A Complete Guide to International Payroll Processing

Resource Type: Useful Info

When it comes to global expansion, there are a series of challenges to overcome including language barriers, currencies, and legal compliance. Businesses operating on a global level or considering expanding into new territories need to process payroll correctly to ensure their staff are paid on time, no matter where they live in the world.

However, global payroll processing is more than simply renumerating staff for tasks they have completed. It involves a range of key factors, including deductions, currency conversions, and regional specifics that ensure businesses meet legal requirements within those countries.

This detailed guide will take you through every aspect of global payroll processing to ensure you are fully prepared for that all-important payday.

What is international payroll processing?

Global payroll processing incorporates the onboarding, salaries, and payments of international employees and contract workers in the following areas:

  • Wage calculations, deductions, and bonuses
  • Payment of taxes
  • Payslips
  • Currency
  • Legal compliance
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How to process international payroll

When it comes to processing international payroll, it’s important to carefully consider the method by which it is done. There are four main options: payroll software, fully managed payroll, PEO or EOR.

1. Payroll software

If you want a DIY approach or have the in-house expertise and resource to dedicate considerable time to payroll processing, then a payroll software solution may be for you. Most payroll software is designed for one country or region, however, so you may struggle to find payroll software that can accurately scale with you.

2. Fully managed payroll

If you already have entities set up in other countries and are simply looking for a way to run payroll for all of your offices, then outsourcing it to an international payroll provider might be the right option. Here, a third party will take on all your payroll processing for you.

All you have to do is supply the right information, and then everything else is handled for you. You’ll get a regular report showing you what has been done at the end of every pay run as well as the peace of mind that your payroll is completely managed without any issues.

3. PEO (Professional Employer Organization)

A PEO (Professional Employer Organization) is a method by which employees are leased by an employee organization to the main employer, often for short-term expansion plans. The PEO will then carry out administrative employment tasks, like payroll and HR.

It’s often used by smaller companies who need short to medium-term expansion, as it can be expensive in the long run. It’s less of a replacement for your HR team, and more a group of experts who can help with growing your company.

4. EOR (Employer of Record)

In legal terms, an Employer of Record (EOR) is effectively the service that facilitates the employment of international staff on behalf of a business or organization and is an essential element of any global payroll process.

EOR facilitates the management of payroll in a foreign country and supports staff recruitment, intellectual property protection and all other legal requirements associated with the provision of a comprehensive global payroll service. This makes it easier to onboard international workers without having to establish a legal entity in the country where a worker is tax registered.

Processing global payroll – step-by-step

Once you’ve chosen your method to process payroll, you’re ready to do a pay run. Whether you’re doing this in-house, or through someone else, the steps will be the following:

1. Register with the relevant local authorities

From tax registration to city or town councils, there’s a variety of registration steps that need to be taken before you can begin to pay people. This is called creating a local entity, and many people chose to use an outsourced provider to assist with this, as there’s often a lot of paperwork and translation to do.

2. Organize your tax status and payments

Once you’ve registered with the relevant authorities, you need to discover what you’ll need to pay, to whom and when. If you’re using a payroll provider of sorts, they’ll handle most of it and should be able to tell you what you’ll be paying on top of salaries every month.

Different countries have different base-level requirements for employer contributions to a variety of tax systems, and some require insurance or pension contributions as well. Sometimes, within countries, different regions will have different requirements.

3. Agree your pay run process

Whether you want to run a pay schedule every two weeks, or every month, you’ll need to agree when and how you want to transfer money to your employees. This will need to include benefits, bonuses and anything else that involves the exchange of money, or monetary-related items.

Then, once you’ve agreed this, you’ll also need to organize the relevant tax forms and submissions, to ensure you remain compliant.

4. Collect the employee information

Every country will need, to some extent, employees to provide certain information. This is often address and contact information, as well as tax information for social security purposes.

It’s up to you to inform your local employees of this information needed and ensure that they provide the relevant content to you, for you to pass on as needed.

Co-workers talking in a office environment

Considerations for global payroll processing

1. Storing employee data safely

When a business employs someone from another country, they will require personal information such as name, address, date of birth, social security number and bank details. The safe storage of this sensitive information is of paramount importance to the accuracy of a global payroll run. For example, in the European Union, under GDPR rules, a breach of information like payroll data can be a fine of up to $20 million or 4% of company turnover, whichever is higher.

Businesses will also be in possession of the private details of each member of staff’s terms of employment. This will include more sensitive data involving many or some of the following:

  • salary,
  • bonus,
  • commission rate,
  • retirement contributions,
  • tax deductions,
  • pay frequency,
  • health insurance payments and
  • all other benefits the employee receives.

There are a number of cloud-based software options available that will ensure the safe storage of this sensitive information and also limit access to that information to select Human Resources or Administration staff.

2. Regularly update employee files

Personal situations change all the time, as can someone’s terms of employment. This can impact on salaries a company must pay out.

Therefore, businesses should pay particularly close attention to staff changes and ensure records are kept up to date to reflect this. For example, a change of residence (possibly to another country), the birth of a child, a salary increase, or additional bonuses must all be accounted for, as should sickness absences and periods of unpaid work.

The situation around contractors can also change quickly. In the UK, for example, where IR35 regulations mean that a contractor’s employment status is now assessed by the business which employs them instead of through self-assessment. This means contractors may have to pay the same rate of income tax and national (social) insurance as regular members of staff which equates to an overall reduction in net pay.

The COVID-19 pandemic further demonstrated the importance for businesses to factor in all potential eventualities which could impact staff and contractor salaries. Quarantine measures meant some employees became exempt from certain taxes while others were eligible for furlough schemes depending on their employment status.

Smaller companies may be tempted to send personnel changes in an email to their payroll provider, but this is strongly advised against due to the high-security risk and the possibility of human error.

two women talking in front a laptop about work related matter

How do you process contractors and self-employed workers?

A global payroll partner can manage the payment of contractors and self-employed workers in foreign countries and ensure all relevant legislation is met. This is particularly useful in cases where a business does not wish to make that person a full-time employee.

The definition of an ‘employee’ can differ from country to country, so a global payroll partner acts as a vital buffer to avoid worker misclassification and the potential threat of legal action should a contractor dispute the nature of their working relationship. Caution must be taken to avoid penalty fines and even the potential loss of intellectual property.

In some cases when dealing with contractors, a business may tailor its global payroll process to the specific requirements of the resident country. This could mean using a combination of payroll services in line with expert advice provided by an international payroll provider. For example, in the UK, you need to follow IR35 rules for off-payroll workers when paying contractors. This differs from traditional payroll, and it’s important to maintain compliance as self-employed workers and contractors are more likely to be scrutinized if working with an overseas company.

Why do businesses need a global payroll provider to process global payroll?

Putting a reliable and trustworthy payroll process in place is essential for the success of any international business. Payroll processing can be a drain on resources, particularly when managed by an in-house team. Businesses may decide to outsource their global payroll function – or elements of it – which can reduce the cost of employing staff and save time specifically assigned to this task.

Very few businesses will have the resources or expertise to do this themselves and will require legal and financial guidance in order to tick all the registration boxes involved in this process. It is advised to employ the services of a payroll provider with knowledge and experience in the field of global payroll processing such as IRIS FMP.

IRIS FMP provides a full range of global payroll services and expertise

IRIS FMP is a trusted global payroll provider supporting businesses in 135 countries across the world. Our in-country payroll experts help companies and organizations overcome the common barriers your business may experience with international expansion. It’s why global businesses keep turning to us for help. We’re here to help you with your global payroll processing.

Get in touch today.