How to Pay Employees Overseas
When your business decides to make its first steps to expanding overseas and payroll incorporates countries other than your own, paying employees suddenly becomes a much more complex affair. Paying employees overseas can put a considerable strain on your HR and payroll teams, who until now may have only dealt with domestic payroll. Depending on which country you expand into, there are numerous options for how you can pay employees overseas.
How to Pay Overseas Employees
- Understand local tax laws.
- Establish an overseas business presence.
- Understand payroll differences in specific countries
- Ensure your payroll is fully compliant.
1. Understand local tax laws
When expanding a business internationally, you will need comply with local tax laws in order to pay your employees, there are several ways to do this:
- Employer of Record (EOR)
- Entity Establishment
Employer of Record (EOR)
An EOR becomes the sole registered employer of an international employee when they move abroad. This allows for simplified administration, as while the employee is carrying out work on your behalf, the EOR in the relevant country becomes the employer in legal terms and will be able to run payroll, carry out relevant tax duties, and comply with local legislation.
While this method is initially more admin intense, there are many long-term benefits. If you are moving permanently into a country, or for an extended period of time, then establishing an entity can be a wise choice. This could be as simple as setting up a branch in the country or creating a specific division that is run from one country. A branch office can be one method, but you are not able to generate revenue through this method.
Secondment is used as a temporary solution and shouldn’t be a permanent solution. Secondment can help if you need to send certain members of staff abroad for them to temporarily work in an established entity. Their tax status remains as one of the home country, and it can be used to upskill workers abroad.
|Local Tax Type||Initial admin work||Temporary or permanent||Legal responsibility||Time to market|
|EOR||Low, done on your behalf||Both||EOR||Quick|
|Entity||High, all must be done by you||Permanent||Company||Slow|
|Secondment||Low, but done by the number of employees||Temporary||Company||Quick|
2. Establish an Overseas Business Presence
There is no straightforward way to enter a new country. You could establish a commercial presence inside its borders by registering with applicable authorities, acquiring a local taxpayer ID, and putting overseas employees on an in-country payroll.
This option comes with a significant upfront cost and may not be suitable for all businesses. If a company is only testing the waters for potential expansion into an international location, investing time, money, and effort into establishing an in-country presence can be an unwise use of resources.
Alternatives to Setting Up Overseas Entities
A. Put the employee on the home-country payroll.
Keeping an employee on home-country payroll can result in compliance risk once they become a resident there. But home-country payroll can sometimes be legal.
If your employees simply make business “visits” to a location without establishing local residences, signing contracts, or generating in-country revenue, the employer likely isn’t crossing the “doing business” threshold in that jurisdiction, so creating a permanent presence may not be necessary.
Another way to do this is with a host country workaround. Some countries (not the U.S.) allow workarounds for offshore employers without any in-country presence or place of business.
These workarounds generally fall into three categories:
Foreign Employer Exception
Available in the UK and Thailand, if you don’t do business or have a permanent establishment locally, you can hire and pay local staff without making local withholdings and contributions. The local employee bears the burden of tax and social security filings as if self-employed.
Payroll Only Registration
Estonia, France, and some other countries offer a payroll law compliance option for employers. This option allows foreign employers with no in-country premises to make special “payroll only” registrations with in-country tax and social security bodies so they can issue a legal local payroll.
Payroll law option for the employee
Other countries allow an individual employed by a foreign employer not doing business in-country to self-declare as “foreign payrolled” to the local tax agency. This again puts the onus on the employee and allows them to be paid by a foreign company.
B. Make the worker an assigned or leased employee.
This is a form of secondment to an entity that has the registration in the country you need. The employee is employed by entity A but does work on a daily basis for entity B. An organization may need to send an employee to another country to handle customer service and can ask its in-country payroll provider to payroll that person.
If there is no local business partner, temporary agencies often provide leased employment. This is a form of secondment recognized in the US where an employee typically resigns or their employment is suspended and they become “floating employees”. They go abroad to work and are paid by an agent, who seconds the person’s services back to your company.
C. Register or make the person an employee of a local affiliate.
If you send someone to a country in which your organization is already registered or has a subsidiary there, you can put that person on your payroll. Alternatively, you can “second” them to an affiliate or business partner who is registered in that location. This option isn’t the most practical just for payroll, but it can be an option in certain circumstances.
“Shadow payroll” is another means of leasing an employee, but you keep them under the company umbrella. In this version, Division A of a US company may do something completely different from Division B, which operates solely in another country, for example, the UK. If Division A needs to send someone to the UK, it can ask Division B to fill out the paperwork and report wages to HMRC and can reimburse Division B for doing the payroll.
From the UK payroll perspective, it looks like the employee is being paid by Division B, so you maintain payroll compliance.
3. Understand Payroll Differences in Specific Countries
Key payroll dates differ from country to country, so logistics is as essential in payroll as it is in any other aspect of a global enterprise.
You must also consider currency conversion rates, as well as the need to track payments across multiple borders.
Payments into overseas bank accounts
While in the US there is no statutory minimum paid vacation or paid public holidays, with employers able to determine their own paid vacation offers. Many industrialized nations have very clear requirements for paid vacation. Many countries also have several paid public holidays.
