Paying local and US citizens working abroad can be challenging if your company has no subsidiaries with local authorities, a registered branch, or affiliate representatives. Since you have to pay the employees based on the standards and payroll of the local country and not yours, you have to make significant considerations to ensure you do it correctly. Before delving into the best ways to pay employees in foreign countries, here are three main factors to consider when paying employees working overseas.
The type of employment. Formal employees and expatriates usually get full protections and benefits in the host country compared to their counterparts. Therefore, you have to comply with all the local regulations when paying formal employees. Independent contractors, on the other hand, have fewer payroll issues. Usually, this is because they are more of B2B arrangements and come off as self-employed. However, the host country may view them as your employees, leading to misclassification.
Currency fluctuations. Currency fluctuations can affect the overall net pay of your employees working abroad. Therefore, it is advisable to set the employees’ salary in the home country’s currency. You can also decide to have a currency exchange agreement to offset currency fluctuations and adjust employee salary accordingly.
Tax. Your employees overseas will have to pay taxes, and you will also have to withhold taxes in your home country. To avoid double taxation, you should look out for tax treaties allowing credit use. The treaties may also offer social contribution exemptions or financial help for foreign employees.
By respecting the existing circumstances and laws in both countries, you can comfortably pay your employees and fulfill your legal and financial obligations without running into legal problems.
Paying Employees Working Abroad
You have four options to pay employees working overseas as follows
1. Use Your Home-Country Payroll.
If you send your employee to another country for a short project, you can pay them using your home-country payroll. Fortunately, some countries allow this arrangement and even have special regulations for the payments without requiring the company’s presence in the country. However, if you hire locals in the host country, you will have to create a host country’s payroll for social security and tax reasons. The employees won’t have your home country’s tax id or tax presence. For ex-pats living in the host country, you may have to maintain two separate payrolls as they will become tax residents.
2. Register or Make the Individual an Employee of a Local Affiliate.
Another option is registering your company in the foreign country where your employees are based. However, the approach may not be sustainable, especially if the only reason you are setting up the company is to pay a few employees. Also, the business may not be ready to establish a permanent presence in the host country, or the job is temporary. As such, most companies opt to look for alternative options.
A better alternative is to ask a local affiliate company or business partner to include your employees in their local payroll. Your company can then remit employee salaries through the affiliates for required contributions and withholding.
3. Make Them Leased or Assigned Employees.
Making your workers assigned employees is similar to lending them out to other clients. If your employee goes abroad to work as a customer service professional, for example, the international clients can pay them on your behalf. In this case, your employee technically becomes the international client’s employee. You can then pay your international client the equivalent of your employee’s salary, but they will handle your employee’s payroll.
Another option is to use a ‘shadow payroll”. The method works for companies with a division in the foreign country handling an entirely different business. In this case, if you need to send an employee abroad, you can ask the company in the foreign country to manage all the paperwork and payroll. Doing so gives the impression that the foreign division pays your employee working abroad. You can then reimburse the foreign company and pay your employee working abroad while remaining compliant.
4. Pay the employee as an Independent Contractors.
For self-starting projects, your company can pay employees as independent contractors. Since this method is only appropriate for specific projects where your company has little control over the employees’ work activities, it may not be the best option. According to most employment standards, you can’t classify your employees as independent contractors if they receive consistent benefits, have set working hours, and are subject to performance evaluations. The best professionals to pay as legitimate independent contractors are commission-based salespersons. Accountants and lawyers working on an hourly basis are also good candidates for this payment method.
Whether you are setting up your company in another country, testing waters in global markets, or have an employee working on a particular project abroad, paying an employee working overseas can strain your payroll and affect your entire business. It is, therefore, advisable to seek the help of employment lawyers. Not only will they help you understand all the necessary laws and regulations that you need to adhere to, but they can also give you the best recommendations based on your business needs.
Author: HKM Employment Attorneys LLP
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