It’s easier than ever to communicate and work with employees who live in different countries. This means a greater variety of skills and perspectives, which is awesome. The only problem? Payroll gets a lot more complicated with a global workforce.
You’d think that with all the cutting-edge technology we have at our fingertips, paying international employees would be simple by now.
But no. Consider just a few of the issues you have to be mindful of at all times:
- Employee classification. Do it the right way or you’ll have to pay—a lot.
- Currency fluctuations. Constant changes make it hard to pin down the right compensation strategy.
- Labor laws. Failing to follow the labor laws in an employee’s home country can potentially mean big trouble.
- Payment methods. Getting the money to your employees’ hands can be a lengthy, expensive, and confusing ordeal.
Unfortunately, managing international employees is super complex, and even small mistakes can have a huge cost. Thankfully, there are solutions for just this problem.
How to Pay Full-Time International Employees
When it comes to paying full-time international employees, there are two basic options. We’ll explain both of them so you can see which one fits your situation the best.
Manage International Payroll In-House
If you’re determined to manage international payroll in-house, we salute you. Because it takes a ton of effort.
One of the trickiest things about this whole process? You can’t really start it until you’ve already decided to hire an employee and you know what country they live in. That’s because different countries—and even different regions of the same country—have different tax and employment laws.
Here’s a general framework for what you need to do when you decide to hire a full-time employee (FTE) abroad.
1. Identify what counts as a full-time employee in the country you’re hiring from.
Most countries consider someone a full-time employee if they earn a regular wage, enjoy company benefits, and work a set schedule. But make sure you double-check that your idea of FTE matches up with the country’s idea of FTE.
Employee classification is the foundation for everything you do to get the person on your payroll.
2. Understand the country’s tax laws as they relate to your employee.
Is there an employment tax that you need to pay? Like the US, many countries split the responsibility for employment taxes between the employee and the employer.
But some don’t. Find out the rules for employment tax in the country where your international employee lives. Including who’s responsible for withholding and paying the taxes.
The good news is that there isn’t too much to worry about on the IRS front. As a rule of thumb, the wages paid to non-US employees who live and work outside of the US aren’t subject to US federal income tax.
3. Learn the employment/labor laws for the employee’s country and region.
You’ll need to follow the local labor laws as though you are an employer who lives in the country in question. So if the country’s labor laws say that employees get four weeks of paid vacation each year, you must provide them with exactly that.
Learn the country’s policies on:
- Parental leave
- Health and medical coverage
- Severance pay
- Workplace safety rules
Many countries are more generous with these policies than the US. For instance, Norway’s Parental Benefit gives parents 49 total weeks of leave at 100% pay or 59 weeks of leave at 80% pay.
And in India, mothers receive 26 total weeks of fully paid leave. Mothers are also entitled to receive six weeks of paid leave following a miscarriage.
4. Set up a business entity in the employee’s home country.
The only way to legally add an international, full-time employee to your in-house payroll is to set up a foreign legal entity.
Essentially, you’re creating a branch of your US-based business and establishing it in the employee’s home country. This time-consuming, expensive task makes businesses of all sizes shudder in their boots.
In a nutshell, here’s what you must do to set up an international foreign business entity:
- Decide whether you want to set up a representative office, a branch office, or a foreign subsidiary company.
- Register your company with the country’s government and any other local authorities
- Open a local bank account
- Designate on-the-ground directors/representatives/HR professionals to manage operations in the country
- Set up payroll, making sure to follow the country’s tax, labor, and employment regulations
- Sweat bullets if you mess up at any point in this process
Okay, okay, plenty of businesses pull it all off. But it’s a huge headache, especially if you don’t speak the local language or have intimate knowledge of the country’s employment rules.
The toughest part of setting up a foreign legal entity in another country is that the learning process never stops.
You’ll need to figure out how to source local candidates. Offer benefits and wages that attract international employees. Navigate language barriers. Keep up with local laws as they change. Make sure your employee’s pay is unaffected by fluctuations in currency.
Worst of all, anytime you want to hire in a new country, you have to start this whole process again from scratch. Each time you do it, you pay tens of thousands of dollars just to set up your legal entity, not to mention the ongoing costs of maintaining it.
Which is why plenty of employers decide not to create foreign legal entities. Instead, they outsource their international payroll and all the headaches that come with it.
Outsource International Payroll To An Employer Of Record (EOR) Service
An employer of record (EOR) is a business that acts as the international employee’s legal employer on your behalf. On paper, the EOR will be the employee’s sole employer. But in practice, your company will still be the employer.
You can consider the EOR your on-the-ground HR team.
