How to Process International Payroll Efficiently: A Guide for Global Employers

Introduction

When the COVID-19 pandemic hit the world in 2020, the number of companies hiring remote workers increased as employers sought ways to deal with the global economic lockdown. Today, remote work is the new normal, with 16% of companies globally operating fully remotely.

Despite the popularity of remote work, some challenges accompany it, especially if you're hiring internationally. One major challenge is international payroll processing because you’re dealing with people from different countries and under different currencies, employment laws, and tax regulations.

To help you get started, this guide discusses how to process international global payroll effectively.

International Payroll Processing

International payroll processing refers to all the measures put by your company toward paying employees in foreign countries. International payroll processing allows your company to keep your employees happy and satisfied when done right. It’s also a compliance requirement in many countries.

While international payroll processing mainly revolves around making payments, it also touches on other aspects such as:

• Ensuring correct deductions (student loans, life insurance premiums, mandatory union fees, etc.)
• Complying with wages and hour rules while hiring abroad
• Withholding income and payroll taxes where necessary
• Filing payroll and income taxes with the relevant authorities
• Maintaining accurate records for all payments

How to Process Payroll In-House

You have several options for processing international payroll. One of these options is to handle everything internally using your in-house payroll or HR team. Here is how you can do it.

Establish a local entity

To successfully hire a remote worker from another country, you need to establish a local entity in their country. The entity gives your company a local presence and makes hiring easier because you're closer to potential workers.

If you’re hiring multiple employees from European Union countries, you may be able to hire across different states with a single entity. However, you'll need to register with each respective country's tax and social security authorities.

Unfortunately, setting up a local entity often comes with significant costs. Depending on where you’re establishing the local entity, you may need to replicate the internal structure of your original company. Also, you will need to hire accountants and lawyers to handle payroll and compliance issues that may arise. As such, setting up a local entity may not be a good idea if you’re hiring just a few employees.

Establish a payroll process

In most countries, you have the freedom to pay your remote employees directly from your company’s bank account. However, in some countries, such as Denmark, you're required to open a local account to pay social insurance and taxes. Determine the process you will use to pay your remote workers.

Develop a monthly payment schedule. While most companies have a monthly payroll period, others use semi-monthly, biweekly, or multiple pay periods. The nature of your job and agreement with your employee or contractor will determine the schedule you adopt.

Decide on the type of employees to hire. Choose between a full-time employee, a part-time employee, or an independent contractor. The type of employee will determine many things, including the amount of salary to offer, whether or not to provide benefits and the nature of the work agreement.

Understand payroll taxes

Each country has different tax laws, both in the amount remitted and the payment procedure. For example, countries like Portugal and Belgium apply progressive taxation, while other countries like Romania, Kazakhstan, Bolivia, Hungary, and Lithuania have flat tax rates. Others like the Bahamas, Monaco, Bermuda and the United Arab Emirates (UAE) don't withhold personal income tax. Understanding these differences in regulations will help you comply with the tax regulations of the countries you're hiring from.

In addition, keep up with state and federal tax regulations changes and update your company’s payroll processes to align with the new policies.

File appropriate taxes

Once you’ve understood payroll taxes, the next step is to file taxes with the relevant authorities on behalf of your employees. Typically, you’ll need to send information to social security and tax authorities informing them of the amount you've deducted from your employee's gross salary and the portion of that sum that is to be remitted to them.

Different countries handle tax processing differently. Some countries require you to withhold tax and social contributions monthly and then file them annually as a single return, while others require you to submit a filing after the close of each payroll, meaning you’ll need a real-time reporting system.

Keep your records

Before paying your global team, you’ll need to collect personal data, such as name and address, bank account details, and social security numbers. This information is sensitive and needs to be stored and protected in line with country-specific data compliance regulations.

Also, keep accurate records of the entire payroll process, as situations may arise when you need to access those records. An example is when an employee disputes their pay or when a government regulatory body asks to see reports as part of their compliance checks. Without proper records, you may end up running into compliance issues.

How to Process International Payroll Efficiently

While it may be possible to process payroll in-house for several workers, the process becomes more complex as your workforce grows. Below are options you can use for international payroll management.

Payroll software

If you’re processing payroll manually or using old, outdated payroll software, the entire payroll process becomes slow, and there's a likelihood of making mistakes. This is why your business needs to invest in modern, advanced payroll software. These payroll software platforms are availed mainly by global payroll providers.

Payroll software platforms are scalable, meaning they can facilitate payments to large and small teams quickly and smoothly. Also, the software allows you to collect, monitor, and organize data in a single unified dashboard, thus promoting data consolidation and transparency.

Here are other benefits of payroll software:

• 24/7 easy access to payroll data
• Increased data accuracy when processing payroll
• Save time by using automated features
• Access to in-house payroll experts when you need help

Partner with an EOR

International payroll outsourcing to an employer of record (EOR) is a great option if you want to hire an employee from another country without having to set up a local entity. The EOR acts as the employer and is responsible for handling all aspects of payroll, including employee contracts, payroll, benefits, and timesheets.

In addition, an EOR assumes responsibility for all legal issues that may arise. As a result, you can enjoy the services of your remote workers without worrying about payroll.

While some people use the term professional employer organization (PEO) when referring to the EOR, these two terms are not the same. A PEO offers international payroll solutions but needs to be registered together with your company in the area you’re hiring from. Also, a PEO enters into a co-employment relationship with your company, meaning you share legal employment responsibilities.

Below are four benefits of partnering with an EOR:

• You can hire anywhere in the world
• An EOR can handle the entire hiring and payroll process
• Save on operational costs by not establishing local entities
• Save time by not handling payroll

Work with international payroll providers

International payroll providers are third-party companies or organizers that offer global payroll services for their customers. They distribute payments to your employees, handle payroll taxes, and keep payroll records, among other things.

Generally, international payroll providers are like PEOs in that they allow you to pay international workers without worrying about payroll policies, tax laws, and other regulations worldwide. Besides, these providers offer wide coverage, so you don't have to hire a new provider from each country you decide to hire.

Here are some benefits of working with international payroll providers:

• No license required
• Get access to top talent across the world
• Get help for all your payroll needs

Keep in mind that while international payroll providers simplify the payroll process, they may not address all the problems that arise when hiring global teams. For example, they may not assume responsibility for potential employment risks.

Pay independent contractors direct deposit

Hiring a contractor is different from hiring a full-time employee. Contractors don't receive any statutory benefits, and in most cases, they are required to file their taxes. The employer only needs to provide the salary.

Instead of using the traditional route of cutting paper checks and sending them to the contractors when making payments, you can simply deposit salaries into their respective bank accounts. This helps to save time and money.

Skuad— A global payroll platform for international payroll processing

Processing payroll across various countries is a major challenge for many companies. Managing different currencies, determining the payment method to use, promptly correcting errors, and complying with payroll and tax regulations are just some of the challenges you might come across.

While handling international payroll processing in-house is a good option, it may not be effective if your team doesn't have a deep knowledge of the global market. This option may require you to set up an entity in another country, which is expensive.

Skuad offers unified global employment and payroll platform that helps you manage payroll, administer comprehensive benefits, file taxes, and ensure compliance with country-specific payroll laws. These payments can be made with a click since the entire process is automated.

Book a demo today to learn more about Skuad.