This article is part of a larger series on How to Do Payroll.
When expanding business operations overseas, every process is more complex than you expect, and it can get confusing, especially if you are dealing with international payroll and taxes. For one, you’ll need to decide whether or not your business is establishing an in-country presence where your employees will be working.
That decision will determine if you’re subject to payroll laws beyond the US—and that could include payroll taxes employees owe, any currency translation you may have to perform, and acceptable payment methods. Another aspect that you need to decide early on is if you will use a domestic payroll provider or a global one to handle your employees’ pay and benefits across countries.
Hence, if you need to ensure you’ve done everything right before expanding into foreign markets, then follow this guide on how to pay your global workforce.
1. Consider the Type of International Workers on Your Payroll
To establish the best payroll process for your business, you first need to evaluate the type of international workers you have or need, then determine whether you are handling remote employees or contractors.
Are your employees:
- Existing employees who recently moved overseas?
- Native international employees hired to do work strictly for a US company?
- Native international employees hired to work at an international branch of a US-based company?
Temporary Foreign Workers
In order to fill labor shortages, some US companies choose to hire temporary workers to do remote work or short-term projects locally. They can either be part-time or full-time and are usually needed for an employee on sick or maternity or paternity leave, seasonal customer demand, temporary surges in manufacturing orders, and other short-term roles.
If temporary employees are hired directly by the company, the first step is to make sure you are following the local overseas’ payroll laws, including its tax compliance regulations for this particular type of employee. You’ll need to withhold the appropriate taxes, Social Security contributions, and other payroll expenses accordingly, and an international provider like Rippling can help you sort this out.
If you hired a temp from a staffing agency where you pay a fee over and above the compensation collected by the employee, it is best to know what benefits are paid on their behalf (temporary employees who work through an agency may have paid benefits). Make sure they are paid accurately, even though technically, these employees are part of the agency.
US Employees Working Overseas
Companies with local employees assigned to an overseas project for a short period will sometimes avoid alerting the country about the temporary worker because of the paperwork and extra money they may be subjected to. They simply leave the worker on their US payroll, continuing to withhold income and FICA (Social Security and Medicare) taxes accordingly. This can work in some scenarios and countries, but it becomes more challenging the longer your employee is overseas.
It wouldn’t make sense to go through the tedious process of registering with a new country for one employee. For example, if you send employees just to help test the market out, you’ll need to estimate how many international workers you’ll have and the amount of time they will be working. Then, decide whether or not to move forward with establishing an in-country presence.
Native International Employees
Hiring local workers can become even more tricky. Suppose they’re an employee vs a contractor. In that case, you’ll need to comply with the host country’s local payroll laws and tax compliance rules by withholding the appropriate taxes, Social Security contributions, and other payroll expenses accordingly.
Working with an international payroll provider such as Rippling can help—international laws vary country by country—but it will not eliminate the necessity of registering your business within the country you’re paying employees. The payroll company would need a tax ID number assigned by the employee’s host country to begin processing payroll on your behalf.
Native International Workers Who Are Independent Contractors
Many companies will opt to hire their international remote workers as independent contractors; it seems like a win-win since you won’t be responsible for complying with domestic or international tax laws. You can simply pay the employees their gross pay, and they will have to square up taxes and other costs with agencies in their host country.
Problems arise when companies incorrectly classify employees as contractors. The US has its own independent contractor test, and surprisingly, many countries’ laws are similar.
If you’re monopolizing your employees’ time, meaning they are spending the same time as full-time employees and don’t have space to work for other companies and control how and when they work, your worker is probably an employee. Incorrectly classifying employees and contractors can lead to thousands of dollars in back taxes, penalties, and legal charges (depending on your intent and how many times this has happened).
Tip: Check out our article on independent contractors vs employees for details of US-based laws. We also strongly recommend checking your workers’ host country laws surrounding this issue.
2. Ensure Business Is Set Up to Run International Payroll
Once you do a complete evaluation of the type of international workers you’ll have on staff, you can better assess how you need to set up your global employer status.
- Do in-country payroll: Establish a presence in your employees’ host country by registering and applying for a tax ID number. You’ll have to withhold and pay money for taxes, Social Security, and other required payroll expenses per the host country’s law.
- Partner with an in-country affiliate: This involves working with a company that’s already registered in the employee’s host country. It’ll add the employee to its payroll and pay them accordingly; in turn, you’ll pay the affiliate the total payroll amount and usually an additional fee for using their resources.
- Check for foreign employer exceptions: Check out host country workarounds that have foreign employer exceptions. According to the Society of Human Resource Management (SHRM), the UK and Thailand will allow you to hire and pay local workers without being required to make local withholdings or contributions.
- Register in-country as payroll-only: Some countries offer an alternative option that will allow you to register solely for payroll purposes without having to go through the tedious process of establishing your business there. You will be able to process local payroll legally but will still need to deal with local tax and Social Security payments.