An EOR takes on the responsibility for managing your international employee’s payroll, taxes, and benefits, and makes sure everything is compliant with local laws. EORs are usually based in the same country as your employee.
Because of this, they have extensive knowledge and expertise that you don’t have. With an EOR, you don’t have to stress about making costly mistakes.
You do need to understand the service agreement you enter into with the EOR, though. You’ll still be making certain HR decisions, like deciding how much to pay employees, when to give bonuses, and which benefits you want to offer on top of the required ones.
Your in-house HR will probably also need to recruit, interview, and hire employees, too. That’s not something most EORs do.
And of course, you’ll be the one paying your employee’s salary and supplemental benefits, along with any employer taxes.
The EOR will put the money in the employee’s bank account in their home country’s currency, but you’ll reimburse the EOR for these costs. A high-quality payroll service can help you keep track of all of this.
So aside from these costs, how much money will you fork out to work with an EOR?
Most EORs charge a service fee that can range from $199 to $700+ per employee, per month.
Additional fees involved with hiring an EOR can include:
- One-time setup fee for each international employee
- Deposit that covers a percentage of the employee’s salary and is held throughout the employee’s tenure with you and the EOR
- Currency exchange fees
Prices can vary from EOR to EOR, so poke around and see which one offers the service agreement that best fits your budget and your needs.
Hiring an EOR can definitely be costly. But keeping your payroll in-house is expensive, too—and you’re completely liable for any mistakes you accidentally make. Having an EOR take that burden away from you is 100% worth it.
Is It Easier to Pay International Contractors?
Compared to hiring a full-time employee abroad, yes. So by now, you might be wondering why an employer would ever consider hiring full-time employees from another country. Why not just work with international contractors instead?
Because even though working with a contractor is far simpler than hiring an FTE, there are still important issues to consider.
Here’s a snapshot of the process:
- Put out a call for independent contractors from any country
- Review the applications and work samples
- Ask your favorite applicants for a quote
- Decide which applicant/quote works best for your budget
- Research everything you can about the laws in the contractor’s home country
- Put together a contract that outlines the terms of your agreement with the contractor and follows all the relevant laws
You won’t need to worry about Forms 1099 and W-9, which are required for US-based contractors. Instead, international contractors will fill out an IRS Form W-8 BEN and give it to you, the withholding agent. This form proves that the international contractor does not live or work in the US and is not subject to US taxes.
Along with doing the tax part correctly, the most important step here is learning the labor and employment laws in the contractor’s home country.
In some countries, what the US would consider an independent contractor actually counts as a regular employee. We strongly recommend speaking with a legal expert to make sure you classify the contractor the right way. Failing to do so can come with huge consequences.
And then there’s paying your international contractors. Thankfully, doing this is a lot less complicated than paying international employees.
How To Pay International Contractors
There are several payment methods you can use to securely and accurately pay your contractors abroad:
- Society for Worldwide Interbank Financial Telecommunications (SWIFT). Deposit money directly into the payee’s bank account. While secure, this method usually takes several days and requires a currency exchange fee and a transfer fee.
- PayPal. Use the employee’s name and PayPal email to quickly send payments. PayPal’s transaction fees will apply, and the contractor may need to pay additional fees to transfer the money from PayPal to their bank.
- Wise (formerly TransferWise). Securely pay contractors in over 80 countries with Wise. Contractors don’t need a Wise account to get paid, but you will need to collect their domestic bank details. This means lower fees for the independent contractor. Plus, Wise uses the mid-market exchange rate, making it one of the more affordable international payment systems.
- Papaya Global. An all-in-one platform, Papaya Global lets you onboard, manage, and pay international contractors. This gives it an edge over money-only services like PayPal and Wise. Papaya Global can also act as an EOR, so you can seamlessly transition a contractor to a FTE.
These are just a handful of the services that can help you pay international contractors. Payment software like PayPal and Wise charge you a percentage of each transaction.
Services like Papaya Global charge monthly fees. Papaya starts at $2 a month for contractor management services and $650 a month for EOR services.
Keep Your Sanity and Outsource Paying International Employees
If you’ve decided to hire employees abroad, congratulations! We 100% recommend outsourcing the payroll and compliance work to an EOR.
It simply saves time, money, and a ton of stress to hand these crucial workflows to someone who knows what they’re doing.
As a result, you’ll have the bandwidth to experience the good things that come with hiring international employees.
You’ll benefit from a wider talent pool of people with unique strengths and skills. You’ll discover opportunities to expand your company’s reach.
And best of all, you’ll enjoy the fruits of collaborating with a diverse group of people.