The world of work is changing, and the way companies use contractors has changed too.
Contractors were traditionally thought of as an ad hoc solution for short-term projects or to help manage a temporary increase in workload. But today, more and more companies are seeing the benefits of using independent contractors on a more long-term basis as an alternative to permanent employees.
And in 2022, a contractor doesn’t necessarily have to be located where you are to work for you. By opening their doors to remote contractors, companies can get access to a vast pool of talented professionals around the world — and even save money at the same time.
Allowing your employees to work from anywhere can have significant benefits in terms of retention, talent attraction, and employee satisfaction. Plus, opening your eyes to hiring remote workers abroad gives you access to a vast talent pool and a better chance of finding the best people for your business.
But it’s not as simple as just adjusting your corporate policy to allow employees to work wherever they like. Both employers and employees need to be aware of the tax implications of working remotely from a different country — which can be complicated.
In this post, we’ll explore how taxes for remote workers actually work, and describe some of the pitfalls that employers and employees should be aware of.
What determines where an employee pays taxes?
Determining which country an employee needs to pay taxes in isn’t as simple as it sounds, as there are multiple factors at play. Generally speaking, there are four elements to consider:
1. The country where the employee works:
Whether or not the employee pays tax here might depend on how long they have spent in the country during the tax year, or whether they have significant ties to another country.
2. The country where the employer is based:
This can also have an effect, although the employee might not necessarily have to pay taxes in the company’s home country if they don’t live or work there.
3. The employee’s citizenship status:
This is usually not a consideration, but there are some exceptions. Most notably, US citizens have to file a US tax return each year, even if they don’t live or work in the US.
4. The employee’s tax residency:
This might be the place where they have residential ties, where they usually work, or where they expect to pay tax based on local tax laws.
What about double taxation?
Many countries have double taxation agreements (DTAs) with other countries, which means employees can avoid paying income tax twice on the same income. Exactly how this works varies from country to country.
Generally, the employee will have to file a tax return in both countries — which is usually the country they work in and the country where their employer is based — and pay 100% of the tax they owe in the country with the lower tax rate.
They may also have to pay tax in the other country, but the amount they have already paid will be deducted from their tax bill. In some cases, this means they won’t have any more tax to pay.
Remote work taxes: examples
Here are some practical examples to give you an idea of how taxes for remote workers might work in certain situations:
Example #1: Bill
A UK company allows one of its employees, Bill, to work remotely from his second home in France. Since Bill will live and work permanently in France, both he and his company will be responsible for French income tax and social security contributions.
Instead of setting up a legal entity there, the company agrees to employ Bill through a French employer of record, which employs him on the company’s behalf. The employer of record also withholds tax from Bill’s salary, and he will have to file a French tax return at the end of the year.
Depending on Bill’s residential ties to the UK and whether or not he makes additional income there (e.g. from renting out a property), he may also have to file a UK tax return and pay UK taxes. But since the UK has a double taxation agreement with France, Bill will be able to claim tax relief from the UK to avoid being taxed twice on the same income.
Example #2: Louise
Louise is a US citizen who spends part of the year travelling and working for her company, which is based in the US. She spends two months of the year in Spain and two months in Japan.
Because Louise works for an American company, she has American tax obligations and her employer withholds tax from her paycheque throughout the year. She will also have to file a US tax return on her income.
Depending on how long Louise spent in different countries during the year, she may also have other tax obligations. In this case, it’s likely that she didn’t spend enough time in any one country for this to have an effect. The exact amount of time that an employee needs to spend in a country to trigger a local tax obligation varies by country, but it’s often 184 days, or half of the year.
It’s still a good idea for both Louise and her employer to look into the tax implications of her working remotely from different countries to ensure there are no surprises at the end of the tax year.
Should companies be worried about permanent establishment (PE) risk?
Permanent establishment (PE) is a tax concept that means a company has enough activity in a given country to be liable for corporate taxes. In theory, PE can be triggered even when a company has no legal entity in a country, due to employees working remotely there.
The exact definition of PE is different depending on the country. But generally speaking, you shouldn’t run into any problems if the employees working there are only performing work that supports your main activity without directly generating revenue.
You can read more about permanent establishment risk in the remote era in our complete guide.
Other pitfalls to be aware of
Taxes are not the only factor you need to be aware of if you decide to hire remote employees abroad or allow your current employees to work from another country. Here are a few other considerations to keep in mind:
1. Work permits
As an employer, it’s important to check whether someone has the right to work in a particular country before you allow them to do so. Requirements vary from country to country, but employees often need a permit to work in a country for more than a few months at a time.
Many countries now offer remote work visas, which allow employees to move there and work remotely for a company in their home country for a set period.
2. Employer contributions
Tax treaties often include provisions for social security contributions (or the local equivalent), but it’s still important to check this before allowing an employee to work from abroad.
If your company is based in an EU country, you can consult the EU’s guidelines on the employer contributions you’ll have to pay for an employee working from another member state.
3. Intellectual property rights
Each country has its own intellectual property laws, and it’s a good idea to look into them before sending an employee to work abroad. The law in each country specifies whether intellectual property created by an employee automatically belongs to the employee or the employer.
The safest option is to add a clause to your remote employees’ contract stating that intellectual property they create on your behalf belongs to your company.
What about independent contractors?
Independent contractors are responsible for paying their own taxes and social contributions, usually in the country where they live and work.
This means that engaging contractors instead of hiring employees can be a good solution if you want to avoid the confusion around international taxes for remote workers.
However, whether someone counts as an independent contractor or an employee depends on the nature of the work they do — not the contract or agreement that’s in place. And independent contractor misclassification is a real risk that could have negative consequences for your organisation.
If you’re considering engaging a worker as an independent contractor instead of employing them directly, it’s important to verify that they’ll definitely count as an independent contractor where they live.
Hire remote employees with CXC
CXC can help you to compliantly hire employees in over 65 countries, thanks to our vast network of legal entities.
We’ll manage any tax reporting requirements for you, and help you to eliminate any risk of employee misclassification. We’ll even ensure you retain your IP rights in any country your employees operate in.
Have a question or need help?
Our friendly team is more than happy to help you clarify any questions you may have, even if it is unique or you are at an early stage of implementation.
Contact us today to find out how we can help you.