Paid sick days for short-term illness of an individual or family member are also not required within the US but must be taken into consideration overseas.
Organizations need to effectively track and manage employee absence, whether from vacation or sickness and ensure that any compensation is accurate.
US employees who work overseas have unique tax challenges that include the treatment of pension contributions made while working abroad. Pensions such as IRAs and 401(K)s have specific contribution limits and rules that may be affected by an expat worker’s presence in another country.
There are several key factors that must be considered when deciding how to contribute to a US pension while overseas, but there is no hard and fast rule that will apply in every situation.
Social Services & Contributions
Without a doubt, one of the most complex areas of payroll is managing the diverse social service and healthcare contributions. Whilst in some countries the process appears transparent, for others, it is much more challenging.
4. Ensure Payroll is Fully Compliant
Aside from the physical nature of locating a bank account and transferring money abroad, there are other areas you will need to consider before paying your international employees.
Visas & Immigration
If you are considering a long-term strategy and need to send key stakeholders into foreign markets, applying for visas and supporting your employees’ immigration is the logical step. Given the level of commitment involved, this is often part of a long-term global strategy.
Deciding which approach is best for your business will depend on a variety of factors. Part of the challenge of establishing your business overseas is understanding these complex options and knowing which one is best for you.
Employment Status & Contracts
Every country’s revenue service has a variety of requirements for all employees, and this will include US nationals. Depending on your needs and market, you may have to comply with specific or unique case requirements, but all countries have standard, established requirements for all employees.
Every country has a different take on employment contracts, so you need to be able to meet a variety of legislative requirements.
There are several potential pitfalls for US companies, especially those that like to use a rolling short-term contract model for overseas employees. In order to establish an overseas presence, it is important to understand the payroll requirements of each country and make changes to your contract policy accordingly.
Security & Data Protection
For US companies looking to expand into European markets, the General Data Protection Regulations (GDPR) will need to be taken into consideration. These data security regulations put very specific duties upon any company that holds the data of EU citizens. This includes EU customers and any local EU staff you may choose to engage to do work for you on the ground.
Understanding the regional security and data protection rules of other markets is key to safely doing business there. You must also take into consideration that, as you grow globally, your data has the potential to be stored in more and more disparate places. Unifying your data stores and managing a globally standardized policy of data storage will keep your data secure as your business expands.
For US organizations looking to deploy staff overseas, it will be important to recognize the potential impact of a higher – or lower – taxation regime on their earnings. While Federal Tax rates in the US vary from 10% to 39.6%, in the UK, the minimum rate is 20%, rising to 45% for the highest earners, with additional taxes due at both local and regional levels.
Understanding the taxation regime will be essential to ensure employees receive comparative salaries globally.
There are huge discrepancies in tax rates from country to country. Understanding this is crucial to legally compliant, comparative, and competitive salaries for all employees.
Withholding tax rates vary from country to country and one of the most common occurrences of double taxation is overseas employee wages. Understanding your tax obligations and international tax treaty opportunities is an essential part of managing payroll for overseas employees from a business finance perspective.
Depending on the residency status of an employee, some, all, or none of the US rules for withholding and reporting on income apply.
US citizens and green-card holders who work abroad for US companies remain subject to US payroll taxes and Form W-2 income reporting. Substantially present residents remain subject to these rules until they are away long enough to become nonresident aliens.
Qualifying US expatriates can use foreign-earned income exclusions and foreign tax credits to avoid double worldwide taxation while working abroad. Foreign nationals who are nationals of a treaty country may also be eligible depending on their circumstances.
Special payroll rules allow for reductions in wage withholding for employees who expect to qualify for IRC §911 foreign earned income exclusions or whose wages are subject to foreign wage withholding.
Payroll in Spain
In Spain, working and business foreigners must obtain a Foreigner Identity Number (NIE) whether they live in Spain or not. Your NIE acts as a personal tax number and helps keep track of your financial and legal activities. New employees must be registered as company workers with the Social Security Office before they can commence work. Late registration has a negative effect on certain employee rights.
Payroll in Germany
In Germany the model has added complexity because, in addition to income tax and social security contributions, employees must pay a solidarity surcharge, while employees who belong to a church have to pay a church tax. Furthermore, the amount of income tax payable depends on the amount of taxable gross income, the tax grade and the number of dependent children.
Keeping Overseas Payroll & HR Under Control
Establishing an overseas presence requires careful planning and strategy before you set foot outside your borders. Questions regarding immigration approaches, compensation and benefits strategies, and potential mergers with other entities all need to be answered well ahead of your first placement of personnel.
As you engage your HR & payroll teams to develop a global people management strategy, you will inevitably identify new opportunities and additional levels of detail that expand beyond your initial global objectives.
It’s important to roll out a global payroll & HR strategy so workloads scale with complexity, not volume. Your global people management strategy should be iterative and with opportunistic transitions in mind so you can scale your payroll effectively.
What to Look for in an Overseas Payroll & HR Provider
Global payroll is complicated. Country-specific requirements, multiple service providers, different formats and processes, and potentially significant compliance penalties can create extra work and extra hassle. You need an international payroll solution that:
- Works for all your employees, no matter where they’re located
- Simplifies complex payroll processes country by country for your entire international footprint
- Gives you ready access to your complete multinational financials
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