Key Takeaways
1. Paying employees internationally means understanding pay cycles in different countries, as well as whether ’13th-month pay’ is compulsory, or a matter of custom.
2. Paying a global team means understanding the different rules around compulsory deductions, withholding tax and payroll taxes.
3. International businesses need to pay attention to currency requirements to ensure employees are paid in the right denomination.
4. Correctly classifying workers (whether as an employee, or an independent contractor) is important throughout.
In early 2020, the world witnessed a historic shift in the global job market due to the COVID-19 pandemic.
While some companies at the time were already offering the ability to work from home as a “perk,” it is now very much the norm, and it’s likely to stay this way for quite some time.
Hire & pay remote workers with Horizons EOR.
And although it’s true that the pandemic will come to an end and things will start getting back to the way they used to be, remote working is mostly expected to stick around and become more common than it was pre-pandemic. In 2021 alone, the percentage of workers permanently working from home is expected to double.
By the time 2025 rolls around, it’s estimated that a whopping 70% of the global workforce will be working remotely for at least five days per month as more and more companies embrace the inevitable and benefit from a worldwide, distributed remote workforce.
Despite all the benefits of having a remote workforce, however, there are just as many challenges. While some are easier to deal with (i.e., setting up remote work allowances and stipends), others require more thought and planning (i.e., hiring remote workers and connecting with the best talent).
One of the more significant issues that stand out is paying remote employees (also known as virtual employees) and dealing with all the complexities of paying taxes across international borders and complying with local labor laws.
That’s why we’ve decided to put together this guide.
While not the be-all-and-end-all, it is a good starting point and overview for anyone who is considering working with a remote team.
As always, it’s a good idea to consult a professional or work with a global professional employer organization (PEO)—like Horizons—who can help you efficiently and compliantly pay remote employees.
Calculating Pay for Remote Employees
The first—and arguably biggest—hurdle to paying a remote employee’s salary, is deciding how much compensation they should receive. How much you pay your remote employees not only depends on the type of work, their experience, and seniority, but also where they are based and what the national median salary is in their country, among other things.
Companies should look to develop a remote employee pay strategy that not only accounts for the local cost of living and median salaries, but also aligns with the employee pay strategy of the organization in general.
American compensation software and data company PayScale has an excellent resource that can help you work out fair and accurate remote employee pay figures.
You can also consider negotiating remote employee pay based on things like:
- The scope of work.
- Whether it’s a one-time project or an ongoing undertaking.
- Whether you are hiring somebody to fill a long-term vacancy.
- Whether the employee is using their own equipment or if you need to provide it.
- The candidate’s history, references, portfolio, etcetera.
There’s no one-size-fits-all approach to calculating pay for remote employees; remote employee pay is unique to your own company.
How to Pay Remote Employees
When you are utilizing an international workforce in addition to your domestic one, you will want an efficient payroll setup for your remote team that’s cost-effective, compliant with applicable domestic and international labor and tax laws, and reduces your admin burden.
Step one of this process is figuring out exactly what’s included in the process for paying remote employees. Such as when to pay employees, accounting for taxes, and knowing what contributions to pay.
We are going to cover all of this and more below:
Knowing When to Pay Remote Employees
Every country has its own rules and customs for when employees need to be paid.
As an employer, you need to be aware of these for the pay cycles—i.e., the time during which an employee’s time worked is recorded and paid—in countries where you have full-time or remote employees.
You also need to know of any specific rules regarding paydays, including when and how they should occur. While most jurisdictions allow employers to choose when in a given month to pay their employees (i.e., bi-weekly, on a specified date, on the last Friday, on the first day of the month, etc.), some specify country-wide paydays in law.
For example, in South Korea and The Netherlands, the 25th day of the month is the national payday. Meanwhile, in Mexico, paydays are stipulated in employment contracts and can be weekly, biweekly, or monthly.
Some countries also have mandatory 13th month or 14th-month pay.
Knowing What to Include in and Deduct from Remote Employee Pay
When you calculate full-time and remote employee pay, you need to include more than just the core compensation for their salary or time worked. In most jurisdictions, employer and employee contributions also need to be made, such as:
- Payroll tax
- Employer healthcare contributions
- Unemployment insurance
- Employer pension or superannuation fund contributions
Also, you may have to make deductions from your employee’s pay, such as:
- Income tax (more on this later)
- Student loans
- Employee healthcare contributions
- Employee pension contributions
The difference between what the employer pays out, and what the employee takes home is the gross pay vs net pay distinction.
This does depend on jurisdiction. For example, in the UK, employers pay employees through the PAYE system and make deductions for national insurance (healthcare), auto-enrolled pensions, payroll taxes, student loan contributions, and income tax. In contrast, employees in the U.S. need to make all these deductions themselves when they file their tax returns.
