Over the past year, the workplace, workforces and employers have undergone a significant paradigm shift. Whereas before, remote work was viewed as a luxury, reserved (perhaps unfairly) for the most trusted of employees. Now, remote working policies are being implemented in abundance.
The proof that employees do not need to be present in an office environment to work effectively has removed geographical proximity barriers and has led to some employers considering – for the first time – hiring from different international locations.
But with overseas hires comes a new challenge: How businesses should pay international employees.
Though hiring overseas is not without its complexities from an administrative and tax perspective, it is also not intrinsically complicated. In this blog, we’ve noted the four most important steps to take when it comes to arranging how to pay new international hires.
- Decide what the employee will be paid as
This may sound like an obvious first step, but how you identify the employee in the eyes of accounting will depend on how they receive payment, whether through a home country payroll system or whether they are invoiced, for example.
An employee could be classified in the following ways:
As a contractor
If the business’s relationship with the employee is unstructured, for example if they are not under a contractual obligation to dedicate set hours of their time to the business, nor do they need to follow business protocols, the employee can be paid as a contractor.
Examples of contractor agreements would be individuals who are hired not as employees but as external support, such as graphic designers or bookkeepers.
International contractors can be paid in the same manner as domestic contractors. They will need to invoice according to the terms and conditions of the contract agreed between the two parties, and there is no reason for their location to impact accounting as taxes and other financial obligations will be handled by the contractor and not the business.
As a temporary field worker
If your employee will only be spending a small amount of time overseas, for example in a ‘digital nomad’ style setup, then they are able to be kept on the domestic payroll.
However it is worth ensuring that the host country does not object to this in line with its own financial guidelines and regulations.
As a Third Party
Some businesses are lucky enough to have global expansion and may have formed partnerships with other businesses in different countries.
If this is the case, provided there is a good pre-existing relationship with a company in the designated host country, a business could ask the business located in the country to payroll the employee through their own company. The partner business then becomes the employer and takes care of all of the tax and legality agreements, whilst your business transfers the salary to them.
If however your employee does not fit any of these options and will in fact be recognised as an employee despite their location, you’ll need the following three steps.
- Take into consideration PAYE Tax and National Insurance
If a UK resident becomes an employee of a UK company both the tax and social security position for the business is clear: PAYE and National Insurance Contributions (NIC) are due on any employment-related earnings.
However if an overseas employee is employed by a UK company, and provided with a UK contract of employment, UK tax obligations become slightly more muddied but must be adhered to.
On the surface, PAYE tax with overseas employees looks quite simple.
If an employee recruited internationally is not a resident in the UK, no PAYE tax is due unless the employee is seen to be performing duties in the UK which are more than incidental to their work overseas. As guidance, HMRC classes ‘Incidental Duties’ as things like training in the UK, or attending general meetings.
If the employee is not performing more than their Incidental Duties, then it becomes possible to pay the non-resident employee on a gross basis via a UK payroll.
To be able to pay the employee on a gross basis via a UK payroll they must fit the following criteria:
- They must work wholly outside of the UK (apart from when performing incidental duties)
- They must not be and must not have ever been residents in the UK
- They must not intend to come to either live or work in the UK.
So to recap: If you are hiring an overseas resident as an employee of your UK company, you can pay them on a gross basis through a UK payroll provided they will not be moving to the UK or working in the UK outside of performing Incidental Duties.
However, if the employee will be performing working duties in their country of choice it is likely that that gross payment will be subject to tax deductions in line with the country’s regulations.
This is where it becomes slightly more complex depending on the size and shape of the company, so we’ve split the following into two sections.
PAYE Tax if your company does not have international entities
If your UK company does not have a corporate presence in the chosen country, for example a subsidiary company or branch, then there is usually no tax withholding obligation in the chosen country (although it is best to review this periodically to ensure you remain in line with current legislation).
This is good news because where no tax withholding is required it means that employees are able to be paid through the UK payroll system on a gross basis, and they themselves must take care of tax obligations by filing tax returns in their country.
Care should be taken however to ensure that any employees activities can not be deemed as enacting a corporate presence for the UK company.
PAYE Tax if your company does have international entities
On the other hand, if your UK company does have a corporate entity in the chosen country by way of branch, subsidiary company or deemed corporate presence (this will be defined under the local tax legislation and is worth reviewing), it becomes likely that tax withholding will be required for the employee.
In this scenario, the recommended solution would be to establish a payroll in the chosen country and pay the employee through the non-UK payroll system. This ensures that the relevant tax obligations are being fulfilled, and minimises the risk of incurring fines or penalties.
Similarly if a non-resident employee’s duties in the UK are deemed to be more than incidental to their overseas duties, HMRC may inflict a PAYE obligation, as well as a tax withholding obligation on the payment. This leads to a situation called ‘double withholding’ and it is one best avoided. Double withholding can hit employees with significant tax deductions that could cause detrimental cash flow issues.
National Insurance Laws
National Insurance (NIC) payments will be taken care of as part of tax withholding obligations as stated above – if necessary. However, depending on the country that your non-resident employee resides in will depend on which payments they make.
As an initial guide, this differs depending on whether there is a European Economic Area (EEA) agreement in place. For example:
- If the country is a designated European Economic Area (EEA) or Switzerland:
Your non-resident employee will make social security payments to their country. In some scenarios, they may also need to make NIC contributions, but this is dependent on a range of factors.
- If the country is a Non-EEA member and has a social security agreement with the UK:
Your non-resident employee will make contributions to social security in their country of residence, rather than paying NIC contributions.
- If the country is a Non-EEA member with no social security agreement:
As the employer, you must calculate and deduct NC payments for the first year of your non-resident employee’s overseas employment.
- Assess the financial environment
No matter how you will be paying your international employee, whether through a UK payroll or as a contractor, businesses must always be aware of the financial environments in different countries, especially where currency will be being converted.
Things to keep in mind include:
Currency Exchange Rates
Currency exchange rates will differ from country to country and from border to border, unless the country uses an identical currency, such as the Euro.
However if this is not the case and the wage will be exchanged into a different currency, you will need to ensure that the currency rate is fixed in the employees home currency so that the amount they are being paid does not change depending on fluctuations in exchanges.
The domestic regulatory environment
In Argentina, employees are paid for 13 months as opposed to 12. In Spain, annual salaries are divided into 14 installments.
These rules and regulations are country specific and may considerably alter how you are able to pay your employee and to what amount. Ensure that you run these checks before sending over their first paycheque, as failure to comply could result in a detrimental situation.
- Safeguard HR
As well as payroll you will also need to consider other implications when it comes to hiring international employees, such as:
- Mergers and acquisitions
- Remote onboarding
- Talent acquisition and employee screening
To this extent, it means that HR will have a more comprehensive job managing employees both domestically and internationally. To be able to support HR in their work, you’ll need to develop a global HR and payroll strategy or else risk mistakes like tax or benefit compliance.