Did you bet your bottom dollar that remote work is good for business? Then, your bottom line is probably better than ever.
Now, it's time to keep growing, potentially by expanding into other countries.
If you lead a U.S.-based company, one option is to relocate some of your U.S. employees — but that is not the only or even necessarily the best choice. Why?
Well, for one thing, international moves are expensive and will likely include the need to apply for visas or work permits for your employees — which is a time-consuming process.
Instead, your company should consider the value of hiring local employees with on-the-ground experience in the different countries where you're expanding. They know local vendors. They understand cultural nuances. They get it.
Of course, there are risks, too. Before you begin your global expansion, ensure you know all the ins and outs of compliantly paying international workers.
Key takeaways:
- Unless you're hiring 30 or more employees in one country, establishing a legal entity there probably doesn't make financial sense.
- Payroll requirements, labor laws, tax liabilities, and benefits obligations vary from country to country.
- An Employer of Record can help U.S. employers compliantly pay full-time employees and contractors.
Employee or Contractor? Properly Classifying Foreign Workers
From diversification to driving additional revenue to engaging with different business methods, there are many good reasons to grow internationally.
But once you've embraced expanding your business, you must decide how to make it work. That means deciding who you'll hire and how they'll work with you.
Full-time employees or independent contractors? That's the first question. The answer will impact how you run payroll, meet payroll tax obligations, and navigate compliance with local labor laws.
It gets tricky when it comes to contractors, as the local laws governing misclassification differ by country, and there can be serious consequences for misclassification.
For example, in Brazil, contractors can be hired as micro, small, or even medium-sized businesses. Hiring Brazilian workers as contractors can lower an employer's tax burden. But when the classification is wrong, the costs are high. Just ask Uber.
Many European countries, like Germany, also levy hefty penalties against companies that misclassify their workers.
For example, Scheinselbstständigkeit, a German term that translates to "false self-employment," can lead to obligations from back taxes and late-payment penalties to being legally required to hire the freelancer as a full-time employee.
Understanding Payroll and Tax Laws for International Employees
Whether you employ full-time workers or freelancers (or both), compliance concerns don't stop with correctly classifying your foreign workers. You also need to pay them compliantly.
Every country has its own regulations governing payroll, taxes, and employee rights. U.S. companies must follow the local laws of every country where they hire to ensure compliance.
This includes:
- Income tax withholding and reporting
- Social Security or national insurance contributions
- Overtime rules and paid time off policies
- Currency and payment regulations
Companies must also ensure timely and accurate payments in the employees' local currency. However, fluctuating exchange rates can make that a challenge, potentially leading to overpayments or underpayments.
One way to ensure compliance is by working with local payroll providers in each country where you employ international staff since they're experts on their region's laws.
However, managing all of the vendors might become a job in itself pending how many locations you have employees distributed.
Choosing the Right Payment Methods
Determining how you'll pay international employees and contractors is critical to ensuring timely and cost-effective transactions.
Companies must consider factors like transaction fees, exchange rates, and the availability of payment platforms in the recipient's country.
For contractors, you'll also want to discuss their preferred way to get paid, as it might differ from how you pay your employees.
Some common payment options include:
Clear communication about payment schedules and methods is essential to set expectations and ensure a smooth process.
One way to streamline the process and minimize compliance concerns is by working with an Employer of Record (EOR). More on that later.
Navigating Tax Compliance for International Employees
U.S. companies must also meet their tax compliance obligations with the IRS.
This includes proper documentation and reporting for international employees and reviewing tax treaties between the U.S. and the employee's home country to avoid double taxation.
Totalization Agreements, which prevent dual social security taxation on earnings, are available between the U.S. and specific countries. However, the benefits of such agreements differ. So, ensuring your company complies with all applicable laws is essential.
In most cases, U.S. companies aren't required to withhold taxes for foreign contractors. However, U.S. laws still require you to complete the W-8 BEN form that certifies a freelancer's foreign status for tax purposes.
Ensuring Compliance with Local Employment Laws
If you run a U.S.-based company, you're already familiar with regulations like the Equal Pay Act and Title VII of the Civil Rights Act of 1964. But expanding into other countries means abiding by the laws where your international employees are based.
Local employment laws across the globe govern minimum wage, working hours, mandatory benefits like health insurance or pensions, and termination processes, including potential severance pay.
Laws and the penalties for breaking them vary widely, however. It can be surprisingly easy to make a misstep if you don't have the right guidance. Comforting, right?
Opening a Local Entity vs. Working with an EOR
We hear you. We do. And we get it. This is a lot to handle.
Still, it all boils down to making one of two choices.
Compliantly paying international employees means you must establish a legal entity in each foreign country where you employ workers. Or, you can partner with an EOR.
The first choice isn't just time-consuming. It's expensive. And it's not practical if you only plan to bring on a few folks in a specific country.
Unless you're planning to hire, say, 30 employees (or more) in a particular country, it makes more sense for your company to work with an EOR. It's simply more affordable, not to mention way less time-consuming.
Pay Your Foreign Employees and International Contractors with RemoFirst
Working with an EOR like RemoFirst helps companies lower costs. It makes it possible to centralize your global payroll system even when paying freelancers and contractors across borders in multiple currencies (without the headache of tracking exchange rates).
In addition to payroll, RemoFirst also takes on responsibility for:
- Proper classification of workers as employees or contractors
- Onboarding, which can include shipping equipment
- Employee benefits administration, including health insurance
- Compliance with local labor laws and tax regulations
- Creating employment contracts and ensuring IP protection
Want to learn more? Schedule a demo with us today.
