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A U.S. Employer’s Guide to Paying International Employees
July 15, 2024
Overseas talent is a valuable asset for your business, but paying them can be a legal and logistical minefield. Let’s examine everything a U.S. employer needs to know about paying international employees.
Big or small, U.S. companies today can easily tap into overseas talent with modern technology that enables remote work. But despite the sleek tech and cultural considerations, one basic thing remains: They need to get paid.
And paying international workers is undoubtedly more complicated than domestic payroll. You’ll face challenges like language barriers, cultural differences, currency fluctuations, varying salary expectations, and local labor and tax laws.
In this guide, we'll explore options for making overseas payments while staying compliant and competitive.
How to Pay International Employees
Before you start cutting checks, understand that there are legal and logistical prerequisites for paying employees beyond U.S. borders. The specific requirements vary based on how you establish your operations abroad.
Let's explore a few options for paying overseas employees and the scenarios they best suit.
Key Takeaways
- Options for paying international employees include using a global payroll provider, paying through your home country’s payroll, setting up a local legal entity, or outsourcing through a PEO or EOR.
- Local labor laws, tax regulations, and employment standards can be complex and present the biggest obstacles to hiring overseas — and there are steep consequences for non-compliance.
- Employers must consider the unique cultural differences in payment practices, local legal requirements, and the impact of currency exchange rates.
Pay the Employee on Your Home Country’s Payroll
There are a few situations that allow you to pay overseas staff via your domestic payroll. This can apply if you send a normally U.S.-based employee to a foreign country to work for an extended period of time.
- Foreign employer exception: If your employee is working in the U.K, you may be able to bypass local withholdings under this exception. Instead, your employee functions as “self-employed” and is obligated to pay local tax and social security filings.
- Payroll only registration: Some countries offer employers to register as “payroll only” and issue local payroll without registering as a local employer.
- Foreign payrolled: Some countries allow persons employed by a foreign organization without an in-country presence to self-declare as “foreign payrolled” for tax purposes.
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While these are workarounds, generally, if you hire someone who lives permanently in another country, you’ll need to set up a separate payroll in that country.
Use Secondment or Leased Employment
Another option is to place allow your U.S.-based employee to temporarily work for another company registered in another country, also known as secondment. They’re still employed and paid by you, but they do their job at the other entity.
Leased employment is a form of secondment where you create “floating employees” by suspending their official employment. While overseas, they’re paid by an agent who then sends their services back to your company.
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Set Up a Legal Entity Abroad
It’s possible to set up a new legal entity in the country where you want to employ workers, but this takes time and resources (and local employment expertise). It’s only really a viable option if you plan to establish a long-term presence in that country.
If you do plan on expanding overseas, there are three types of local entities:
- Representative office: A foreign organization’s local presence that engages in non-commercial activities such as market research and customer support but doesn't directly conduct business or generate revenue.
- Branch office: An extension of a parent company established in a foreign country to conduct business activities, including sales and contracts, while remaining legally part of the parent organization.
- Foreign subsidiary: A separate legal entity owned by a parent company, established in a different country, that operates independently and conducts full business activities. These types of entities may be eligible for local tax rebates.
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Outsource With an Employer of Record (EOR) or Professional Employer Organization (PEO)
Rather take a more hands-off approach? Some businesses choose to pass of responsibility to local entities via an EOR or PEO.
- Employer of Record: An EOR is an entity that legally takes responsibility for your employees in a particular country. It signs a service agreement with your business, agreeing to pay the workers’ wages and perform hiring, onboarding, and other HR tasks.
- Professional Employer Organization: A PEO functions similarly, but serves as a co-employer, while your U.S.-based organization remains the legal employer and controls the daily operations.
Both of these approaches provide local expertise and the resources to manage employees in more than one overseas country. In this setup, international staff are normally entitled to benefits such as health insurance and social security.
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Use a Global Payroll Provider
For a simpler way of managing international salaries, use a global payroll provider. There’s no need to set up local payroll vendors or multiple systems, and the provider will ensure you stay compliant with local regulations.