In addition to this, specific regions within countries like Australia, and intra-national regulations in political unions like the EU, will all have other guidelines that must be adhered to.
Sometimes, through a ‘shadow’ payroll system, taxes and contributions in two countries will need to be managed.
Knowing Local Currency Rules
Most countries’ labor laws will require you to pay remote employees in the local currency.
This can be problematic due to the volatile nature of the foreign exchange market. While currencies in most developed nations (Great British Pound, US/CA/AU Dollar, the Euro, Chinese Yen, etc.) are stable, fluctuations can occur, and the value of a currency can rise or drop suddenly.
In such a scenario, somebody has to bear the cost, and it’s (rightly) usually the employer.
To reduce the currency fluctuation risk, some jurisdictions allow employers to specify other currencies in their contracts or specify a fixed exchange rate to guarantee stability.
Another example of a common local currency rule is the restriction on paying employees in cryptocurrency.
Knowing Which ‘Type’ of Employee Somebody Is
The type of working relationship you have with your remote employees plays a defining role in the way payments and taxes work. Generally speaking, there are two distinct types of remote “employee”:
Full/part-time employees: These are people who work for your company exclusively and enjoy full employment benefits, such as holiday pay and healthcare. What defines someone as an “employee” varies depending on the labor laws of individual countries.
Contractors: These are people who work for the company, but not exclusively (i.e., freelancers), and are usually self-employed or have their own corporation/company. This is usually the preferred way for fully-remote companies to ‘hire’ people because of the higher degree of flexibility. Contractors are also responsible for dealing with their tax affairs, whether they are domestic or international.
The type of employee that’s right for you (i.e., actual employees vs. independent contractors) depends on your own needs, operations, and the vacancy that’s being filled.
Can You Treat Employees as Independent Contractors?
The short answer is no; you can’t.
Although the use of contractors by both remote and non-remote companies is on the rise, and while it does help ease the remote employee payroll burden due to contractors being self-employed, there’s a major risk of misclassification.
This is because the country where a contractor is residing and working may view the contractor as an employee based on how you work with and manage them.
The distinction is vital because formal employees (office-based and remote, domestic and international alike) are usually entitled to a range of benefits and labor protections depending on their country of domicile, and these can’t just be ignored.
For example, in the United States, there are rigid rules on when a worker should be classified as a full-time employee rather than a contractor. And failing to abide by these rules can lead to hefty financial penalties.
Where do Remote Employees Pay Taxes?
Unsurprisingly, and as with everything related to paying remote employees, the main issue with taxes is where your remote employees are located, i.e., where they are working.
Even if they are based in the same country as you, you might need to follow different rules if they live and work in a different region or state, as is the case in the United States and Australia.
If, for example, your company is based in California, but you are employing a full-time employee who works remotely from Ohio, you, as the employer, must register with tax authorities in Ohio and comply with their local regulations.
And if you are employing people internationally, you will need to register with the domestic tax authority and comply with local tax laws for the domicile of each remote employee. You may also need to open a local branch for your company and comply with all the local laws concerning employment, such as minimum wage, paid leave, and health insurance.
As you can imagine, this can get quite confusing for the average business owner. However, PEOs and payroll providers such as Horizons will handle all this for you.
Taxes for Contractors
Due to the complexities involved with hiring international full-time remote employees, many companies opt to ‘hire’ contractors instead.
This makes the situation much more manageable as self-employed contractors are responsible for their taxes; it avoids the need to open up local branches, register with international tax authorities, and jump through all the legislative hoops.
However, you may still need to issue some paperwork depending on your company’s location and the location of your contractor, such as 1099 forms if you are based in the United States.
Don’t Let Complexity Stop You from Hiring Remote Employees
Hiring and paying remote employees can get complicated. This is down to all the different legal jurisdictions, legal gray areas, and edge cases that exist.
You shouldn’t let this stop you from hiring remote employees; the advent of the Internet and remote working has allowed companies to tap into and benefit from a goldmine of international workers.
Compared to these benefits, hiring remotely is definitely worth the initial hassle and teething issues. Nothing can give your business the same advantage as hiring global talent.
Video: How to Pay Remote Workers...Twice
Bloomberg Quicktake investigates the legalities of employees working two fulltime remote jobs at the same time.
Outsource Payroll for Your Remote Employees
One way to master paying remote employees is to work with a global PEO firm to which you can outsource your payroll.
A comprehensive global PEO like Horizons will offer full, global payroll and employment compliance services in the countries where your remote employees live and work from.
Since the PEO has a legal entity in place where your remote employees are, it functions as the local employer for them, relieving a lot of the administrative burden on your company.
By partnering with our global PEO, you can easily hire the best global talent and pay your remote employees on time while complying with all local employment and tax laws.
