When your company first starts hiring employees overseas, the immediate question that needs to be answered is how you are going to pay them. It’s not as simple as it first appears, and the solution is going to depend on the classification of worker, the specific country and the intended length of engagement or contract.
Assuming your company does not have a branch, office or registered entity to run payroll in the foreign country, you are most likely considering paying them remotely from your home office. But is this possible?
There are many different scenarios.
- Hiring a foreign employee and they will be working remotely from home.
- Sending an employee from your home country on a six-month project abroad.
- Building a virtual remote team based on skills rather than location.
- Contracting local marketing and sales representatives to expand into a new market.
The temptation here is to pay the employee remotely from your payroll and treat them as though they are working out of your office-based location. This can work for temporary assignments and some types of virtual remote work, however, for longer appointments, you must consider several different factors.
The issues are – once you hire an employee in a foreign country, you are accountable in two different tax and payroll systems. Double compliance and its ease of navigation depends on individual country agreements and can potentially become very messy.
Three factors will need to be considered when working out how to pay the employee:
The type of worker
You need to consider whether they are a remote employee or contractor? Contractors are on the rise. It is usually an easy fix to the international payroll issue because they are self-employed. It can be considered a B2B arrangement.
The issues are the potential risk of misclassification. With remote employees, the host country views them as your employee based on how you structure and manage their work. These formal employees are entitled to a full range of benefits and labour protections in the host country. If this is the situation, you will need to find a way to comply and meet with local regulations, at some point.
Variations and fluctuations in currency can affect a foreign employee’s net pay, so you may have to fix the salary in their host currency. You may have to arrange a currency exchange agreement to offset fluctuations in either direction.
Tax and social security
Because your employee is in a foreign country, they will most likely have to pay tax in the host country, but your company may also have to withhold tax at home. To avoid double taxation, you must look into tax treaties between the two countries, that will allow credits to be used.
The home and host countries will also want to have social security or superannuation contributions paid by both the employer and employee. Some tax treaties accommodate exemptions. But you need to ensure compliance.
What are your options?
You have four options to pay your overseas employees
Pay the employee on your home payroll
For brief assignments or projects overseas, it should be possible to keep the employee on the home payroll. Some countries allow this but have rules for the remote payment. It usually involves registration without the need for a legal entity.
If you hire a local, they will need to have a payroll in their own country for tax and social security purposes. This may become more complicated if hiring an expat.
Ask a local partner to place them on their payroll
If your company has an existing business partner in the host country, then you could request them to payroll the employee locally. The third party becomes the employer for payroll administration, and your company remits the salary through them for tax and other required contributions.
Outsource payroll to handle your remote employee
There are two ways to do this. Either through a payroll provider or a Global Employment Outsourcing (GEO) service. Payroll providers are primarily administrative and can’t function as a legal employer. A GEO is a complete solution. They will offer a local employer of record that is already incorporated and ensure the employee and your business are in agreement of all local regulations. This is preferable to the remote home payroll option and avoids any compliance issues.
Pay them as independent contractors
This can definitely work well for certain types of positions or projects that are more self-starting and where the company doesn’t exert control over the workers time or methods. Examples would be salespeople working on commission, as well as hourly specialists such as lawyers, accountants or writers.
When you are considering these options for hiring and paying employees overseas, your priority needs to be on compliance with foreign tax, employment, and social security/superannuation laws.
Deciding to take the easy option of remote payroll will eventually bring non-compliance issues, possibly resulting in penalties and enforcement of local employment laws.
So if you don’t want to run the risk of being in non-compliance, it is best to find either a payroll provider or a complete payroll and employment solution with a GEO. These companies will help you find the optimal way to payroll and employ staff overseas. If you need some guidance, contact us 🙂