These days, an employee doesn’t have to be physically in your office to work for your company — or even in the same country.
Opening your eyes to working with employees who aren’t located in your country can bring great results to your company — but there are a few administrative hoops you’ll need to jump through.
The first one is figuring out how to pay international employees — which you need to do in a way that’s legal, compliant and secure, and doesn’t leave anyone out of pocket because of fluctuating exchange rates.
When might you need to pay international employees?
There are many different situations when you might need to pay someone who lives and works abroad.
- When you want to penetrate a new market: You might be planning a full expansion, but need a few employees there ahead of time to test the waters.
- When you want to sell your product abroad: Even when the majority of your team is based in your home country, you might need to have one or two local sales reps in the countries you sell in.
- When a current employee emigrates: An employee may decide to move abroad for reasons entirely unrelated to work, such as to follow a spouse who’s been offered a position overseas.
- When someone has the right skillset for a short-term project: Skills aren’t defined by location, and sometimes the best person for the job isn’t located where you are.
Potential problems with paying foreign employees
While you might be perfectly fine with your employees working from wherever they choose to, there are several potential problems that you might run into.
When you hire internationally, you might face issues with double taxation.
Employees generally have to pay income tax in the country they work in, but your own country probably requires you to file taxes for your employees too.
This can make the cost of paying an employee internationally unnecessarily high.
However, many countries have tax treaties in place specifically to avoid this.
It’s important to learn about the various tax treaties your country is part of before hiring an international employee — or work with an external tax advisor with experience in this.
Social security and other contributions
Similarly, most countries require employees and employers to make contributions for social security and other benefits such as unemployment insurance.
This can quickly get complicated if you’re paying someone in a different country.
Again, tax treaties sometimes provide an exception to this, so it’s important to do your research about any treaties in place.
Local payroll customs
Every country has its own customs when it comes to paying salaries.
In Argentina, for example, salaries are divided into 13 instalments, not 12.
The 13th is split into two semi-annual instalments, so employees effectively get a small bonus twice a year.
The situation is similar in Italy, where the 13th instalment is paid as a sort of Christmas bonus at the end of the year.
Other countries, like Armenia, Greece, Portugal and Spain have similar customs, though they all manage this slightly differently.
And in many others, like France, Belgium and the Netherlands, this is optional for employers, but customary.
You need to know about these customs in any country you plan to pay employees in.
When you’re paying wages to international employees, you also need to think about the currency in their home country, if it’s different to yours.
Since exchange rates change constantly, your employee could end up getting short-changed if you agree on a salary in your home currency.
To avoid this, you might want to form an agreement based on the amount your employee will receive in their own currency, so their paycheck is the same even if the exchange rate changes.
When you’re paying employees internationally, even just transferring money from your bank account to theirs can sometimes be complicated.
If you’re used to paying employees by cheque, this likely won’t work as their bank won’t be able to cash it.
And even paying by bank transfer can get expensive when you’re sending large sums overseas.
There are many companies offering low-cost, international payments, which you could look into for paying your employees.
However, it’s worth noting that they don’t all operate in every country and that they do still charge fees for international transfers — albeit usually smaller ones than brick-and-mortar banks.
How to pay international employees: what are your options?
If you’ve never paid an international employee before, it can be tempting to just put their payments through your payroll system as you usually would and hope no one notices — especially if they’re only going to be working abroad for a short period.
However, you could easily run into compliance and legal issues down the road, so it’s much better to figure out the best way of paying international workers ahead of time.
Here are a few options you could consider:
Keep them on your home payroll
If you’re sending a current employee abroad for just a short stint — of a few months, say — you may be able to simply keep them on your home payroll.
However, this depends on the country you’re based in, the country your employee will be working in, and any tax treaties that exist between the two.
Keep in mind that even if there’s a treaty in place that allows your employee to work abroad for a short period, the host country might still tax them and require a work visa.
It’s always best to look into the law in the specific country your employee is going to — or seek advice from an external accountant or tax expert.
Pay them through a subsidiary, branch, or representative office
The traditional way of paying employees abroad is to establish an entity, such as a branch, representative office or subsidiary, in the country where they’re based.
This way, you can legally pay them and manage all tax, social security and other obligations through that entity.
Some countries even offer the option for companies with no local entity to create a ‘payroll-only’ registration, which means you can compliantly pay employees without having to open an actual branch.
However, this method can quickly become expensive and time-consuming.
It’s also sometimes just not worth the trouble if you only need to hire one or two people, or you’re just testing the market before launching a full expansion.
Pay them through a trusted third party
Another option is to pay your employees through a partner based in the country they work in.
This could be a business that’s affiliated with yours, or even a customer.
From a legal and tax perspective, the third-party company acts as your employee’s employer, takes care of tax and social security obligations and manages payroll.
You just have to transfer them the required salary.
But, while this may be a perfect solution for some companies, it doesn’t work for everyone.
Any company you ask to take on this responsibility needs to be a trusted partner with whom you have a solid working relationship — and you probably don’t have this in every country.
This solution would also likely take up too much time and resources if you want to employ in multiple countries.
Pay them as an independent contractor
Alternatively, you may be able to pay your international workers as independent contractors.
This is an attractive solution, as it means you’re only responsible for their fee and not the tax, social security and other obligations that normally come with hiring an employee.
However, this approach needs to be used with caution, or you could face issues related to worker misclassification.
Your relationship with the worker must genuinely be one of an independent contractor and their client — and not an employee and their employer.
Normally, this means that you can’t exercise control over how, when, and where they do their work, and that they’re free to work for other clients.
If the worker’s home country determines that you have an employment relationship, you could be held responsible for the tax and social security contributions you would have paid if they were an employee — and even face legal consequences for employing someone illegally.
Outsource payroll to an external payroll provider
A final — and simple — option is to consider outsourcing your international payroll to a company that’s used to dealing with it.
These companies are known as employers of record (EORs) or global employment organisations (GEOs).
Generally, they operate through a web of legal entities around the world, which means they’re able to locally hire employees on your behalf.
As well as providing payroll services, they also handle administrative processes like tax declarations, onboarding and other HR functions.
Secure and compliant international payroll processing with CXC
If you need an easy, secure, and compliant way to pay your international employees and independent contractors, CXC can help.
We manage payroll in over 65 countries globally, thanks to our network of legally entities and dedicated partners across the world.
We provide international payroll solutions for some of the world’s leading tech companies, from start-ups to enterprises — and work hard to eliminate any unnecessary risk exposure for your business.
Get in touch to learn more about what we could do for your company.