Global payroll providers can handle payroll operations in multiple countries and currencies, as well as pay your regular employees. They consolidate all your employment data into a single platform and usually include other HR features like time tracking and employee self-service.
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Take an Alternative Approach: Pay Independent Contractors
Another option is to hire overseas independent contractors rather than employees. This means contracting on a short-term basis for a specific project and paying them per project or hour with a written agreement. Companies often do this when they need specialist roles, such as consultants.
The advantage is that contractors pay their own taxes, contributions, and insurance, and you don’t have to onboard them as you would with a regular employee. It’s simpler and more affordable for the employer, but countries have differing definitions of what constitutes a contractor, which may limit how you use them.
U.S. Tax Obligations When Paying Foreign Employees
Taxes are one of the biggest headaches of paying wages to overseas employees. Every country has different tax laws, and reporting deadlines vary. Compliance is critical, and it’s best to get help from an expert.
One thorny issue is double taxation. U.S. companies must file taxes with the IRS, but your international employees are likely subject to taxes in their own country. So, you may be making double payments for benefits, social security, and health insurance. However, some U.S. expats can use income exclusions and foreign tax credits to avoid this.
If you employ U.S. citizens (or green card holders) to work abroad, they’ll still be subject to U.S. payroll taxes and Form W-2 income reporting. But pension contributions may change, as pensions such as IRAs and 401(K)s have specific contribution limits and rules when the individual is working overseas.
If hiring overseas contractors, you’ll need to navigate IRS form W-8BEN. Foreign individuals or entities who receive income from a U.S. business need to provide this form to the firm that’s paying them. It certifies that the contractor isn't a U.S. citizen and not subject to U.S. withholding tax.
Whatever your status, you must keep accurate records of your taxes. Tax authorities in the country where you operate may decide to conduct an audit at any time.
Learn More: How to Hire Remote Employees
Challenges and Risks of Paying International Employees
The more international employees you hire, and the more countries you operate in, the more complex your payroll becomes. Here are a few of the main challenges and risks.
Currency
When making payments in different currencies, you’ll need to be aware of fluctuating exchange rates and fees. Rate fluctuations can significantly impact the actual amount employees receive, potentially causing financial instability and dissatisfaction.
Legal requirements in many countries mandate payments in the local currency, and failing to comply can lead to penalties and legal complications. Additionally, paying in a foreign currency might incur higher banking and transaction fees for both the employer and the employee, increasing costs and administrative burdens.
Cultural Differences
Foreign employees may have different expectations about when they’ll be paid, extra bonuses, and benefits offered.
For example, many workers in India may expect to receive a celebratory Diwali bonus during the festival season. And while many U.S. companies pay employees on a bi-weekly schedule, workers in Japan are usually only paid once a month.
Compliance
Compliance with global regulations is one of the biggest challenges. There are serious penalties for misclassifying employees as contractors, even unintentionally (some countries count people as employees if they’re contracted for a long period of time).
Also, look out for laws on minimum terms of employment, maximum hours, and overtime limits. There’s also international data privacy laws such as GDPR in Europe.
Business Entities
Setting up a business entity in another country is fraught with bureaucratic and financial risks, including being exposed to higher taxes.
If the local tax authorities classify your business as a permanent establishment (and each country has its own definition of this), new taxes will apply. This may include double taxation on the same income in your own country and the country that hosts your entity.
Need an Easy Way to Pay International Employees? Paylocity’s Global Payroll Is the Answer
Paying international employees is complicated, but you don’t have to bear the burden alone. With Paylocity’s global payroll solution through Blue Marble Payroll, it’s easy to manage overseas (and domestic) employees in one place.
The global expansion and consulting services team will help you:
- Launch business entities and set up in-country bank accounts
- Navigate local laws and requirements in 100+ countries
- Create competitive compensation and benefits packages for each market
- Hire and onboard local talent.
Request a demo to learn more about Paylocity’s global solutions.
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