Global Payroll — 17 min
Global Payroll — 20 min
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.
Here is the quick and easy guide on how to pay international employees.
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.
If you’re interested in learning more about the ins and outs of international payroll, here are a few resources we recommend:
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.
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.
Depending on the type of local entity you choose, there will be several additional steps to follow financially, including:
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.
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.
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.
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 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:
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.
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:
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.
Challenges of managing your international payroll process include:
How can you pay international employees more affordably? Here are a few options to save money:
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:
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.
Here is the full breakdown on how to pay your international employees.
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.
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.
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.
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.
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.
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.
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.
Let’s now take a look at the steps to follow if you work with a global payroll partner, like an EOR.
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:
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.
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.
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.
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.
Working with a global payroll partner to pay international employees has several advantages:
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.
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.
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.
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.
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:
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.
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