The Beginner’s Guide to International Global Payroll
With the increase in hybrid and remote work, organizations can now hire from anywhere. Hiring internationally brings its own challenges, though, especially in terms of payroll. We walk through the main steps to take when you set up global payroll.
Published on March 17, 2022
The rise of hybrid work is great news for companies interested in growing their talent pool. Organizations willing to hire remotely have the upper hand because they can source job candidates from anywhere in the world. Borders are no longer a barrier to recruiting and onboarding the best of the best. Such is the beauty of hybrid and remote work models. As great as expanding your candidate reach sounds, it does come with its own set of challenges. Payroll can already be complicated when domestic employees are concerned (tax forms aren’t exactly fun). But international global payroll is even trickier. You now have to consider aspects like local labor regulations, tax laws, data compliance, and IP transfer. With so many new variables to examine, knowing how to kickoff your international payroll journey is a challenge. So let’s start at the beginning. Below are the main steps to take as you dive into global workforce expansion waters.
Understand the differences between contractors and full-time employeesYou can hire international people to join your company either as contractors or full-time employees. It’s important that you understand the difference between these two types of hires because it influences the international global payroll process. And if you misclassify a worker, you’re looking at potential fines and even criminal penalties.A contractor is typically an independent worker with the freedom to dictate their working hours. Contractors are usually hired to take part in seasonal or one-off projects and are less involved in company culture than full-time employees. From an international global payroll perspective, contractors are easier to handle. Depending on the country, they typically don’t receive benefits, and employers don’t pay for and withhold employment and payroll taxes, Social Security and Medicare taxes (FICA), and state and federal unemployment (SUTA and FUTA) taxes. A full-time employee is usually bound to work how, when, and where an employer dictates. While contractors tend to be hired for short-term projects, full-time employees are brought on under the expectation of a long-term relationship with the company. When you hire full-time employees, you’re obligated by law to pay for and withhold all the taxes listed above, as well as to provide benefits, including health insurance, sick leave, and paid time off. If you hire employees globally, you have to comply with local tax and employment laws. (Note that some of those laws may apply to contractors, too, depending on the country.)Companies that want to expand to international hiring might look at these differences and decide to hire everyone as an independent contractor. The lack of tax obligations may sound appealing. However, if you want to build a loyal workforce that contributes to your company’s success in the long term, you need to offer workers good reasons to remain with your organization. That includes benefits, ties to company culture, and opportunities for growth.
Choose your international hiring solutionThere are several routes you can take to hire employees across borders. The best solution for your company depends on a number of factors, but the most important considerations are your organization’s staffing and financial resources, long-term goals, how quickly you want to hire, and what countries you want to hire in. Open a local subsidiary. A local subsidiary is a company owned by your company, established in another country. This is probably the best-known solution. If you want to hire several people from a specific location, and you want to build a local presence there as a business, local subsidiaries are a good option. However, they come with significant costs. You have to replicate the internal structure of the original company in every subsidiary. You also need to hire local lawyers, accountants, and HR professionals and deal with more complex taxes in your home country.Set up a branch office. A branch office is an extension of your company, but unlike a subsidiary, it’s not a separate legal entity. You don’t need to file separate tax returns or comply with local tax laws. The biggest limitation of branch offices is that you can’t set one up in every country if your country doesn’t have a tax agreement with the country in which you want to set up a branch. If there’s a location where you want to hire from that doesn’t allow you to set up a branch, you’ll have to look into other options. Use a third-party solution. International PEOs, EORs, and Foreign Subsidiary as a Service (FSaaS) are third-party solutions that hire employees for you in the country of choice. You don’t have to establish a foreign legal entity, and these organizations manage local compliance for you. Third-party solutions are a viable option if you’re looking for speed and/or want to hire people from several countries because you don’t want to waste time with bureaucracy. The downside, however, is the fees — up to $3,500 per country or per employee for setup fees, with some solutions charging up to $3,000 per month per employee, even after the initial setup.
Research and comply with local employment and tax lawsEach country has different employment and tax laws you must abide by if you choose to set up a subsidiary. It may sound like a snooze-fest, but failing to comply with these laws will result in costly legal penalties. When you’re in the process of hiring someone from another country, research the specific regulations you have to adhere to and integrate them into your international global payroll process. Local employment laws include factors like minimum wages, working hours, parental leave, paid time off, and notice periods, which vary from country to country. For instance, in Argentina, male employees are only allowed two days of paternity leave, while in Spain, they are entitled to 16 weeks. Local tax regulations are also a mixed bag. In some countries, such as Monaco and the Bahamas, you don’t have to withhold personal income tax at all. Others, like Hungary, have a flat tax rate, and places like Belgium and Portugal apply progressive taxation. You might also have to consider other taxes, like Germany’s solidarity surcharge tax, as well as Social Security contributions. The volume and complexity of the information you have to comply with can easily get overwhelming. Even if you think you fully understand something, it’s still advisable that you hire local help. Lawyers and accountants from the country where you’re doing business have the necessary knowledge to help you employ international workers by the book and avoid legal violations.
Collect and protect employee dataBefore you’re able to pay any of your employees, you need to collect personal data, including names, addresses, social security numbers (or the equivalent in their country), birthdays, and bank account details. All of this information is sensitive and needs to be collected and protected according to each country’s data compliance regulations.The number of data compromises in the third quarter of 2021 alone surpassed all of 2020, with nearly 190 million records exposed. This is a concerning trend in cybersecurity. Hackers are looking to get their hands on valuable personal information, and if your company stores employee data on the cloud, you’re at risk.The platform where you store employee data and the platforms through which you pay each employee need to be propped up by rigorous security and compliance procedures. Data compliance laws vary from country to country, so there’s an added layer of complexity to it when you hire international employees. Consult with local data compliance experts who can help you understand your obligations and assist you in choosing the best, SOC 2 compliant platforms to store information and pay employees.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
Adopt a single platform to manage your international global payrollAt Pilot, we believe that growing your team overseas greatly benefits both your culture and your bottom line. The bureaucracies associated with paying international contractors and employees shouldn’t be a deterrent to these accomplishments. That’s why we created a single platform that streamlines payroll for global teams, issues payments, ensures you remain compliant on all fronts, and provides EOR services with transparent pricing and no hidden costs.Spend less time and money on administrative work and focus more on retaining a skilled, happy workforce. Request a demo with one of our experts and learn how Pilot makes international global payroll a seamless, headache-free process.
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