Payroll costs: how can global businesses reduce payroll expenses?

Payroll is one of the largest expenses for just about every business. Without people, your business can’t function. But payroll isn’t as easy as sitting down and writing a few checks.

Consider the following: salaries, benefits, and payroll taxes, such as unemployment, Medicare, and Social Security — and those are just the categories in the US. If you’re managing global payroll, there can be even more costs. And don’t forget the time and people required to deal with all the people, plus the tools and infrastructure to do it right.

As your business grows, so do your payroll expenses. Meanwhile, you’re under pressure to cut costs and maximize performance. Luckily, you have several options for cutting payroll expenses without reducing production.

If that sounds like a lot, don’t worry. We’ll go over the basics and help you get started.

5 types of payroll costs

Payroll expenses are a major expense for most businesses, covering all kinds of payments and contributions related to employing staff. Here are the main types of payroll costs:

1. Salaries and wages

These are regular paychecks that employees earn, whether they’re paid hourly wages or fixed salaries.

2. Overtime pay

This is extra pay for employees who work more than their usual hours, usually at a higher rate than their normal one.

3. Bonuses and commissions

These are rewards for good performance, paid out as either fixed bonuses or a percentage of the sales or profits employees helped generate.

4. Employee benefits

These are a range of perks that employees receive in addition to their paychecks, including the following:

• Health insurance

• Retirement plans

• Life and disability insurance

• Paid time off (PTO)

• Family and parental leave

• Wellness programs

• Commuter benefits

5. Payroll taxes

Payroll taxes cover various mandatory contributions that employers must withhold or pay themselves to cover government programs and benefits. They include:

• Federal income tax

• Social Security and Medicare taxes (FICA)

• Federal unemployment tax (FUTA)

• State and local taxes

Other statutory taxes, such as state disability insurance (SDI) and paid family leave

7 tips on how to reduce payroll costs

Managing payroll costs effectively can really help you cut down on expenses without shortchanging your team. Here are seven practical tips on how to trim payroll costs, ensuring your business stays competitive while still taking good care of your team.

1. Streamline operations

Looking to reduce payroll costs without compromising on quality or productivity? Start by streamlining your operations. Here’s how to do it.

• Assess your current processes: Before doing anything else, take a look at how things are currently done. Find out where the bottlenecks, redundancies, and unnecessary steps are. You can do this by watching how things are done, talking to your team, and looking at the data.

• Improve how things are done: Once you know where the problems are, start fixing them. This might mean changing the order of operations, combining some tasks, or removing unnecessary procedures. The goal is to make each process as lean and effective as possible and save on operating costs.

• Automate repetitive tasks: Identify tasks that are repetitive and see if you can automate them. This could be things like entering data, making reports, managing inventory, or handling bills. Automation not only saves time but also cuts down on mistakes.

• Optimize team structures: Take a look at how your teams are organized. Are there overlapping job roles? Could tasks be shared more effectively? Sometimes, organizing teams around the workflow (rather than via traditional roles) can boost efficiency.

By simplifying how things are done, you can often reduce the need for overtime and might even find you need fewer employees — leading to big savings on payroll.

2. Outsource labor to contractors

Outsourcing some activities to third-party local and international contractors can save businesses money on payroll. Here’s how.

• Payroll taxes: Although rules vary from country to country, in general, companies don’t have to pay payroll taxes for independent contractors. This obviously represents a major cost savings.

• PTO and benefits: Companies are typically not required to offer statutory benefits, such as PTO, other types of leave, or medical insurance to contract workers.

• Wages: You can hire a contractor for a week or for several months at whatever rate the contractor sets. In many cases, a contractor’s rate may be lower than what you’d pay a full-time employee.

• Severance packages and bonuses: Contractors don’t typically qualify for severance packages or bonuses. If the relationship with the contractor isn’t working out, you can quickly cut ties and find someone more aligned with your business goals.

Advantages of international contractors

There are several key benefits to working with international contractors:

• Speed: It’s much faster to hire and onboard contractors than employees, as there’s less paperwork and training required.

• Wider talent pool: You can hire people from anywhere in the world, giving you access to people with diverse perspectives and skill sets and candidates with specialized expertise.

