How to Handle Payroll for Remote Workers

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Rosen Valchev

01 November 2022

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As remote work gains popularity across European and US companies, employers start to reconsider their working practices. Naturally, this includes changes in payroll procedures as well.

In order for companies to be able to hire a worker from a foreign country, they must figure out the most financially efficient way to send money abroad. Businesses should also cover the legal aspect of payroll which can vary depending on many different factors.

All of this can be quite challenging and it can take a substantial amount of time and effort to research and set up. If you don't know what you're doing you can easily make wrong decisions and end up losing both time and money.

With the knowledge provided in this article, however, you can avoid the most common pitfalls and set yourself up for success.

Unfortunately, that doesn't mean it's going to be easy or fast. If you can't or don't want to spend countless of hours researching and setting up things, you can use services like RemoteMore. Using our platform, you can hire remote developers with different tech stacks and salary rates from all around the world.

The best thing is that payroll and legal are 100% covered by us so the only thing you have to do is find a developer that would be a great fit for your team.

With that said let’s jump right in and show you how to best handle remote payroll.

How to pay employees internationally

When paying abroad, companies generally use one of the following methods:

1. Wire transfers

Most large banks in different countries support international bank wire transactions or as most people call them - wire transfers. In the past, these transactions usually required one to be physically present at a branch office of a bank to fill out the required papers, and documentation and send the wire transfer.

However, with the advancement of digitalization, most banks now allow customers to send wire transfers electronically (e.g. from your online banking account or a payment partner of the respective bank). You should have this option easily available in your banking account but you can always ask your bank for help if you have trouble locating it.

In both cases, the sender of the wire is the one that provides all the instructions for the wire, including the recipient's bank account, address and other details. Sending a wire is relatively easy and definitely a safe option to send money abroad.

On the negative side, wire transfers can usually take between 2-5 days to arrive at their destination which can be quite a hindrance. Another downside is the high fee that can reach up to $50 for a single transaction.

Last but certainly not least, if the recipient's account is in another currency (which is very likely) you can have serious complications and issues. First, the money would be converted to that foreign currency at an unfavourable "buy" rate of the bank for the respective currency. Also, the money would be converted on the day of its arrival which makes it impossible to predict the exact amount the person would actually receive as each day the "buy" and "sell" rate of the bank for each currency changes.

All of this results in a rather unpredictable and very expensive transaction - wasted money that could have stayed in your pocket or gone to the employee.

2. International Payment Processor

An alternative to handling payroll procedures is using business apps that optimise payment and money transfer procedures. Popular companies such as Iono, Wise and Payoneer help businesses and individuals process international payments easily and aid companies in optimising their payroll processes.

With Wise, for example, you can easily send money to a foreign person while directly converting your payment to their local currency. The fee is significantly lower than the usual wire transfer fee and you can actually see the exact amount of money the person would receive in their local currency.

However, simply sending money through an international payment processor doesn’t free you from the legal burden of remote hiring. You still have to comply with the respective regulations and laws and these legal documents must be set up and signed separately. One of the most difficult steps is establishing an agreement between your company and the person you want to hire.

What makes choosing the right employer-employee agreement so difficult?

On a local level, handling payrolls is quite easy - there are no other laws you have to take into consideration besides those of the country you are operating in. Most companies and in particular - their payroll and legal staff, are very familiar with the local regulations and payroll procedures.

That is why most businesses that operate on a local level often choose an employment agreement - as it is a quite concrete agreement with very specific outlines and employees are familiar with it.

But when the business goes outside of the country-of-origin’s borders, things get a bit trickier. In order to help you better understand why that is, let’s look at the different elements that constitute an international payroll: income tax, social security, and payroll tax.

Income tax

The income tax is a tax imposed on individuals or entities in respect of the income or profits they earn. It is generally computed as the product of a tax rate times the taxable income. However, the tax rate is not a concrete fraction of your earnings, as it varies from country to country and even, in some cases, region to region. This is why your company may have to withhold the appropriate amount of income tax from employees’ paychecks, based on where they work, and any applicable regional, local, or state income tax.

