How to Pay International Employees: All You Need to Know

With so many businesses adopting remote or hybrid models, it has also meant that the workforce has become increasingly global. 

As a result, hiring and payroll have become more complex. Companies are trying to work through the best ways to recruit and retain global talent while finding cost-effective ways to pay employees worldwide. 

Before diving in, though, it’s essential to distinguish the types of employees on your payroll to understand tax and legal obligations better. 

For example, businesses based in the US may have employees on assignments, which means US-residents overseas employees. Therefore, foreign employees would be anyone who is hired overseas and are residents of those countries (i.e., they hold citizenship or residency where you are hiring). 

Some businesses also choose to work with foreign contractors on a per-hour or by-project basis instead of full-time work, depending on needs.

In each scenario, businesses want to find the right solution for paying wages to overseas employees without incurring huge costs and fees.

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US payroll for international employees

Certain types of employment, such as employees on assignments, can be on US payroll and US citizens living overseas. 

When you’re thinking about how to pay international employees, In each of these situations, specific considerations need to be taken into account, such as:

• Employee nationality and where they are living

• Where the company is headquartered

• Tax obligations for both the company and the employee

For employees that are US citizens, payroll for international employees needs to consider any taxes and treaties that may be in place. Payments to US citizens and resident aliens who are outside the United States are generally subject to both Social Security and Medicare tax if the employer is headquartered in the United States.¹ 

For employees that are not US citizens, US payroll would only need to consider the cheapest options for paying international employees, but those employees would not be subject to US taxes.² 

The primary consideration for these employees would need to be saving costs on foreign transaction fees that may incur.

A US company paying foreign employees will also need to think about solutions that could help navigate local currency exchange based on how the employees would like to be paid. 

How to pay international employees?

There are many options available for paying foreign employees overseas depending on the size of the business, plans, and current needs.

Let’s look at some of the most common methods companies are using for paying foreign employees overseas, the benefits and potential drawbacks for each.

1. Online payment service providers

Several options are available for online payment services, when the question arises: how to pay international employees. Although they may have different rules and regulations. These include:

Wise Business: Wise Business has various features to make paying wages to overseas employees simple and easy.

• Businesses can pay in different currencies using the multi-currency account and take advantage of the mid-market rate.

• Plus, Wise Business comes with additional features, including cash flow management, invoicing, and multiple user access to accounts.

• Quick payments ensure that businesses save time on admin, while paying employees in their local currency. Not to mention that you can save up to 19x on international business transfers compared to PayPal.

Pay employees with Wise Business

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PayPal: Businesses can use PayPal as a potential solution for payroll for international employees.

For employees with existing PayPal accounts, money can be sent directly, although fees will be incurred for the transaction itself and there are invoicing features available.

For employees that do not have a PayPal account, Businesses can use services like PayPal’s Xoom for local bank transfers.

However, it’s crucial to compare exchange rates and fees as PayPal may be more expensive than other options. 

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Payoneer: Payoneer is another option for paying international employees, especially foreign contractors.

Payoneer offers multi-currency accounts, manages requested payments, and other features that could potentially streamline payroll.

However, exchange rates and additional fees may make Payoneer a less feasible option compared to others.

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Bank wire transfer: Wire transfers such as SWIFT payments are another option for paying foreign employees overseas.

However, this method is often slower than the others mentioned. Additionally, there may be higher exchange fees associated with bank transfers and any fees that banks apply to the transactions on their side.

Before opting for SWIFT payments, check with local banks whether it can be used for business purposes and how fees are calculated.

2. Professional Employer Organization (PEO)

A professional employer organization (PEO) is an organization companies work with to establish local employment relationships.

The PEO contract and responsibilities will depend on the organization’s need, but the PEO will serve as the ‘employer’ and provide employees to the company as needed.’

The PEO essentially works to provide employers with employees from local markets but takes care of payroll and human resources on their end. Instead of the company handling foreign payments to overseas employees, the PEO takes care of payroll administration, taxes, and benefits on their end.³ 

3. Partner up with a local business

Many businesses have partnerships with local companies within the industry based on strategic goals.

