A woman approaching an ATM with her bank card

Global Payroll 20 min

How to pay international employees

Written by

Quentin Vassas

Share

share to linkedInshare to Twittershare to Facebook
Link copied
to clipboard

Remote work has created incredible opportunities for companies to hire people all over the world. By hiring international employees using an employer of record (or by opening your own international entities), you can enrich your organizational culture, build a more creative and innovative company, and offer better service and solutions to your customers.

Each new international hire comes with a new set of local labor laws, though, which can affect the payment process and lead to compliance issues. Choosing the right method of handling payroll for international employees saves you time, ensures your compliance with local laws, and keeps your employees happy.

How to pay international employees in five steps

Here is the quick and easy guide on how to pay international employees.

  • Decide whether to open an entity, use an employer of record, or hire contractors. You could register a local legal entity in the country where the employee lives and works, then hire employees directly. You might also partner with an employer of record to hire employees on your behalf. As a third option, you could hire workers as independent contractors. Each option has its own advantages and drawbacks. If you choose to go with an employer of record, you need to know how to evaluate potential employer of record (EOR) partners.
  • Classify your employees correctly. Are your workers full-time employees, contractors, or something else? In the UK, for example, a separate category exists between employees and self-employed contractors. Knowing the difference is essential to good international hiring.
  • Determine what kind of tools and expertise you need. What kind of international payroll software will you use? Do you need to hire new people to manage our increased HR load, or can an employer of record ease that burden for you?
  • Stay compliant with local laws. Hiring internationally means complying with a host of new labor laws. You will need a team of legal experts to help you navigate all the rules.
  • Set your budget. Opening an entity takes a long time and can be extremely expensive, depending on the country. Working with an EOR is usually the best option to hire full-time employees quickly and compliantly, but you may want to open an entity eventually if your team in another country is large enough (25+ people). Paying people as contractors is the cheapest option, but incorrectly classifying employees as contractors could land your company in serious trouble.

That’s the short version. In the rest of this guide, we help you understand all your global employment challenges and provide simple, helpful solutions so you can grow your team abroad with confidence.

Helpful global hiring resources

If you’re interested in learning more about the ins and outs of international payroll, here are a few resources we recommend:

What options are available for paying employees overseas?

Let’s take a look at how you can pay international employees, starting with setting up your own local legal entity.

Setting up a local legal entity may be the best option if you plan to hire at least 25 employees within the country and are willing to spend the money and time to own the infrastructure yourself.

Every country has its own rules, so there are a number of issues you’ll have to address, including legal requirements and government processes. Factors may include information on shareholders’ minimum requirements, minimum share capital, business licensing, bank accounts, taxes, and employment regulations.

Step 2: Decide on your entity type.

There are three main types of local entities which you can create: representative office, branch office, or foreign subsidiary. Each comes with benefits and limitations.

A representative office is quicker and easier to set up, but it doesn’t let you employ people who will be responsible for generating revenue, like sales, management, software engineers, etc. A branch office is more flexible than the former; however, it’s also much more costly and takes longer to create. While a foreign subsidiary gives you the right to benefit from local tax rebates, running one is not only very expensive but also takes a lot of time. The option you select should support your global expansion strategy

Step 3: Register your company and open bank accounts.

Depending on the type of local entity you choose, there will be several additional steps to follow financially, including:

  • Finding and registering an office
  • Gathering all relevant documentation
  • Recruiting a local manager or director
  • Setting up local bank and tax accounts 
  • Creating a payroll system
  • Registering with local tax authorities
  • Hiring and onboarding local personnel 

What this process will look like exactly will depend on the country where you’re establishing your local entity and its legal requirements. Expenses will also vary; however, you will always have to cover certain universal costs, including registration fees, initial capital, legal consultation, and documents. 

Use an employer of record (EOR) to pay international employees

An employer of record (EOR) is a service that helps companies hire people in other countries. EORs take care of all the day-to-day HR work, like managing payroll, paying taxes and social contributions, and managing benefits, all the way through to ensuring your company’s compliance with local law. 

Partnering up with an employer of record is the most time- and cost-effective option for global employment. Working with an EOR lets you avoid setting up a local legal entity in each country where you want to hire while insulating your business from any potential compliance risks. The EOR employs the worker on your behalf and signs a service agreement with your business to transfer ownership of all intellectual property.

