Paying your employees should be simple. They do their jobs, and at the end of the pay period, they receive wages in their bank account. It’s very simple … unless you count employer taxes. And benefit deductions. And withholding. Oh, and all the other calculations that can carry big penalties if completed incorrectly.
So if handling payroll within your own country can be rife with opportunities for confusion, what about hiring internationally? Hiring remote employees and contractors from other countries can impose even further — or different — requirements than the ones you’re accustomed to.
To successfully navigate this process, you’ll want to select your countries very carefully and know what classification of worker you are hiring. Perhaps most importantly, you should choose a reliable third-party administration partner to ease your administrative headaches and let you get back to conducting business.
How Does Payroll Vary Between Countries?
Payroll differences between countries aren’t just a matter of how much you need to pay your workers. There are also variances in regulations regarding taxes, required benefits, and contractor classification. You’ll need to consider these hidden costs when opening your hiring pool to certain countries.
Let’s say you’re an employer based in the United States and want to pay remote workers in Mexico. The minimum wage might be lower in Mexico than in the U.S., but there are other components to overall compensation costs. Employer taxes are much higher in order to fund certain public benefits, and there are even required bonuses in addition to regular pay. These are only two of the unique examples of requirements employers must adhere to.
In addition, there are also standard benefits not traditionally offered in the United States. For example, it is not uncommon for employers in Mexico to offer food vouchers to their employees as a regular benefit. This is something you might not be aware of without consulting an international payroll specialist.
Paying an International Employee
Oddly enough, one of the additional requirements of hiring an international remote employee can make the process much easier. Unless you already have a legal presence in the country you’re hiring from, you’ll need to engage an employer of record (EOR).
An EOR is able to hire employees on your behalf because they have established a presence in the country of hire. Because the EOR is technically the employer, you are not responsible for the administration of or compliance with any international hiring requirements. The worker is receiving wages from an employer within their own country, so there are no international considerations from the employee’s side.
Employers of record aren’t necessarily established in every country. When selecting an EOR to work with, make sure it serves the countries you would like to hire from. The EOR should also be able to advise you which countries would be most beneficial for your business purposes.
What if you don’t want to pay the cost of an EOR? The alternative is to expand globally and establish a physical presence in the country where you would like to hire. The process for accomplishing this is both time-intensive and expensive. Unless you will be hiring many employees long-term, it is usually more cost-effective to retain an EOR.
Paying an International Contractor
Hiring a contractor instead of an employee is not nearly as daunting when it comes to meeting requirements. In most countries, you do not need to offer benefits or paid time off, and you don’t necessarily require an EOR. In addition, you are unlikely to be responsible for the litany of employer taxes mandated by many countries.
When you hire an international contractor, you have a few more options regarding how you set up payment administration. You can attempt to perform the tasks yourself or engage a third-party administrative partner, usually a professional employer organization (PEO). A PEO typically handles the payment and collects necessary information from the contractor. Some will even offer assistance in drafting contractor agreements and ensuring they are compliant with regulations in the country in question.
Whether you do or don’t partner with a PEO, the contractor is recorded as being paid by you rather than a third party. This means that you are ultimately liable for any errors in adhering to administrative requirements. Hiring a PEO to process payments and provide guidance on foreign regulations can minimize this risk but not eliminate it entirely.
If you don’t have the expertise and internal resources to investigate specific contracting rules in other countries, seek help. Penalties for misclassifying employees as contractors can be substantial. Not only could you incur expensive fines, but certain nations will suspend your ability to hire contractors from their country.
Individual countries all have their own stipulations for contractor classification, but it generally hinges on the degree of independence the worker has. Things like length of engagement, the worker’s schedule, and expense reimbursement can all factor into worker classification.
Even being overly generous can get you into trouble. If you offer benefits to your independent contractors, it could be an indication that they should be classified as employees. And since penalties for misclassification fall on employers rather than the contractors, you will be solely responsible for the fallout. Hiring a PEO to help avoid these missteps is worth strong consideration.
Keep It Simple
Maintaining compliance while paying international contractors and employees can be a problem, but it doesn’t have to be your problem. So avoid unnecessary risks and tedious regulations research by hiring a third-party specialist appropriate for your needs. This way, you can worry less about paying your international hires and more about leveraging their talents to help your business thrive.
