Table of Contents
Multinational companies with a global workforce and freelancers must recognize challenging international employees and payroll issues that evolve as they enter new markets. Global payroll processing requires understanding regulations governing payroll, foreign and cross-border payments, and information privacy that vary from country to country.
A business should reduce fraud risk and errors to protect and optimize cash flow with the right international payroll solution.
What is International Payroll?
International payroll is paying net compensation to a global workforce of employees and independent contractors in multiple countries. International payroll requires compliance with country-specific regulatory requirements. The global employee payroll process includes withholding, contributing, and submitting income and payroll taxes to government agencies.
Main Components of International Payroll
International payroll includes many components that your business needs to know. These components include laws/regulations, employee salaries, other compensation like bonuses and sales commissions, employee benefits, independent contractor payments, taxes, and employer and employee Social Security or totalization agreements.
International payroll services may also provide human capital management (HCM) services using an advanced human resources information system (HRIS).
A qualified global payroll service understands local payroll rules within each country and the language of the area. Their global payroll system can handle specific payroll functions required for each country payroll.
An international payroll service like ADP or its partners offers global PEO services as the employer of record (EOR) for your global workforce. A PEO is a professional employer organization that can handle the onboarding of foreign employees, reviewing and approving employee payslips, workforce management, and other human resources services.
Setting up a new legal entity to pay foreign workers may be avoided when your business uses a PEO as the employer of record. And hiring independent contractors abroad eliminates the need to set up new legal entities as you establish an international workforce in new countries.
Each country issues employment laws that cover hours worked in a day or workweek, how frequently employees must be paid, and the taxability of employee compensation items, benefits, and other regulations. Like a U.S. state, the local jurisdiction can also issue labor laws affecting your company’s global payroll management and payroll processing.
The EU has issued a GDPR information privacy law to protect its resident’s data worldwide. GDPR imposes steep fines for non-compliance.
The U.S. has OFAC regulations for foreign country economic and trade sanctions that apply to payments made through U.S. banks and financial institutions. The OFAC list includes blacklisted countries to which payments shouldn’t be made. Your international payroll processing service or automation software for mass payments to international contractors should screen for and comply with OFAC.
Employee Salaries and Other Compensation
Employee salaries include hourly wages or fixed salaries, bonuses, and sales commissions. Paying the correct amount for hourly wages and overtime is essential. Rules vary by country and location.
Employees may receive vacation pay, sick pay, holiday pay, paid time off, retirement plans, company stock purchase plans, and other employee benefits. Internationally payroll must comply with country regulations, track availability, and adequately pay employee benefits. Some other benefits include gym memberships (mandated in some countries) and company automobiles for qualifying employees.
Independent Contractor or Freelancer Payments
Independent contractors, including freelancers, are paid differently than employees. They don’t receive corporate benefits. Income tax or Social Security equivalents aren’t deducted from their payments because they’re responsible for paying these taxes through their business.
Special forms like IRS W-8 forms should be on file to track payments, pay these contractors, and file any required IRS 1099 forms when due. International contractors like freelancers can be paid in their local currency through a choice of payment methods. Payment processing fees may be shifted away from your business to the independent contractors using global mass payments software options.
Does the global payment processing company automatically generate required tax filings like W-2 vs.1099 for employees or independent contractors?
Tax laws of each country and local laws of a jurisdiction govern the deduction and withholding of taxes from employee compensation and the amount of any employer contribution required. Some employee benefits are taxable.
Employer and Employee Social Security or Totalization Agreements
Did you know that the U.S. Social Security Administration (SSA) has Totalization Agreements with several foreign (international) countries similar to Social Security benefits?
According to the SSA:
“Since the late 1970s, the United States has established a network of bilateral Social Security agreements that coordinate the U.S. Social Security program with the comparable programs of other countries.
International Social Security agreements, often called “Totalization agreements,” have two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country”.
How Does International Payroll Processing Work?
International payroll processing works by making mass payments to employees and freelancers or other independent contractors through a payment service that understands how to comply with regulations in multiple countries and process payroll or contractor payments efficiently with automation software.
Challenges of International Payroll Processing
International payroll processing is a challenging and complex process. Issues include full compliance, tax withholding calculations, employer contributions, computing employee benefits, and payroll information protection, ensuring compliance with privacy regulations. Gaining sufficient knowledge and accessing payroll experts combined with a global payroll solution is essential.
The best international payroll services can provide full compliance with applicable global, country, and local regulations, including GDPR privacy of employee data when required.
Tax Withholding Calculations
The withholding of taxes from employee pay differs based on each country’s laws and applicable agreements like income taxes and totalization agreements for a country’s benefits program like Social Security in the United States. Calculations must be accurate to withhold the correct tax amounts.