• Regional expertise: With international contractors, you have access to local knowledge, which is especially important if you’re expanding into new markets.

• Easier to scale: Because your commitment to contractors is finite, you can flexibly scale up or down to address trends and seize short windows of opportunity.

• Diversity: A variety of skills and perspectives can give your company an edge. Diversity can increase innovation and offer high value, especially in a global marketplace.

For more information on how to hire international contractors, see Remote’s Expert Guide to Hiring International Contractors.

The differences between employees and contractors

Employees and contractors are defined differently, and each country has its own definitions for them.

In general, companies employ employees directly to fulfill specific roles. Contractors, on the other hand, are hired to perform specific functions, often ones that the company doesn’t have the ability to perform internally. With contractors, companies are the clients, not the employers.

Employers have much more control over employees than contractors. This includes when, where, and how work is completed.

The risks of misclassification

While figuring out how to save on payroll taxes with contractors is beneficial, misclassification can result in serious consequences. This is increasingly important as more countries crack down on misclassification in the growing gig economy.

• Fines. Expect fines for every instance of misclassification. These fines can be severe. If the misclassification is found to be intentional on your part, you may be subject to even higher fines.

• Back taxes and penalties. Misclassifying an employee as a contractor means you avoid paying statutory payroll taxes for that employee. In most countries, you’ll owe back taxes, which can be substantial. Additionally, you may be liable for penalties and late fees as a result of non-payment. These costs can be multiplied by the number of infractions and the number of years the worker was misclassified.

• Back pay and benefits. You may also be required to compensate the employee for any pay discrepancy that occurred as a result of the misclassification, as well as for benefits that were denied to them during the misclassification.

• Legal issues. Misclassification opens you up to legal risks from the government and from employees. This gets expensive quickly and can lead to an erosion of public trust. Further, the government may even bar your company from operating in the area if the misclassification infractions are deemed severe.

• Damage to your brand. It can be very damaging to your brand if you gain a reputation for trying to deny fair pay and benefits to your workers. This can harm your ability to recruit new talent and can affect your bottom line if customers don’t trust you.

For more information on penalties related to contractor misclassification, consult our guide to international contractor misclassification penalties.

Minimizing misclassification risk

Clearly, the consequences of misclassifying contractors can outweigh any advantages or cost savings. It’s in your best interest to make sure you’re properly classifying your workers.

Know the local laws and statutes in the countries where your contractors live

Understand classification rules in the countries where your contractors live. These can vary greatly from country to country and may change without warning. If your legal team doesn’t have dedicated resources to keep up with global contractor regulations, you may need outside help from an international contractor management company.

Hire contractors for appropriate work

Make sure the work being done by contractors falls within acceptable boundaries. Work that’s commonly outsourced to contractors includes customer service, data storage, marketing, engineering, and design. Employees should perform work that’s central to company profit or functioning, such as strategy or product development. This could include sales and closing contracts, major decision-making, management roles, and more.

Use our Contractor Compliance Checklist to avoid misclassification.

Work with a global HR partner

Classification rules and enforcement are constantly evolving. This is even more true today as more workers turn to the gig economy for primary or supplemental income. More and more workers are remote and on the move, so you might need to understand the rules for more than one country for each worker.

Working with a global HR expert like Remote can help you strengthen and simplify compliance. Sign up now and begin onboarding your international contractors in seconds!

Other considerations when hiring international contractors

Protecting your intellectual property (IP)

IP laws vary from country to country, so working with international contractors means working with unfamiliar laws. If you aren’t careful, you could end up drawn into a costly and complex legal battle over ownership of your company’s invention rights in another country. See our guide to IP and invention rights for distributed teams for more information.

Permanent establishment risk

Permanent establishment is a tax designation given to businesses that are deemed sufficiently established to pay corporate taxes in another country. Even if you don’t have full-time employees in the country, your contractors may trigger permanent establishment depending on the type of work they do and how much authority they exercise on your behalf. Learn more about permanent establishment risk in our helpful article on the subject.

How to hire, manage and pay international contractors

There are over one billion contractors in the world. Because you can hire international contractors with ease now, that gives you more than a billion options to hire for your business.. While that may feel overwhelming, the additional firepower contractors can offer your business is worth the investment and planning. Consider a few of these tips as you get started.

