Going global with your business brings new payroll challenges. When operating at the international level, a single approach to paying employees will not suffice. Laws differ between jurisdictions, so you will need local expertise regarding compliance, administration, payroll processing, and money transfer fees for different currencies (see this article outlining the key considerations of international payroll processing).
There are many aspects of international payroll processing that need to be understood to ensure compliance. Errors can cause upset amongst employees as well as penalties associated with non-compliance. These penalties will not only hurt your finances but could also damage your company’s reputation abroad. To avoid this, you will need to consider:
- Different languages
- Time zones
- Local culture
- Local currency & money transfer fees
- Local tax rules
- Local employment law
- Local benefit laws
- Different payroll management systems
Register as an employer
First, you need to register as an employer in each area of business operation, whether you have one employee or hundreds. That will usually involve opening a company and registering with the tax authorities in the areas where your workers are tax resident. There are exceptions to this, though, so check the rules in all countries you intend to run payroll in. The complexity of this process, and the time it will take, will vary between countries, so always assume it will be a lengthy process.
Most countries levy income tax on workers, but rates vary widely. As is central to all aspects of international payroll processing, check the rules for each country you intend to pay workers in. Income tax can be federal, regional, or state-based. Either way, it will typically involve monthly withholding of income from pay as it does in the UK.
Federal income tax is levied by the national government. In some countries, workers are also required to pay an additional regional tax rate. Ensure you are aware of the income tax rules, to whom they apply, the process, the rates, and any relief that may be available in an area.
In some countries, social security contributions are mandatory for employers and employees. This will be the equivalent of National Insurance in the UK and covers things like pensions, healthcare, and welfare benefits. In some countries, there will be treatise in place regarding foreign workers to avoid double payments. Whether these will apply will depend on your employees’ nationalities and their status in the country you are paying them in.
In every country you will be required to pay payroll tax. This is usually based on an employee’s earnings and withheld on their behalf by you as the employer. However, in other states, payroll tax is calculated differently.
In Australia, for example, it is based on the total wages of all employees in the organisation. Like income tax, payroll tax can be collected by either federal, regional, or state governments. Like social security payments, payroll tax funds healthcare, unemployment insurance, and worker injury compensation.
Filing taxes & notifying authorities
Each country will have different systems and entities that deal with tax and social security. While HMRC deal with both in the UK, this is not always the case. Some countries have separate organisations for each. This can make filling taxes and notifying the relevant authorities that bit more complicated, so do thorough research to ensure compliance.
Local employment law
It’s important to study local employment law for each business operation area as this will affect payroll. Key areas of employment law relating to payroll are minimum wage regulations, working hours, paid holiday, absence, and sick leave. Health and safety legislation is also crucial as it will affect cases of injury and illness.
To ensure the money reaches your employee’s bank accounts on time, and there are no nasty surprises in fees, establish a treasury process in each operation country. In some nations, it is a requirement to have a local bank account to pay social security and taxes. Even if this is not the case, it can be easier in terms of payroll, accounting and currency issues.
Choosing a payroll strategy
The complexities of international payroll require a strategy. If you think you might struggle to manage processing, compliance and errors inhouse then consider outsourcing your international payroll. There are many global and local services, so do some research to find the best fit for your business. If you want to proceed with in-house payroll processing, make sure you have the right expertise and local knowledge. International payroll is a complex topic and a challenge for those undertaking it. Make sure you do further research before setting up your payroll abroad, with a particular focus on the local rules in each country of operation.