Social Security

Social security is one of the most important components that constitute an employer-worker agreement, especially for the latter. It replaces a percentage of a worker's pre-retirement income based on their lifetime earnings. However, the amount of these retirement benefits varies depending on the employee’s earnings and work timeline. Generally, this tax is collected both from the employee's and the employer’s end and is greatly dependent on regional laws and regulations.

Payroll tax

Lastly, companies need to consider the payroll tax. That is the percentage withheld from an employee's salary and paid to a government to fund public programs, such as unemployment tax and workers’ compensation. Again, the amount of this tax can vary depending on the country where the worker is located and sometimes it may include regional taxes as well as federal taxes.

Of course, those are not the only variables that constitute the payroll payment. There are numerous legal aspects of international payroll, such as the timeliness of each payment, local customs, local laws, and other legal concerns.

But, having said all that, how do companies make the process of hiring and retaining international workers easier? The answer is simple - by choosing the right agreement.

Contractor agreement (Recommended)

The contractor agreement is an agreement between two businesses, that trade services in exchange for payment. Now, this may cause a certain amount of confusion - how are individual workers businesses?

Let’s take freelancers, for example. The agreement they have with companies is exactly that - an agreement of a purchase of a certain service on an ongoing basis. It is a quite simple relationship, as freelancers participate in this “trade” as self-employed businesses.

There is no need for the employer to pay any additional taxes, as they process the payments as a liability such as electricity or consultancy bills. Moreover, the company chooses which country’s laws they will consider - the local or international ones. The main advantages of such a structure are its flexibility and its efficiency, as it allows great freedom when discussing specific terms of the agreement.

The main downside to it is the worker side of the agreement. Since the worker acts as a self-employed business, they must follow all local legislation, which includes paying pension, healthcare, and other tax contributions on their own. Some employees are not willing to do that or don't have the know-how nor the resources to do it - for example to hire an accountant to do it on their behalf.

Employees also do not receive by default benefits such as health insurance and paid time off. However, companies can easily add those as benefits to the contractor agreement if they want to.

On the positive side, taxation for businesses is often lower, so the employee would usually end up paying fewer taxes compared to a regular employer agreement. So obviously, remote work increases profits for both companies and employees.

Another crucial aspect of the contractor agreement is that employers do not need to have an office in the residence country of each employee. Since it is a B2B agreement, it will not require incorporation (registering a company), unlike the employer agreement, and is therefore easier to manage and implement.

That said, setting up contractor agreements is not as easy as it sounds and it requires specific financial and legal know-how. Luckily, there are companies that can make the international hiring and payroll process seamless. For example, RemoteMore assists businesses and workers in processing the entire payroll and legal side of things so it's effortless for both the employer and the employee. We collect and sign all required documentation, pay the workers on behalf of companies and take care of all necessary taxation matters. All companies get at the end of the month is one easy-to-pay invoice.

Employer agreement

We're all familiar with the standard employer agreement. Regulated by each country it has it's specific which every employee from the respective country is usually familiar with. Regular employer agreements have their advantages such as sick leave, paid leave and redundancy compensations that are guaranteed by the government of the respective country.

However, it's important to note again that these benefits can be replicated to a great or often even full extent in a contractor agreement.

The biggest downside to the employer agreement is the administrative burden it poses on the employer. For example, according to EU law, the applicable legislation is the one where the worker is based. Therefore, if your business wants to hire a person abroad, you must register a company in the region where that worker is located and comply with local law.

As you can imagine, that makes accounting and taxation quite difficult for employers, as it must happen both in the region of the employee and internationally. That means that the employer is responsible for all payroll components and taxations and is highly likely to require that you register a subsidiary in the country of work of the said employee. Which is a great burden to the business, especially if you have very few employees in that region.

The financial aspects of things should be considered as well. Employer agreements usually require paying high amounts of taxes for both the employer and the employee. Payroll expenses and salaries in general are significantly more expensive compared to hiring through contractors agreements.

Conclusion

Handling payrolls is an extensive and quite difficult process that requires a great deal of planning and discussions. Still, companies like RemoteMore are there to aid companies in choosing the right payroll method for each worker, depending on the work that is to be completed, the specific needs of the worker, and, of course, the company structure.

Regardless of whether you choose to hire workers on a contractor or employer agreement, RemoteMore can help you handle all processes regarding payrolls and leave you and your remote workers focusing on your job.

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