Payment methods and foreign exchange rates

As with employees, there are many ways to pay international contractors, including through Remote, by check, direct deposit, PayPal or Venmo, and more. Be clear about how you’ll pay workers before they do work for you.

With global payroll, you also need to consider things like currencies and exchange rates. Keep in mind that some countries mandate that workers be paid in local currency through a local bank, although contractors aren’t always subject to these laws.

Learn more about paying international contractors with Remote’s in-depth guide.

Pay structures for international contractors

Unlike employees, you don’t set a regular salary for your contractors. Instead, they invoice you for their work, setting their own rates as they do. This system provides a layer of protection against classification risks.

There are a few different payment structures for contractor agreements:

• Time-based: Pay contractors for the time spent on a task or project, usually by the hour or day.

• Project-based: Pay contractors for individual projects.

• Retainer: Pay a lump sum, usually at the beginning of a month or quarter, for a specific amount of work to be performed. Contractors then invoice for work done above that amount.

• Upfront: Pay contractors for work in advance. It’s common for contractors to require a percentage of the payment upfront.

• On delivery: Pay contractors after the work has been completed.

If you aren’t sure where to get started, Remote makes it easy to pay and manage global contractors in countries all over the world!

3. Structure schedules to reduce or remove overtime

It’s more expensive for businesses when employees work more than their scheduled hours. Overtime rates are often very high, and different countries have different thresholds for when overtime hours begin. Additionally, long, unpredictable hours can decrease employee productivity and morale. Some countries have laws requiring businesses to give workers additional time off after overtime shifts, creating more unpredictability.

To avoid these costly consequences, design work schedules and scope to reduce or remove overtime. It may be difficult, but you’ll usually find that it’s better to hire a few extra workers or extend project deadlines than to have employees regularly work long hours.

Here are a few tips to reduce how much overtime your team works:

• Offer flexible working hours. This gives employees the ability to work when they are most productive.

• Properly plan and scope projects so workers can meet deadlines without overtime.

• Adopt asynchronous work practices. Get started with async to improve productivity while maximizing flexibility.

• Use contractors to easily and quickly scale up or down without adding costly overtime. Remember, though, that many countries still enforce work hour limits for contractor relationships.

4. Integrate your payroll systems

Integrating payroll with systems for applicant tracking, hiring, onboarding, offboarding, and other HR processes can save your business money by:

• Reducing training time and downtime

• Accelerating processing of HR tasks

• Eliminating compliance issues

• Reducing human error

Remote is partnering with a number of industry-leading HR solutions, including Greenhouse and BambooHR, to make it easy for businesses to combine the power of multiple HR tools, saving businesses time and money as they expand their global teams. For more information on the Remote API, which allows HR and payroll companies to connect Remote’s global employment solutions directly to other platforms, visit our Remote API headquarters.

5. Automate payroll processing

The more manual your payroll process is, the more expensive it is in the long run — and the greater the chances for human error. Automating payroll processing can reduce payroll expenses while eliminating errors and improving the experience for your team, both at home and internationally.

How does automating payroll processing work?

Global payroll management is complex to handle on your own. Fortunately, Remote makes it easy for businesses of all sizes to pay and manage their global teams. Whether you have just one person or a team of thousands spread across the globe, Remote can help you automate your payroll.

Here’s how it works:

• Decide whether to pay workers as employees or contractors. Contractors are simpler to onboard, but employees have several advantages in the long run. Which option you choose is up to you.

• Determine whether you have entities in the countries where your workers live. If you don’t have a local legal entity in every country where you want to hire, you’ll need to work with an employer of record.

• Create a competitive compensation package. When you hire in other countries, you need to be aware of what local employees expect in your industry.

• Protect your intellectual property. Not all global payroll solutions provide the intellectual property protections you need. With Remote IP Guard, you can rest easy knowing your IP is protected all around the world.

What are payroll processing programs?

A payroll processing program can automate and speed up the global payroll process on your behalf. Payroll processing programs is a general term that may include global payroll providers, employers of record, payroll administrators, and other types of HR partners. Before working with any outsourced payroll solution, understand exactly what is and isn’t covered in your partnership agreement.

How does automated payroll processing save you money?

