How to Pay International Payroll Employees

Cody Cromwell
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Consider the Type of International Workers

on Your Payroll

Many of your company’s employees work for you overseas. In order to give them the same conditions as your other employees in your home country, you will need to pay them in the same way.

As an employer, you will need to understand the tax requirements of your country.

You will also need to deal with obtaining work permits for your employees, as well as determine how to pay your employees’ payslips and other payroll-related costs.

Your company’s tax implications will depend on the employee’s country of domicile and their citizenship, as well as an international payroll corporation’s eligibility to work in your country.

These are some of the factors you will need to consider before you can begin to consider your company’s options for paying your international employees.

US Employees Working Overseas

If you work for an American company that is sending you overseas, you may need to familiarize yourself with international payroll requirements.

Some of your employees will need to comply with international labor laws which vary significantly from state to state within the US.

Make sure that you are familiar with your company’s policies regarding payroll tax rates and withholding.

Also, make sure you follow the proper procedures when paying your employees.

Native International Employees

In recent years, as digital payment methods have advanced and become more rampant in business operations, the questions of how to pay workers outside the country have been at the forefront. This is especially so when dealing with individuals from different countries and different cultures.

In order to minimize tax liability and liability risks for both parties, employers may want to start recognizing payment methods as the two principal methods of handling payment for their international payroll:

  • Standard International Payment Methods
  • Wire Transfers/International Funds Transfer
  • Wire Transfers/International Funds Transfer Electronic Payments
  • Checks
  • Checks Cash

As the simplest of the three, when it comes to payroll, the wire transfer, or international funds transfer, is usually the preferred method as it’s easy, quick and fairly secure. Wire transfer orders usually get filled within 24 hours and are highly traceable with the use of the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network.

Electronic payments are also another popular method of payment, especially in the United States. They usually take 48 hours to receive and are highly traceable as well. This method is also popular because the company is able to track how much is being paid to the employee. Electronic payments are also commonly used by U.S. companies sending payment to customers located internationally.

Hiring Native International Workers as Independent Contractors

International payroll is another process that can be very challenging. It is quite common for international payroll companies to charge high fees for their services, even higher than those of the country from which the employee is working.

In terms of the actual processes, it is not difficult to pay international employees…it is the costly third party fees that are the problem. For larger companies, the cost of paying international workers can become prohibitive.

Features to Look for in a Process to Pay your Employees:

The payroll module should be as easy as possible to use. This is particularly true if it connects through the internet. It should be possible to save entries as offline for later. It should not be necessary to save records offline if new information is not relevant to the process. The employee should be able to enter the information needed to track payrolls online, either through a web-based interface or spreadsheet interface. It should be possible to do this wherever the employee is located.

The system should be able to easily print an itemized report showing the payroll information needed by both the employer and employee. The system should also be able to generate the necessary paper forms for the employee to submit to the government to comply with payroll laws. While there are slight differences between payroll systems from different companies, the format of these forms is not usually that different.

Ensure Business Is Set Up to Run International Payroll

The first and most important step in running an international payroll is to ensure your business can finance the payroll fees. The IRS requires you set up a formal international payroll program through a qualified payroll service provider and you will need to set-up a Federal Taxpayer Identification Number for each person. This number is an IRS number issued by the IRS and assigned by the Federal Taxpayer Identification Number (ITIN) office. ITIN numbers are assigned on a first-come, first-served basis.

Choose a Pay Cycle

Your best bet is to choose the least common pay cycle for your organization. While you may have a need to change the timing of payday, this will increase your chances of facing payroll complications. For example, if you change the payout once a month, you will have to take extra steps to add extra paydays or adjust the payroll schedule.

By avoiding the least common pay cycle, you can keep your reporting more consistent. You will be able to know more accurately how much and when you have paid employees.

Track Work Hours

The simple and safe way to track employee time and pay them for their work is by a time clock or an employee time clock. Although employees can use their cell phones to check their hours online, using the time clock is still the best way to ensure that they are spending the appropriate amount of time working. The time clock system creates a record that automatically calculates and totals hours worked. Both the employee and the employer can easily access the time clock records, which eliminates discrepancies between the records.

The Two Types of Time Clock Systems:

The employee time clock is the most common type of time clock and is used where the employee operates, controls, or regulates equipment. Employee time clocks are found in manufacturing facilities, warehouses, offices, and retail businesses.

The payroll system takes charge of the tasks involved with payroll, such as:

  • Paying employees
  • Ensuring that employees have only worked those hours taken by the last time clock record

Receiving and depositing payroll checks.

Helps Employers to Track Compliance with Any Contractual Work Hours Requirements

Faster, more accurate payroll processing.

