Payroll and tax rules change from country to country, each with their own specific regulations. This means that with each financial relationship, you’ll have to calculate different payroll rates and tax deductions. If you’re not compliant with these varying legislations it can cause major problems for any growth strategy.
Here are the main things to consider when paying home and foreign employees overseas.
- How to Pay Overseas Employees
- Considerations When Paying an Overseas Employee
- Case Study: PAYE Tax and National Insurance for UK Expats
How to Pay Overseas Employees
Each country has its own payroll methods relating to salary and tax. For example, in Spain payroll tax is deducted quarterly and all employees have to pay social security contributions. There are a number of ways of paying employees overseas, which will be affected by the legislation of the country in question. Here are the main four:
Home Country Payroll
For shorter stints abroad, an employee can be kept on a home payroll. This does depend on the relationship between the two countries. However, if you’re hiring locally as part of your growth strategy, that employee will need a payroll from their country as it will cover the intricacies of tax and social security. This may also be possible for expats if they become tax residents.
Pay Them as a Contractor
If the projects or expansions are more freely-committed to and the employee has control over their own time, they could be classed as an independent contractor. For example, someone working on commission could be seen as a contractor.
Pay Them Through a Third Party
If you’re lucky to have an existing relationship in a different country to your own, it’s possible to payroll an employee through that foreign organization. This third party then acts as employer, taking charge of payroll administration. Your company remits the employee’s salary through them.
Outsource to a PEO
A Global Professional Employment Organization (PEO), such as Global Expansion, is one of the more efficient ways of offering payroll. They act as a local employer of record that can easily provide hiring, payroll and even tax compliance services for any employee, be they expat or local hire.
Considerations When Paying an Overseas Employee
There are several considerations you need to take into account when paying an overseas employee. For example, regulations will change depending on the type of employee you’re hiring. Formal employees such as locals or expats are entitled to many benefits and protections when working in a host country, meaning you must comply with local regulations.
Alternatively, many businesses have begun to hire contractors, which makes payroll responsibilities easier as contractors are self-employed. However, there can be the problem of misclassification. In some cases, a host country can view a contractor as your employee, depending on how you manage and pay them.
You also need to consider tax. With employees in other countries comes tax, which could have to be withheld at home. Consider any tax treaties between the two countries and whether they provide any credits or financial help in those respects.
Finally, when paying overseas employees you have to prepare for fluctuations in the exchange rate between currencies. You can either fix a salary in a home currency or set up a currency exchange agreement which would adapt an employees salary in the event of change.
Case Study: PAYE Tax and National Insurance For UK Expats
Here’s an example of the kind of regulations you would have to cater to if you were a UK-based company looking to pay employees overseas.
The PAYE Tax
UK organizations who have employees who work abroad still need to calculate and deduct PAYE tax. If your employee is moving from the UK to a foreign country, they must be given a letter stating the date they went abroad. It must also include:
- Gross pay from the beginning of the tax year to the date they left the country.
- Tax deducted from the beginning of the tax year to the date they left the country.
UK employees who spend most of their time abroad may be able to obtain full UK tax relief on any of their earnings. Furthermore, if your employee happens to be on an overseas contract, the host country may take direct tax deductions from their income. It’s worth researching what kind of tax obligations you may have to deal with when expanding into new territory.
UK National Insurance
If you’re a UK employer, making National Insurance contributions is mandatory. However, if your employees begin to work abroad, you’ll need to research what laws to comply with. These can change depending on which country you’re expanding into.
European Economic Area (EEA) or Switzerland: Your employee will normally make social security payments to the host country. In some cases, they must continue paying NI contributions but this depends on numerous factors.
Non-EEA members with a social security agreement with the UK: In these circumstances, your employee would pay contributions to social security in their country of residence rather than NI contributions.
Non-EEA member with no social security agreement: You as the employer must calculate and deduct NI payments for the first year of your employee’s work abroad.
Evidently, there are many moving parts to keep track of during expansion into foreign territory.
HR and Overseas Payroll
Implementing a growth strategy into a new market or territory only works with the right amount of planning. On top of payroll, you also have to consider the following:
- Mergers and acquisitions.
- Remote onboarding.
- Talent acquisition and employee screening.
This means that HR will have a full-time job managing personnel globally. Any expansion demands a well-developed global HR and payroll strategy. Without this, mistakes or missed opportunities can be costly, especially when it comes to things like tax compliance.
One thing to consider in these circumstances is working with a Global PEO. The right Global PEO has expertise in managing overseas payroll, as well as the other functions mentioned above. They can help to deliver full payroll compliance, with regard to any special trade relationships had between international governments. They help to provide a governing insight across your growing international team.
If you’d like to find out more about what a Global PEO can offer, click through our link below.
Here’s Why You Should Choose a Global PEO
From real-time data insights to compliance to remote onboarding, Global PEOs are the remedy to any issues experienced with expansion into foreign markets. Not only do they provide HR support, you can also benefit from a 70% reduction in initial expansion costs.
If you want to explore the top reasons you should be working with a PEO, click the link below.
Subscribe to our blog
Receive the latest GX blog posts and updates in your inbox.