Computing Employee Benefits
Employee benefits are enumerated in company policies that comply with local and country regulations. For example, paid family leave may be offered. Vacation pay, sick pay, and other employee benefits must be tracked and calculated accurately.
Besides tax withholding from employees, an employer contribution to specific taxes may also be required.
Payroll Information Protection
Payroll information must always be protected as part of a company’s security policy. For EU residents, the GDPR (General Data Protection Regulation) requires the protection of personal information, including payroll data. Other countries may require similar security of payroll information.
Understand the regulations and how to adequately protect payroll information before you begin international payroll processing in a country. And ensure that your company hires a qualified payroll and independent contractor payments processor with the ability to handle payroll operations and process payroll in the countries you need.
Examples of International Payroll
Examples of international payroll include functions offered by a global payroll solution and the contract your business signs explaining which services have been selected. International payroll services offer payroll and benefits processing, payments to employees and independent contractors, tax compliance services, tax payments, and possibly HR services.
The typical cost per employee per year is between $100 and $200 for payroll-related services.
International Payroll FAQs
The following FAQs answer frequent questions about international payroll.
Is International Payroll the Same as Global Payroll?
Yes. International payroll is the same as global payroll.
Should I Use International Payroll Outsourcing?
Businesses should consider international payroll outsourcing to a qualified provider that understands payroll or freelancer payments in multiple countries. A payroll service should make mass payments in local currencies that are compliant with the recipient’s country and local regulations.
How Does International Withholding Tax Work?
International withholding tax works by withholding at a 30% U.S. tax rate as a deduction from payments received by a foreign person (nonresident alien) as U.S. source income unless a tax treaty agreement with the U.S. exists or an IRS Revenue Code Section allows a different withholding rate or exemption.
The IRS provides an International Withholding Issues Toolkit, which includes the following summary information describing how international tax withholding works:
“Federal, state and local governmental entities often act as withholding agents, and pay income to a foreign person. You are a withholding agent if you are a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding.
Generally, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax at a rate of 30%. A reduced rate, including exemption, may apply if an Internal Revenue Code Section provides for a lower rate, or there is a tax treaty between the foreign person’s country of residence and the United States. The tax is generally withheld (NRA withholding) from the payment made to the foreign person.
The term NRA withholding is used in this area descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Generally, NRA withholding describes the withholding regime that requires 30% withholding on a payment of U.S. source income and the filing of Form 1042 and related Form 1042-S. Payments to all foreign persons, including nonresident alien individuals, foreign entities and governments, may be subject to NRA withholding.”
How Can I Learn More About Global Payroll?
Another valuable resource is the comprehensive Deloitte Global payroll management report dated February 2019.
What is a Smart Way to Manage International Payroll?
A smart way to manage international payroll is to use a qualified payroll provider and independent contractor payment software. You may decide to use different payment processing methods for employee payroll vs. independent contractor payments because the necessary expertise and reporting differ for these business processes.
Tipalti, a global mass payments and AP automation software company, handles supplier payments, including freelancer and other independent contractor payments, worldwide in over 196 different countries in 120 currencies, with multiple payment methods. Tipalti real-time add-on software, with integrations with your ERP system or accounting software, is accessible through that software login.
Tipalti has the scalability to work for growing small businesses using QuickBooks for international payments and excels at global mass payments solutions for established mid-sized and enterprise companies.
Tipalti uses built-in rules and screening for international regulatory compliance, including GDPR privacy and blacklists like OFAC. Tipalti can help your company significantly reduce payment fraud and errors. It will streamline the time-consuming contractor payment process and can be combined with comprehensive AP automation software features.
Summary – International Payroll
International payroll, including payments to employees and independent contractors like freelancers, is a complex process that requires expertise. International payroll consultants and services provide valuable insights into country payroll policies and how to pay international employees.
Companies should consider international payroll outsourcing to a qualified provider that understands payroll or freelancer payments in multiple countries. An international payroll service should be capable of making mass payments in local currencies that are compliant with the recipient’s country and local regulations.
Evaluate each global payroll service under consideration for international payroll outsourcing. Review the types of international payroll solutions and HCM and PEO services offered, countries and industries served, customer ratings and testimonials, ability to generate regulatory compliant payroll, and pricing to find the best match for your business needs.
A choice for making foreign independent contractor payments is using software designed for automated global mass payments, including independent contractor payment tracking and tax compliance reporting features.
International payroll requires good execution through global payroll services or independent contractor payment software to make timely payments in local currencies to foreign employees or contractors and report or pay taxes properly to avoid fines or other penalties.