Taxes on International Payroll

When wage earners are paid by employer organizations outside the U.S., they are classified as independent contractors. These workers are also referred to as non-employees, non-employees, non-employees, and/or foreign employees.

So, if they are non-employees, why can’t you just pay the non-employees with money you earn from U.S. corporate treasury?

This is because it’s been the Federal tax system’s belief that when you pay non-employees, you should withhold and pay taxes on the non-employees’ income to the U.S. Government.

Doing this is necessary because it’s the U.S. Government that grants you permission to pay these non-employees in the first place. And it’s the U.S. Government that collects taxes from these non-employees. In addition, the IRS requires that you withhold a percentage of the non-employees’ pay to ensure they are actually non-employees.

Independent Contractors and Payroll Taxes

Payroll taxes can be confusing and frustrating for both America’s independent contractors. But there is a way to make it significantly less confusing.

To start you need to understand that as an independent contractor you will be treated as an employee (not a C.T.A.) with some benefits and with a lot of paperwork.

You will need to file a Schedule C with Form 1040 and you will need to treat your business as a sole proprietorship.

Using a third party like Direct Pay to handle the payroll will be safer, easier and faster.

Offering Employee Benefits to Global Workers

When you’re looking to hire international workers, it’s important to decide what type of benefits you’ll want to offer to them. There are some general trends for international payroll workers. Increased flexibility, such as remote working options, is the most popular benefit, followed by reduced travel time. However, when you offer a benefit that provides a specific result, such as charity donations, that’s when it’s most appreciated by the worker.

For instance, Charity Miles–an online charity fundraising option—is a popular choice for workers in Canada because it takes the personal effort out of it, providing instant rewards. Employees just log in and begin earning and donating donations for every kilometre they walk.

Paying International Workers

When hiring employees from abroad, pay them the same way you would for any domestic worker.

If you are hiring a local employee, you would pay them their usual salary. International employees fall in this category as well and will not require any other additional payments.

When you hire an international worker, you are required to obtain an international business account at your local bank. You are now ready to draft an international business contract and send off a sample payroll application.

The payroll company will then process the payment and send it off to your international employee.

Currency Translation

International payroll is a pain in the neck. But you don’t have to do it manually. You can incorporate the exchange rates provided by PayPal.

For example, if you are an employer in the UK and want to pay your US employee in USD, you need to factor the currency exchange rate too into the payroll.

The exchange rate provided by PayPal is based on the PayPal rate +8.75%, which is as close to perfect as gets.

According to David Seagar, Director of Global Business Development at PayPal, the calculation method has been tested throughout the last year to be as accurate as possible. When we have the power of the recent world online marketplaces, such as Google, Amazon or Ebay, we believe this to be the best calculation method.

Sometimes, the calculation goes wrong. The length of your international payroll will depend on the amount of transactions and amount of payment to be made, but generally when you are paying a few thousand dollars to your international employees, you can expect the calculation to be correct in the range of 1.5% to 2.5%.

International Payroll Laws to Research

If you have employees working outside the United States, you’re probably aware of the payroll laws that apply to your employees. However, if you don’t send employees to certain countries or you’re unsure of the payroll laws in those countries, you may want to check the laws that apply to your employees before paying them.

The laws for international payroll vary depending on the country your employees are working in. Basically, each country has its own laws that apply to the payments employees receive. These laws generally cover cash-out, housing, food, travel, and many other expenses. You can view the country’s laws by typing the country name into the search field on the U.S. Department of Labor’s website. (Just click on ‘USA’ on the left, and then, on ‘Country Resources’.)

Be aware that the laws vary even in the same country, depending on region. Generally, there are different requirements for employees working in rural areas as opposed to those working in urban areas. For example, it’s more likely that employees will be furnished with housing in rural areas than urban locations.

Bottom Line

International payroll is simply the process of paying an employee in another country. Basically, international payroll is only very complicated if you let it become so. The reality is that paying international employees is just a (semi) automated process that can easily be handled without hiring a payroll specialist.

If you’re going to be based somewhere other than the United States you can’t pay employees in USD. When an employee is paid via international payroll, the company is charged a currency conversion fee for every transaction. Most likely, these fees will eat into the profit margin on your international payroll. So I would only consider international payroll if you are making a significant amount of money or have very large profit margin.

Put simply, you should only consider international payroll if:

You have a higher profit margin than domestic payroll. You have a large international company or are able to get lower fees. If you are paying thousands or tens of thousands of dollars in payroll processing fees, It pays to be diligent about doing your research.

There are also a LOT of misconceptions in regards to international payroll. Here are a few: