pointing out that in some places, payroll tax might be regional or local tax as well as a federal tax.
When paying international employees, you must ensure that you are withholding and paying the appropriate types, and right amount of taxes. Deadlines across the world vary considerably, so knowing when these are to meet the right deadline is imperative. In the UK, for example, tax returns are due one year after the end of the accounting period, but in Germany returns are due on July 31.
Following the rules for benefits and wages in a country is also a necessary consideration of international payroll. Businesses need to be aware of pension plans and minimum wage rules, whilst certain areas have rules about how many hours an employee can work a week. For example, in the European Union, employees can’t work more than 48 hours during a seven-day period.
However, international payroll has many things in common with domestic payroll. It is for the company to decide how frequently employees get paid, and how money is distributed to them – through paper cheques or direct deposit.
An employer must keep a full record of taxes, meaning any tax documents and receipts, for years. The risk is, the tax authority may audit the company and if this reveals you weren’t withholding or paying the right amounts of tax, and you have no evidence to rebuttal this claim, you could incur hefty fines.
There are many legal differences that companies are required to keep track of. In the UK, for example, employers must pay employees statutory sick pay, however, this isn’t a legal requirement in other countries, such as in the United States. Documentation also differs from country to country. Employees need to present identification such as a national insurance number or passport to prove their right to work in certain places, and it is imperative you are aware of these requirements. You will also need to consider: what are the requirements for the employment contract? Is a local union registration required? What are the data protection laws? Do you need to have a nursery available on-site for your workers?
When you build an in-country operation from the ground up, you must be aware of all the laws you’re filing.
Learn about local customs
There are also many cultural differences which are reflected in payroll. For example, a 13th-month payroll is customary in many South American, European and Asian countries. The idea behind this pay arises from a longstanding Filipino tradition to relieve the burden of expenses around Christmas day. Other countries have since adopted similar regulations and international hires may expect to receive this extra payment when they start working for your company. Unawareness of local customs such as this, runs the risk of disappointing your team.
Converting currency can be complicated
Another complication of paying an employee who is working in another country – is working out how to pay them in the currency of that respective country. We always recommend negotiating payment in local currency, which in most countries, is legally required anyway. The issue is, if a foreign currency value increases in relation to the dollar, your business may end up paying international employees a considerable higher value than agreed. You’ll also need to pay payroll tax in local currency, so having to navigate exchange rate each month with the employee complicates things. One option to manage this is to outsource payroll responsibilities to an employer of record for international team members. This way, your organisation can pay the company in local currency, and they can issue the salary in the nominated currency.
A problem shared is a problem halved
When a country expands internationally, or hires employees in a new region, there are many complications at play. Payroll is a prime example of this. Not only are there vast and intricate differences in the way each country handles pay and taxes, but rules and regulations are also always changing. This can be a lot for a company to manage on its own, especially when it has so many other things to oversee. Outsourcing these responsibilities allows a company to onboard employees without having to set up complicated and expensive subsidiaries. Working with a trusted employer of record such as Globalization Partners ensures that the country-specific payroll requirements are met. However, if companies do decide to go it alone – then understanding and learning about payroll and keeping this guidance in mind is a great place to start.