How to Pay Your Foreign Employees
Technology enables businesses to work with employees around the world. However, businesses sometimes have a more difficult time paying international employees for a variety of different reasons. Currency exchange rates, compliance conflicts, processing fees, delays in payment processing, and other challenges can slow down your company when processing payroll.
Your company might also face legal concerns since employees in different countries are subject to different tax and labor laws, which you will need to satisfy every pay period. Unfortunately, reporting payroll taxes for foreign employees is often more complicated than for domestic workers.
International employees will expect payment at the same time as any domestic workers. However, payroll that includes foreign employees can take days longer to process. You may need to process manual payments for your foreign employees in advance so that they receive payment alongside any local workers.
Rather than face the complications of paying international employees, some employers opt to pay workers under the table. Though this option might be tempting, any unofficial payments are subject to steep legal consequences. If the IRS discovers you have paid employees under the table, you and your employees may be subject to fines, penalties, and years in prison.
Thankfully, there are plenty of payroll structures and tactics that can make the process of paying foreign employees easier.
1. Home-Country Payroll
The home-country payroll model, also called shadow payroll, makes it easier for companies to pay employees internationally. This payroll structure is ideal for employees temporarily traveling abroad, especially if they are traveling to their employer. In particular, traveling nurses may thrive under this payroll structure when they travel between foreign countries to satisfy regional medical needs.
Shadow payroll allows employees to report income through their home country, even though they earned compensation elsewhere. However, employees must still satisfy international tax laws. Some countries require that income — regardless of where it comes from — be taxed in the employer’s country.
In other countries, employees may need to report income in both their home country and their employer’s country. In most cases, shadow payroll allows an employee to earn compensation billed through their home country, no matter where their employer operates.
2. Shadow or Third-Party Payroll
Third-party payroll can make it easier for foreign employees in certain cases to receive payments. Many employers trust third-party payroll options for their ease of use. Companies will provide employee information, payment details, and other information to a third-party payroll provider who then takes over the payroll process.
Rather than try to figure out complicated foreign payroll details, some companies prefer to trust a third-party payroll service with their employee compensation needs. Payments are often processed faster through third-party payroll services, given their expert knowledge of international tax reporting, filing deadlines, deposit requirements, and other details.
Third-party payroll options work particularly well for companies with a large portion of foreign employees, or for companies with employees in several different countries. If your company faces several complicated, international payment situations, third-party payroll allows you to entrust regular payments to experts in international finance.
3. Host Country Workaround
In some countries, companies can use a designated host country workaround to pay foreign employees. Not all countries make this option available to employers.
For example, the United States does not allow you to pay foreign employees through a host country workaround. However, countries like Thailand and France will allow employers to exercise a host country workaround for offshore workers.
It’s important to note that host country workarounds are only valid if your foreign employees do not have a physical presence in the host country. For example, an employer would not be able to exercise a host country workaround for an employee working onsite. Rather, employers can only use a host country workaround for foreign employees working remotely from their home country.
Any remote employees working for an international employer in a valid host country can take advantage of the host country workaround process.
Through a secondment, employees are disassociated from one organization and work for another organization for a specific period. One company will essentially lease an employee to another company, often for a period of a few months to a year.
Secondment can also work across international borders. Before work can begin, a formal agreement, known as a “secondment agreement,” must be established between the employer, employee, and a hosting company.
Many companies hire foreign employees through the secondment structure to accommodate staffing needs. For example, a nursing staffing company might deliver leased nurses to high-need areas through secondment, for a period of a few months.
Staffing companies often need to wait weeks, or longer, before receiving payments from customers. These delay times can decrease cash flow and make payroll more difficult to process. To accelerate payment and fund payroll, some industries use factoring as a method to receive the cash they need faster.
Factoring can benefit nursing supply companies, medical staffing agencies, and other companies with longer wait times between sales and payment. Unlike forfaiting, factoring allows you to sell accounts receivable and receive immediate cash.
5. Independent Contractors
Companies hiring foreign employees may only be looking for help satisfying short-term work. These businesses typically seek out independent contractors — individuals who sign on to provide temporary services.
Some companies find it easier to pay foreign contractors over foreign full-time employees. Contractors do not require benefits, overtime pay, PTO, bonuses, or other incentives that full-time employees traditionally receive.
Hiring foreign independent contractors is most appropriate when your company needs help filling a specialized, temporary role. For example, your company might need translation services when creating a new website. As soon as the website is completed, your relationship with the foreign contractor will end.
You’ll need to clear a few hurdles when hiring international contractors. Make sure that your human resources department does not classify the newly hired contractors as employees. Your company can be fined if contractors are mislabeled.
Different countries operate with different definitions of contractor work. Make sure you familiarize yourself with the definition of contract work in the company’s and the contractor’s countries before bringing on a new contractor. In some countries, your contractor could be viewed as a full-time employee based on their working hours or the number of their employers.
Both employers and contractors should complete Form W-8BEN, which identifies both foreign contractors and their employers to the IRS. In addition, make sure both parties sign a written contract or agreement before work begins.