On that note, it’s important to understand that EORs are not co-hiring schemes. On paper, they are the sole employer, but in practice, they do not participate in the day-to-day management of your workers. Think of your EOR as your own local HR team in another country.

Pay workers as independent contractors

You may be able to pay people as contractors instead of employees. However, you must correctly classify your employees. If you fail to do so, you will be subject to fees and penalties.

Before you hire independent contractors, double-check to see whether they genuinely qualify as such. Bear in mind that legal requirements will differ on a per-country basis. There might be situations where you’ll have to convert your contractors into full-time employees to stay legally compliant, in which case you would need to open an entity or work with an EOR.

When it comes to paying independent contractors abroad, the process is straightforward. Depending on your individual agreements, you can either pay them per hour or per project. In most cases, contractors are responsible for paying their own taxes and insurance. They also are not entitled to any employment benefits (including sick leave), unless you’ve agreed otherwise. You are only obligated to pay their invoices, which you can settle using various payments methods such as:

Be sure to choose an option that works for both parties. Remember to review the contractor relationship regularly to ensure misclassification never occurs. In some countries, simply working with the same contractor for a long period of time may qualify that contractor as an employee.

What are the challenges for businesses when paying international employees?

Now that we have discussed your hiring options, let’s look at the challenges you may need to tackle when you hire international employees

Permanent establishment risk 

Permanent establishment is a tax term used to describe a foreign company’s continuous presence in a market. In general, local tax authorities keep an eye out for businesses that meet certain criteria for “permanent establishment” status, i.e. companies that must pay corporate tax within the country. If local tax authorities consider your business a permanent establishment, you become responsible for new taxes. In the worst-case scenario, your company might become subject to double taxation on the same income in your own country and in the country of your employees.

While each country follows its own definition of what permanent establishment means, some of the indicators include:

  • Having a fixed place of business (not just a registered address, but also a recurring place for operations and sales)
  • Generating revenue in the country
  • The level of control the company has over local staff or contractors
  • How long the business has been present on the market
  • How much decision-making power local employees exercise

Choosing the wrong method for recruiting and paying international employees may also contribute to permanent establishment risk.

Businesses hiring international staff can only avoid permanent establishment by arming themselves with information. Working with an EOR does not necessarily affect your permanent establishment risk either way. However, a good EOR has the legal expertise and staffing to keep up with local laws and help your business avoid excessive taxation.

Understanding local labor laws in each country

If you hire employees internationally, one of the most important issues you’ll have to keep in mind, other than hiring the right people, is staying compliant. That means staying up to date with local labor laws and tax regulations, which are not only complex but also prone to change. 

Payroll specialists regularly cite compliance as one of the biggest challenges they must tackle while managing payroll for international employees. There are a number of issues they deal with:

  • Tax submission deadlines, which vary per country
  • Different documents to file and submit
  • Management of tax responsibilities for employees

On top of it all, businesses need to remember what benefits, especially statutory ones, employees are entitled to; what must be included on each payslip; how to correctly calculate payroll; and what deductions to make. Without a local partner, the responsibility can be overwhelming.

As if things were not complex enough, you also have to consider cross-border regulations, such as the European GDPR. Fail to follow GDPR laws, and you could face fines of up to €20M or 4% annual turnover. In the best case scenario, you’ll experience financial penalties, and in the worst case, your access to local talent and markets will be restricted. Always be sure to know the laws wherever you hire.

Managing an accurate and efficient international payroll process

Challenges of managing your international payroll process include:

  • Local compliance — Employment laws vary tremendously from one country to another, even for countries all within the EU. Keeping track of them all and staying compliant can be confusing. Your best option is to work with an EOR or hire your own local legal, payroll, and HR experts to help you run your local entities in each country.
  • Payroll calculations — To keep your employees happy and productive, pay them correctly and on time. Account for overtime, tax deductions, benefits, and social contributions for each country. Getting this wrong not only brings you out of compliance but creates a poor experience for your employees.
  • Accurate reporting – The more international the company is, the more complicated the reporting process gets. Elements such as payroll income calculations, withholding payroll taxes, and accounting for different currency exchange rates all impact reporting accuracy. 
  • Human error –  Errors happen, but identifying and fixing them quickly limits the damage. If you commit a serious violation, especially in a foreign country, the local government may impose penalties and will likely keep a closer eye on you moving forward.

Reducing the cost of international payments to employees

How can you pay international employees more affordably? Here are a few options to save money:

  • Look into tax treaties between your employees’ countries and your own. These might relieve you of certain taxes applicable to businesses from other markets. The International Center for Tax and Development offers a tax treaties explorer, which could serve as a starting point.
  • Learn about local permanent establishment criteria. As mentioned above, if a country assigns you permanent establishment status, you might be subject to double taxation. Take steps to avoid permanent establishment risk.
  • Look for a platform that offers low remittance fees. If you’re an EU-based company working with a contractor based in another EU country and both countries operate in Euros, you can avoid costly transaction and currency exchange fees. For everyone else, extra fees might apply in addition to standard transaction fees. Look into an online payment platform like Remote to pay your international contractors with no additional fees.
  • Simplify payroll and reduce operational costs. How much it costs to pay international employees also depends on how long it takes your HR staff to handle the process. Look into a solution that lets you handle one-click payments, invoicing, and payouts, all within a single platform.

Using the best payroll systems and software

Wondering which tools to use to pay international employees? International payroll software is the answer. Depending on whether you own a local legal entity, you can work with either an employer of record or a professional employer organization

Opting for payroll software will bring you a number of benefits: 

  • Reduction of errors — Using payroll software greatly reduces the probability of human mistakes by removing manual data entry.
  • Time savings — Calculating payroll takes time and staff to do well. With reliable payroll software, your HR teams can spend more time focusing on your people and less time dealing with paperwork.
  • Data security — Payroll management means dealing with sensitive data like bank details, birth dates, Social Security numbers, etc., which must be carefully protected. If you use the right payroll software, your data will be stored safely so no one from outside of your organization will be able to access it. 
  • Simpler management — The larger the organization, the more complex the payroll process. With good payroll software, paying your international team can be as easy as clicking a button.

Paying the correct taxes and submitting tax documentation 

Managing taxes and declarations is arguably the biggest challenge when you hire international employees.

For instance, Canada charges $1,000 CAD for each day you fail to present employment records for the most recent 36 months. The U.S. enforces a failure-to-pay penalty for not meeting the deadline. The IRS can charge a fine of 0.5% of the unpaid balance for each month in delay. The IRS can also increase this fine continuously until it has reached 25% of the owed amount.

Don’t forget permanent establishment risk. If a country’s tax authority believes that you’ve become eligible for local taxation, then you could encounter a host of new and unpleasant taxation problems, which become even more troublesome if you unknowingly fail to pay them.

A step-by-step guide to paying international employees

Here is the full breakdown on how to pay your international employees.

Decide on whether to manage international payroll in house or use a global payroll provider.

Before you decide how to pay international employees, it’s worth reviewing the steps that are involved in handling payroll internally versus working with a global payroll partner. By doing so, you can determine whether you have the right resources, including budget, headcount, and time, for each option.

Managing international payroll for employees overseas in house

To manage payroll for international employees, you need to make sure that your company is authorized to operate in a specific market. This means either registering your business in the employee’s country of residence. Before setting up an entity in each country, you will need to retain local legal experts to help.

Step 2: Gain a deep understanding of local labor law.

Once registered, learn about the intricacies of local labor law. Each country has its own set of regulations and laws to comply with to avoid payroll errors and potential fines. For instance, if you’re hiring an employee in the UK, there are certain tax registration deadlines you need to meet before the first day of their work, as well as separate requirements for the next tax month. Fail to comply with all the rules, and you might not be able to proceed with the hire.

Step 3: Gather all required data and handle it correctly.

There are two factors at play here. First is collecting employee data, such as name, address, tax ID, and bank account number. Second is ensuring proper data governance.

Each country has its own list of employee information types you need to process payroll. Once these details are entered into your payroll software, you become the data administrator, which means you must use a solution that is compliant with local data protection legislation. Always vet the data security of your global employment partners carefully.

Step 4: Verify your employees’ eligibility to be hired in the country.

After you’ve gathered all the data, make sure that the individual is, in fact, eligible for employment in the country where they live. A visa or resident status doesn’t always mean that the individual has access to the labor market. Hiring someone who isn’t authorized to work might result in legal issues and significant fines for your business, so do not omit this step.

Step 5: Process payments and ensure correctness.

Once you’ve gathered all the necessary data, verified employment eligibility, and notified the respective offices of your new hire, you can plan payment.

How often you pay your employees depends on both contractual agreements and legal requirements. In some countries, it’s customary to pay salaries fortnightly, while in others, payments are processed at the end of each month. Whatever your preference, be sure your payment schedule complies with local laws in every country where you have employees. That may mean processing payroll multiple times per month.

Step 6: Submit tax and benefits declarations to tax authorities.

Finally, your company must pay taxes and benefits for the employee and inform the relevant authorities by submitting declarations. Overall, the more staff you hire globally, the more deadlines for tax, benefits, and salary payments you’ll have to observe.

Using a global payroll partner to pay international employees

Let’s now take a look at the steps to follow if you work with a global payroll partner, like an EOR.

Step 1: Choose your global payroll partner carefully.

When it comes to global payroll providers, there are plenty of options available. Evaluate your choices carefully and select the one which best fits your business needs. Here are a few questions to ask: 

  • Do they own their own local entities in every country where you are hiring?
  • Do they have the legal expertise you need?
  • Can they handle both contractors and employees on the same platform?
  • Do they charge a percentage of salary, onboarding fees, or any additional fees?

With so many variables in play, some global payroll service providers charge several fees and additional costs. Select a provider with a fair and transparent pricing model to save money and reduce stress.

Step 2: Prioritize your employees’ experience.

Accurate and timely payroll processes have a direct impact on creating a positive employee experience. Only global payroll providers that fully own their infrastructure can guarantee fast and accurate payroll, as they do not rely on third parties to do the work for them. Your employees should never have to worry about receiving their salary or benefits on time and in full.

Step 3: Pay the right salary for the person, role, and location.

Create a global compensation policy to pay your global team appropriately. We recommend conducting a full total compensation review to offer fair compensation to all your employees, accounting for their responsibilities, location, and other factors. Your global payroll provider may be able to help you set up this compensation structure.

Step 4: Consider whether you need your own entity for the future.

Hiring with an EOR allows you to pay international employees quickly, easily, and compliantly. Should you need to create your own entity in the future — for example, if you have more than 25 employees in one country and wish to take the responsibilities in house — your EOR can help you make this transition.

During your transition to owning an entity, you should understand the differences between a PEO and an EOR. A PEO provides many of the same services as an EOR but does not hire employees on your behalf, which means if you own your own entity, you can save money using a PEO.

What are the benefits of using a global payroll partner to pay international employees?

Working with a global payroll partner to pay international employees has several advantages:

Reduce your payroll costs

Partnering with a global payroll company can save you a significant amount of money. You don’t have to hire in-house staff to handle endless paperwork, salary and tax calculations, benefits administration, legal advice, and payment processing. With your EOR handling all your payroll needs, your HR team can focus their energies on creating a great environment for your international team.

Ensure global payroll compliance

Wrapping your head around local labor laws can be difficult, and it only gets harder as you onboard employees in more countries. With a good EOR, however, you can onboard employees in dozens of countries with little additional complication. Your global payroll partner ensures you meet all legal requirements and keeps you up to date on changes in local laws. When you don’t have to worry about compliance, you can hire globally with confidence.

Stronger data security 

About 27% of businesses experience payroll fraud. The probability of fraud occurring increases when payroll is handled in house, as more people have access to data. Outsourcing the process to a global payroll partner helps you improve data security by providing you with a dedicated team of specialists committed to keeping your information safe.

Higher employee satisfaction

When you work with a dedicated payroll partner, you minimize the chance of payroll errors. Not only do they ensure salaries are calculated correctly, but they also make sure all payments are made on time. With fast, reliable payroll, your international employees receive a great experience working with your company.

The fastest, easiest, safest way to pay international employees 

If hiring international employees has kept you up at night, in the past, you can finally rest easy. With the right global payroll provider at your side, you can grow your global team with confidence.

Remote is the leading global payroll and contractor management service for dozens of countries around the world. We would be happy to:

  • Help you accelerate your global hiring goals
  • Simplify payments for both full-time employees and contractors, all in our easy-to-use platform
  • Guarantee compliance with local labor laws with the help of our international team of legal experts
  • Reduce payroll costs and streamline your payment processes

If you’re ready, you can sign up now to begin onboarding employees and contractors all over the world in minutes. Have questions? Contact us today and one of our global employment experts would be happy to help.