Hiring international employees can represent significant cost savings for your business and give you access to a global talent pool. However, international payroll processing is a complex matter that often gives companies pause when it comes to hiring international employees. In this guide, we explain how to pay international employees and discuss the challenges that companies should be ready to address when it comes to global payroll processing.
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How to do international payroll
When it comes to international payroll processing, there are seven key steps that will help you get started:
- Categorize your overseas employees
- Establish a local entity so you can do business in the country
- Research international labor and tax laws
- Configure your payroll process
- Determine employee benefits packages
- Select payment method(s)
- Run payroll and maintain accurate records
1. Categorize your overseas employees
When it comes to payroll for overseas employees, there are four main categories of workers that you need to consider: temporary foreign workers, US employees working overseas, native international employees, and international independent contractors.
Each category of workers has different requirements when it comes to paying them and complying with local tax laws. For instance, if you only have a single US-based employee working overseas for a short amount of time, then you might be able to leave them on your US payroll and proceed as usual. If you hire international contractors, then it will be the worker’s responsibility to withhold taxes and ensure global payroll compliance.
Finally, if you hire either temporary foreign workers or native international employees, then it will be your responsibility to withhold the correct taxes, Social Security contributions, and other payroll expenses.
2. Establish a local entity so you can do business in the country
If you hire either temporary foreign workers or native international employees, then you will need to establish a local entity so that your company can do business in the employees’ country of residence. This involves registering and applying for a tax ID number, then withholding all necessary taxes and expenses to ensure global payroll compliance.
If this option doesn’t appeal to you, some countries offer alternative options. For instance, in the UK and Thailand, you can get a foreign employer exemption, which allows a company to hire and pay local workers without having to make local withholdings or contributions. Another more widely available option is partnering with an in-country affiliate, a.k.a. an Employer of Record partner, which will handle all personnel functions on your company’s behalf.
3. Research international labor and tax laws
If you decide to set up your tax ID and directly pay employees yourself, then you will need to educate yourself on all relevant laws and exemptions to make sure that you don’t run into legal trouble and incur penalties down the line. At a minimum, most countries have an income tax and also require employees to contribute to Social Security and pension funds. However, there may be other requirements that you need to meet as well.
In these situations, hiring a local expert who understands the laws and speaks the language may be helpful, especially if you don’t currently have someone on staff who meets those qualifications. This is one reason why many companies hiring international employees do opt to use an Employer of Record instead of handling payroll all on their own. However, even if you do partner with a local Employer of Record, it’s still a good idea to familiarize yourself with local employment laws so that everything remains above board.
4. Configure your payroll process
If you partner with an Employer of Record, they will handle the international payroll process for you — but if you pay your employees directly, you will need to set that up yourself. Using a global payroll software platform can help to automate the payroll process if you decide to proceed with paying employees directly (but you will still need a taxpayer ID registered in that country in order to pay international employees).
Begin by deciding on a pay period and how often you will pay employees, making sure that you remain compliant with all local laws. If you will be paying employees on an hourly basis, you will also need to track their work hours. Look for time-tracking software that syncs with your international payroll platform or HR enterprise software that includes a time-tracking component.
5. Determine employee benefits packages
In addition to minimum wage and maximum hours worked, many countries have stipulations about what benefits must be provided to employees, such as health insurance. These additional benefits must be included as part of the overall compensation package and may affect taxes and withholdings.
6. Select payment method(s)
Again, an Employer of Record will handle the specifics of paying employees each pay period if you decide to partner with one. Some international payroll providers, such as Papaya Global and Remote, will also handle this aspect for your company as well.
If you decide not to pursue either of these options, you will need to choose a method for paying employees. Sending international ACH payments is another alternative, but the Federal Reserve only allows this to happen for a limited number of companies. Your company can also open a central bank account overseas, fund it each month, and pay employees from it directly.
7. Run payroll and maintain accurate records
Once you have accomplished all of the steps above, you are ready to actually run payroll and pay your employees. Keep in mind that even if you have set everything up correctly, you may still run into challenges with payroll processing. Be sure to keep track of all your documentation in case your company gets audited or an employee disputes their pay.
What are the challenges with paying international employees?
Global payroll processing presents a number of challenges for employers who have hired international employees. The biggest areas of concern are cybersecurity, compliance, payroll schedules, and processing delays and fees.
Cybersecurity
Cybersecurity is already a huge concern for domestic payroll and other finance-related tasks. Paying employees across borders increases cybersecurity vulnerabilities and makes data protection even more important. Depending on where your international employees work, there may also be additional international data protection laws that your company needs to comply with.
Compliance
There are many different laws and regulations that you must follow to do business internationally, including tax rates and deadlines, statutory employee benefits, minimum wages, and maximum weekly working hours. These will be different for each country you do business in, and you need to make sure that you remain compliant in each nation.
Payroll schedules
Different countries follow different payroll schedules and have different requirements regarding the length and frequency of pay periods. You need to monitor the pay periods for each country you employ people in and may need to make payments at different times as a result. Finding a global payroll software can automate reminders for this and take some of the burden off your shoulders.
Processing delays and fees
It can take days or weeks to process an international money transaction due to the fraud prevention processes that banks have in place. You need to account for these delays to ensure that employees are paid on time and that your company remains in compliance. Currency exchange rates plus extra processing fees to move money across borders can really add up over time, further adding to the challenges of international payroll processing.
The right software can help with international payroll processing
If you decide to pay international employees directly, investing in global payroll software can help address these challenges and automate the process. Check out our list of Top Global Payroll Solutions to find a payroll platform that works for your multinational business.