What is payroll compliance?
Managing payroll across multiple countries can be a complex task, especially for startups and small businesses. For finance leaders, ensuring payroll compliance in every jurisdiction is critical to avoiding legal issues, financial penalties, and even potential restrictions on hiring and doing business.
This checklist will guide you through the essential steps to keep your payroll compliant across borders.
8-step payroll compliance checklist
Here are the key compliance components to navigate when handling international payroll:
Payroll methods
To legally pay your employees in different locations, you need to have an appropriate method in place. For instance:
1. If you have a legal entity in an employee’s country, you can either manage their payroll in-house, or outsource to a trusted provider.
2. If you don’t have a legal entity in an employee’s country, you can use an employer of record (EOR).
What’s the difference between a payroll provider and an EOR?
As part of this, you (or your EOR) needs to be registered with the local tax authorities and other relevant bodies in each country where your employees are based. In some countries, you must also have an in-country bank account.
Payroll schedules
Pay frequency can vary significantly between countries (and, in the US, between states). It’s essential to comply with these local pay schedule laws in each country where you have employees.
For instance, in some countries, employees are required to be paid bi-weekly, while in others the minimum is once per month. This can also differ depending on the industry.
To avoid non-compliance, ensure that you’re familiar with these differences and run your payroll accordingly.
Statutory benefits
In most countries, you are required to withhold and contribute to statutory benefits, such as social insurance schemes, pension contributions, and other mandatory programs.
Ensure that you’re making accurate contributions on behalf of your employees to avoid legal repercussions and ensure their entitlement to social benefits. Also, ensure that you are making the necessary employer contributions where required.
Data protection
Payroll data includes sensitive personal information, so safeguarding it is required by law. Most countries (or regions) have their own regulations around data protection and privacy, such as GDPR in Europe.
Ensure that your data is securely stored, encrypted, and protected, and that your privacy and data handling protocols are in line with the relevant legislation in your employees’ countries.
When calculating salaries, pay close attention to the relevant employment laws in your employees’ countries. In particular, be aware of:
1. Minimum wage requirements. These can vary not just by country, but by state, city, and industry.
2. Overtime regulations. Overtime pay may be required based on local labor laws, which can vary significantly in terms of rate and applicable conditions.
3. Collective Bargaining Agreements (CBAs). In countries with CBAs, there may be additional wage requirements specific to certain sectors or roles.
4. Industry-specific laws. Some industries may have special regulations that affect wages and benefits.
Withholding
Tax compliance is one of the most critical aspects of payroll management. For each employee, you need to ensure that you're withholding and remitting the correct amounts of income tax, social contributions, and other applicable taxes.
As part of this, you’ll need to familiarise yourself with income tax rates, thresholds, and special exemptions in all of your employees’ locations.
Payslip distribution
Each country has its own rules on payslip issuance, including what information must be included in the document, and how it should be distributed.
Ensure that each payslip contains all the necessary details as required by local law, such as gross pay, net pay, tax deductions, and social contributions.
Note, too, that some locations may require payslips to be distributed in paper form, while in others digital delivery is acceptable.
Reporting and record-keeping
Payroll reporting obligations differ from country to country, but most jurisdictions require some level of periodic reporting to tax or labour authorities. Additionally, storing payroll records for a minimum period is mandatory in many countries.
Implement a system to ensure your payroll reporting is accurate and timely, and that records are securely stored for the necessary duration.
Classifying your team members
When hiring abroad, many startups and small businesses opt to work with independent contractors. If you’re planning to do this, you need to ensure that you classify your hires correctly.
Each country has their own definition of the differences between a contractor and an employee, and you need to adhere to these definitions. If you don’t, you run the risk of misclassification, which can result in significant fines and penalties.
Learn more about misclassification.
Keeping up to date with payroll tax and employment law changes
Consider that employment and payroll tax laws can change regularly. In some locations, for instance, the minimum wage level increases on a yearly basis, while income tax thresholds can also change frequently. Being aware of — and keeping up with these developments — is crucial to remain compliant.
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