If this is your first time dealing with international payroll, you may be confused about what payroll rules apply and when. 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 that could include payroll taxes employees owe, any currency translation you may have to perform, and acceptable methods of payment.
If you need to tighten up your domestic payroll or just ensure you’ve done everything right before expanding into foreign markets, check out our how to do payroll e-book.
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 need.
- Are they temps?
- 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?
US Employees Working Overseas
Companies with local employees who are set to be overseas for a short period of time, such as for a one-month project, will sometimes avoid alerting said country about the temporary worker. This is to avoid 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 are sending employees to just help test out the market, 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. If they’re an employee vs a contractor, you’ll need to comply with local payroll laws and tax compliance rules of the host country by withholding the appropriate taxes, Social Security contributions, and other payroll expenses accordingly.
Working with an international payroll provider such as ADP 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 even begin processing payroll on your behalf.
Hiring Native International Workers as 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 both 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).
2. Ensure Business Is Set Up to Run International Payroll
Once you do a full 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 in-country affiliate: This involves working with a company that’s already registered in the employee’s host country. They’ll add the employee to their 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’ll 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 depends on the type of workers you have along with 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 semimonthly (twice a month) and biweekly (every two weeks), although some companies pay employees on a monthly basis. If choosing precise pay dates, consider making the last pay day 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, which simplifies accounting.
If you’re required to comply with 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 a free time tracking app, like When I Work (free for up to 75 employees). You’ll need a tool that can be used from anywhere, since you won’t be physically present to oversee their work.
5. Taxes on International Payroll
Taxes are a large part of what makes any payroll complicated. Many countries have similar taxes as the US, although they may have different names. Income taxes are common, on a national, regional, and sometimes local level. If you’re required to withhold taxes for employees, be sure you have a good grasp on how the tax system works. Some have a few flat rates based on income brackets, a sole flat rate, progressive rates (like the United States), or even regressive tax rates.
There are also many countries that require their employees to contribute to Social Security and pension funds. You’ll have to know which agencies need to be paid, so 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.
Independent Contractors and Payroll Taxes
If you have an overseas independent contractor onboard, it’s very 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 in regards to this aren’t likely to fall back on your business.
6. Offering Employee Benefits to Global Workers
Decide 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 do cost though, sometimes 15% to more than 25% of your payroll.
You can also find some international payroll providers that make it easy for you to offer insurance, but the rates will be a bit higher. You’ll also have to ensure employee contributions and any funds you agree to pay are actually credited to the benefits provider.
7. Paying International Workers
Out of everything we’ve discussed, aside from taxes, how you’ll actually 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 ADP or SAP, 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, although the Fed 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. Here at Fit Small Business, we pay some workers who reside in the Philippines.
According to Cindy Lo, our Workspace Administrator:
“The main nuance is with conversion rates. We issue our pay in USD, but most employees receive their pay in their home currency. Exchange rates change every second, so even if we pay $1,000 to a worker at the end of each pay cycle, they will receive a different amount every time. Sometimes the exchange rate can fluctuate a lot, and our employees actually earn less because of a poor rate.”
—Cindy Lo, Workspace Administrator, Fit Small Business
You should keep this in mind when paying workers, and consider increasing their pay rate to account for fluctuations, if possible.
8. International Payroll Laws to Research
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
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 to help.