- Add employee to home-country payroll: This is as simple as adding a new domestic employee to your payroll. However, it’s usually done if an employee is transferring overseas for a short period. If they stay too long (check local laws), their place of employment will shift to that country, and you’ll have to find another way to process their payroll.
Remember, the options you have when it comes to running payroll for international employees depend on the type of workers you have and the circumstances surrounding their employment.
3. Choose a Pay Cycle
As you do when paying domestic employees, you need to choose a pay period to govern how often you’ll pay your international workers. If you have both domestic and global payroll, you may opt to align the pay periods. The most common ones are semi-monthly (twice a month) and biweekly (every two weeks), although some companies pay employees monthly.
If choosing precise pay dates, consider making the last payday for the month at least a week before month-end. This allows time for processing and payments to be cut before the next month begins, simplifying accounting.
If you’re required to comply with a foreign country’s labor laws, be sure to check if there is guidance on how often you should pay each employee. You don’t want to be found paying each employee monthly when their local labor laws require you to pay them at least biweekly.
4. Track Work Hours
You’ll need an effective way to track employee work time if you’re paying any employees on an hourly basis. If you don’t have an office space in their host country, consider using Rippling’s time and attendance tracking feature.
It will automatically let you monitor your workforce in real time, and it syncs automatically with Rippling’s payroll software. For compliance, it enforces overtime, meal breaks, and other federal, state, and local labor laws based on the employees’ work location. Lastly, it has geolocation, QR codes, and selfie clock-ins for attendance enforcement.
5. Familiarize Yourself With Taxes on International Payroll
Taxes are a large part of what makes payroll complicated. Many countries have similar taxes as the US, although they may have different names. Income taxes are standard on a national, regional, and sometimes local level. If you’re required to withhold taxes for employees, be sure you have a good grasp of how the tax system works. Some have a few flat rates based on income brackets, progressive rates (like the US), a sole, flat rate, or even regressive tax rates.
Many countries require their employees to contribute to Social Security and pension funds. You’ll have to know which agencies need to be paid so that you can send the money accordingly. Your business may also be responsible for paying payroll taxes on the income an employee earns. We strongly recommend you speak with an international tax adviser or payroll provider before proceeding.
If you have an overseas independent contractor onboard, it’s possible that you won’t be responsible for managing any tax withholdings or benefit deductions. Usually, the employee has to register themselves as a business in their local area and pay taxes and other related expenses per the country’s legal guidelines. Any errors or omissions they make regarding this aren’t likely to fall back on your business.
Tip: Learn about your employee’s country’s laws so that you can offer recommendations and resources to help them stay out of tax trouble. You may start by researching the type of tax system the host countries are using.
6. Decide on Employee Benefits to Offer Global Workers
Determine whether you want to offer employee benefits like life and health insurance. If so, you’ll need to find a provider that can offer you decent rates. Professional employer organizations (PEOs) are great for companies that want to offer their international employees the best rates since they pool employees from all businesses they represent to drive down costs.
They’ll also handle all of your payroll processing and legal compliance legwork, so you don’t have to worry about it. They may cost a lot, though—sometimes 15% to more than 25% of your payroll.
You can also find some international payroll providers like Rippling that make it easy for you to offer insurance—health insurance, 401(k), commuter benefits. You’ll also have to ensure employee contributions and any funds you agree to pay are credited to the benefits provider.
7. Choose How to Pay International Workers
Aside from taxes, how you’ll pay your workers is probably one of the next most important issues. They’re overseas, so cutting a paper check won’t work. If you’re using an international payroll provider, like Rippling, it should offer money transfer services as part of its payroll plans.
Another way to transfer money to your employees is by sending international ACH payments. However, the Federal Reserve will only allow you to transmit funds to 25 countries at this time—Canada, France, and Denmark are just a few.
You can also open a central bank account overseas, fund it each month, and pay employees directly from the account. This is a must in countries where you are required to remit funds for payroll taxes via local bank accounts.
The different currencies are another issue you’re likely to deal with when paying international employees. Keep in mind that when paying workers, consider increasing their pay rate to account for fluctuations, if possible.
8. Do Research on International Payroll Laws
Payroll laws vary depending on the countries in which your employees live. We can’t possibly cover all of the circumstances and potential situations that will determine the laws applicable to your business. Instead, here’s a list of common topics you should research for each country in which your employees reside (if you’re required to comply with their laws) in case it impacts your payroll:
- Minimum wage
- Overtime limits and pay
- Annual leave
- Employment contract laws
- Social Security programs
- Pension contribution requirements
If you want to learn more about payroll before expanding into foreign markets, check out our how to do payroll e-book.
Learning how to pay international employees is tricky and depends on different factors, like the circumstances surrounding your entry overseas and the country you’re planning to expand into. Ultimately, you need to figure out if your situation will warrant that you comply with your employees’ host country’s laws or if you can legally bypass the complexity. Either way, we recommend you consult a legal professional or international payroll service like Rippling to help you.