• Reduces payroll costs: With an automated system, you don’t have to pay workers to perform repetitive tasks. Automated payroll software lightens the load for your team, allowing them to do more and worry less.

• Increases speed: Computers are much faster than people at making calculations and performing repetitive tasks.

• Reduces errors: People are great at a lot of things, but we tend to make mistakes, especially where details and numbers are involved. Automating repetitive tasks eliminates payroll errors that humans may overlook.

• Centralizes information: An automated system puts everything in the same place, reducing the need to train workers on multiple systems.

Outsourcing international payroll with a partner like Remote can help you save money and manage global payroll. See how easy it is to run payroll for multiple countries using Remote!

6. Switch to remote work

Not every job at every company can be done remotely, but when it’s suitable, remote work offers massive savings for employers — and some great quality-of-life improvements for employees.

What are the advantages of remote work?

Remote work can save businesses money on payroll in the following ways:

• Increasing worker satisfaction. Studies show that people who can work remotely are happier, which comes with better performance at work and lower turnover.

• Increasing productivity. Everyone has times of the day or week when they are more or less productive. Remote work lets employees work when and where they work best.

• Reducing unexcused absences. Workers who can get their work done on their own time in their own spaces can schedule work around other parts of their lives, meaning they don’t have to take leave for every small interruption.

• Reducing office overhead. If you have fewer workers in the office, you don’t need as much office. Even better — try going fully remote and eliminating the office entirely!

Taking your company global is a great way to save money while accessing the best talent. Learn more about the benefits of globalization in our helpful guide.

Adopt remote-first work practices

Most companies have experimented with at least some level of remote work. However, to create a truly welcoming remote-first environment, you must adopt remote-first work practices. Going remote-first does not mean you have to shut down your office, but it does mean you have to think about the experience of your remote workers more deliberately. Our guide to creating a more inclusive workplace for remote workers has more information.

7. Improve employee retention

Improving employee retention also comes with significant cost savings. It’s cheaper to retain a current employee than to hire (and train) a new employee. On average, replacing an employee costs 33% of their annual salary. For more expensive employees, like engineers or senior leaders, those numbers can add up quickly.

The costs of employee turnover

Consider all the factors that contribute to employee turnover expenses:

• Time and money spent recruiting, interviewing, and verifying references

• Signing bonuses and other paid benefits

• Training and onboarding periods

• Ramp-up periods for employees to become fully independent in their roles

• Lower morale and increased overtime pay as others pick up the slack from departed colleagues

• Loss of institutional knowledge

• Disruption for clients

Employee retention strategies

The following strategies can help you improve employee retention and save money on payroll costs.

• Pay employees appropriately, accurately, and on time. Nobody wants to worry about where their check is coming from. Working with a partner like Remote allows you to pay your workers on time easily and reliably, no matter where they are in the world.

• Provide attractive benefits. Design benefits packages that are appropriate for the market in which you’re hiring. If you’re hiring internationally, you may need to seek guidance from a partner with expertise in those markets. Benefits vary widely from country to country, and staying compliant with your local benefits packages can be tricky. This is another area where Remote can help.

• Adopt remote-first practices. Better remote work practices help remote workers feel like part of the team. When people feel connected, they’re more likely to want to stay. Creating that sense of belonging starts on day one, so see our guide for more on onboarding international workers.

The fastest, safest way to consolidate your payroll processes

There are many ways to reduce payroll costs. For most companies, a strategy that includes outsourcing international payroll offers the most opportunities to save.

Remote’s global payroll solutions offer support for a wide variety of cost-saving strategies:

• We unify global contractor payments, employer of record services, and payroll management for your international entities in one platform.

• We consolidate payroll processing with a variety of solutions for managing and paying your global workers.

• We provide peace of mind with local compliance. Our local experts ensure your company is always informed on local laws and adheres to all applicable regulations.

• We reduce payroll costs and streamline your payment processes.

• With the Fair Price Guarantee, your bill from Remote is never a surprise. No hidden fees, no percentages, and nothing hidden in the fine print. Just first-class service for your world-class team.

Sign up now to begin onboarding employees and contractors in minutes!

Need more information? Contact us today, and our team will respond quickly to help you grow your business.

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