How can U.S. Companies pay international employees?
Expanding business operations internationally for U.S. companies can be complex and challenging, with different legal, administrative, and financial considerations to keep in mind.
But fear not, we will explore four methods that U.S. companies can use to pay their international employees and provide the benefits of doing it.
- Set up a legal entity
- Use an employer of record (EOR)
- Outsource payroll
- Pay employees as contractors
4 Differents ways to pay international employees
Set up a legal entity to pay international employees
One of the most common ways for U.S. companies to pay international employees is by setting up a legal entity in a foreign country. This involves establishing a branch, subsidiary, or representative office that complies with the local laws and regulations. By having a legal presence in the country, companies can open local bank accounts, hire employees, and ensure compliance with tax and employment laws. While this approach offers more control and flexibility over the payment process, it can be time-consuming and expensive to set up and maintain.
Use an employer of record (EOR) to pay international employees
Another option for U.S. companies is to use an employer of record (EOR) service. An EOR acts as an intermediary between the company and the international employees, handling all the legal, administrative, and payroll responsibilities on behalf of the company. This allows the company to hire employees quickly and easily without the need for setting up a legal entity in a foreign country. The EOR takes care of payroll processing, tax withholdings, and compliance with local labor laws, ensuring a hassle-free payment process. This option can be particularly beneficial for companies looking to enter new markets or test the waters before committing to a full legal entity setup.
Outsource payroll to pay international employees
To save time and money, many companies choose to outsource their payroll processes to a third-party provider. Outsourcing payroll for international employees can be beneficial as it allows companies to focus on their core business activities, while experts handle the complexities of payroll calculations, tax filings, and compliance.
By partnering with a reputable payroll provider with global expertise, companies can ensure accurate and timely payments to their international employees, regardless of the country they are based in. This option not only saves administrative resources but also ensures compliance with local tax regulations and labor laws, reducing the risk of penalties or legal issues.
According to research done by payroll experts, the average cost of processing payroll in-house is $2,700 per year per employee. The cost of outsourcing payroll is typically much lower, ranging from $50 to $200 per year per employee. This means that companies can save an average of $2,500 per year per employee by outsourcing payroll.
Pay employees as contractors
In some cases, companies may choose to pay their international employees as contractors rather than hiring them as full-time employees. This approach can offer flexibility and cost savings, especially for short-term projects or freelancers. However, it's essential to carefully navigate the legal and tax implications of classifying workers as contractors, as misclassification can result in legal consequences and financial liabilities. Before opting for this method, it's crucial to consult with legal and tax professionals to ensure compliance with local regulations.
3 Benefits of Hiring International Employees
Now that you know the four main ways to pay international employees, let’s dive into the reasons why you’d want to hire international employees in the first place. These reasons include:
- Diverse people, and diverse ideas – In the global marketplace, diversity is paramount. Hiring international employees means adding new life experiences and ways of seeing the world to your team.
- The opening of new markets – Bringing your business to new markets is an exciting—and scary—proposition. However, if you have someone who can fill you in on their country’s culture and business practices, you’ll have the knowledge you need to navigate new markets.
- Increased productivity – While “working around the clock” sometimes carries a negative connotation, hiring globally sheds new light on this phrase. That’s because an international employee will likely be starting their day while you’re winding down (and vice versa). Harness the power of time zones by going global.
4 Key Points to Consider as a US Company Paying International Employees?
Be aware of the local tax and employment laws:
Tax needs to be a significant consideration for both the company and the employee when setting up payroll for international employees.
US citizens or residents are subject to US federal income tax withholding, although there may be some exemptions.
However, for non-US employees, companies need to look at tax obligations they may have as an employer.
- Countries such as Bermuda offer a one-year residency certificate for employees working remotely for employers overseas to make it easier for workers without as much of a tax burden.⁴
- Other countries, such as Belgium, may have tax treaties that provide exemption on Belgian income tax if the contracting company is based in the United States. However, if they stay past a certain amount of days, they will become a Belgian resident for tax purposes and may have to pay income tax. Depending on the nature of the work the employee is carrying out and interaction with the market, the business could be taxed as a Belgian establishment, although post-COVID-19, it may be less of a consideration.
Because local and foreign taxes will differ, especially as more countries look to attract digital nomads and overseas employees, it’s crucial to work with a tax professional in the country the company is headquartered in.
Some countries may change their obligations, while others may have treaties for tax exemptions with certain countries. However, tax obligations for both employers and employees will need to consider the company’s headquarters and their tax rules for paying overseas employees.
Laws in the foreign country
Different countries have laws around what constitutes residency and when an employer must provide benefits in line with other employers in the country.
Much of this will depend on where the employee pays taxes, where the company is headquartered, and the local laws in relation to workers’ rights.
For example, some countries within the European Union, such as Spain, require companies to offer minimum terms of employment when hiring employees.
This needs to include the minimum number of paid holidays for full-time employees, which is 30 calendar days.
Choose a payment method that is convenient for your employees:
Another challenge that often comes up for businesses wanting to pay international employees is the most cost-effective way to pay in local currency.
Determining the best foreign exchange rate is important, as businesses stand to lose a lot of money otherwise in fees and costs.
By offering convenient payment methods, companies can enhance employee satisfaction and minimize delays or complications.
Be transparent about your payment terms:
Clear communication is key when it comes to paying international employees. Companies should establish transparent payment terms, including details about the frequency of payments, currency conversion rates, and any additional fees or charges. By setting clear expectations, companies can avoid misunderstandings and build trust with their international workforce.
Conclusion
Paying international employees can be a complex task for U.S. companies. With Ontop, we make it easy. Whether it’s payroll, legal hiring, contract administration, or compliance - we’ve got you covered. Book a demo with us to see how we can simplify your business operations.
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