Partnering with local businesses enables companies to scale faster and build their footprint in new markets without opening their own branches.

Companies will work with an established local business, leveraging their employee recruitment and payroll resources if they do not have a subsidiary present.

4. Set up a local branch

For rapidly growing companies, it’s worth considering setting up a local branch.

It’s an easier answer to the question how to pay international employees, while helping the business enter new markets.

Setting up a local branch can be worth it if you plan to expand overseas and grow the team. A local subsidiary will make administering payroll easier and give you more control as a US company paying foreign employees.

What to consider as a US company paying foreign employees?

Local and foreign taxes

Tax needs to be a significant consideration for both the company and the employee when setting up payroll for international employees.

US citizens or residents are subject to US federal income tax withholding, although there may be some exemptions.³ 

However, for non-US employees, companies need to look at tax obligations they may have as an employer. 

• Countries such as Bermuda offer a one-year residency certificate for employees working remotely for employers overseas to make it easier for workers without as much of a tax burden.⁴ 

• Other countries, such as Belgium, may have tax treaties that provide exemption on Belgian income tax if the contracting company is based in the United States. However, if they stay past a certain amount of days, they will become a Belgian resident for tax purposes and may have to pay income tax. Depending on the nature of the work the employee is carrying out and interaction with the market, the business could be taxed as a Belgian establishment, although post-COVID-19, it may be less of a consideration.⁵ ⁶ 

Because local and foreign taxes will differ, especially as more countries look to attract digital nomads and overseas employees, it’s crucial to work with a tax professional in the country the company is headquartered in. 

Some countries may change their obligations, while others may have treaties for tax exemptions with certain countries. However, tax obligations for both employers and employees will need to consider the company’s headquarters and their tax rules for paying overseas employees.

Laws in the foreign country

Different countries have laws around what constitutes residency and when an employer must provide benefits in line with other employers in the country.

Much of this will depend on where the employee pays taxes, where the company is headquartered, and the local laws in relation to workers’ rights. 

For example, some countries within the European Union, such as Spain, require companies to offer minimum terms of employment when hiring employees.⁷

This needs to include the minimum number of paid holidays for full-time employees, which is 30 calendar days. 

Exchange rates

Another challenge that often comes up for businesses wanting to ​​pay international employees is the most cost-effective way to pay in local currency. 

Determining the best foreign exchange rate is important, as businesses stand to lose a lot of money otherwise in fees and costs.

So identifying the best exchange rate is critical, as is tracking the rates to ensure you’re paying at the best rate possible to save money.

Using Wise Business gives you access to the mid-market exchange rate and a rate tracker to help with planning international payments.

Save on conversions with Wise Business

Hiring international employees

There are many ways businesses can hire international employees, such as:

• Using local job boards

• International job search websites

• Through local and/or global recruitment agencies

• Hiring foreign contractors through freelance websites

When hiring international employees, always double-check the following documents alongside any local or national documentation needed based on the country’s law. This could include:

• Passport and/or proof of residency

• Right to work permit/visa (if applicable)

• Related tax documents and information such as their Social Security number or Tax Identification Number for Americans overseas

Bottom Line

Hiring international employees is one of the best ways to scale and bring on diverse new talent to businesses.

While local and international laws and taxation can make that challenging, working with professionals in the field can help navigate these issues and streamline hiring. 

Tools like Wise Business offer several features that make it feasible for businesses to keep and retain local talent.

These financial tools such as multi-currency accounts, exchange rate trackers, invoice management, and mid-market exchange rates.

Open your Wise Business account here

Sources:

1. IRS.gov - Social Security and Medicare tax
2. IRS.gov - Federal income tax withholding
3. SHRM - What is a PEO?
4. Gov.bm - Government Launches Work From Bermuda One Year Residential Certificate
5. IRS.gov - US - Belgium income tax convention
6. OECD - Updated guidance on tax treaties
7. Your Europe - Terms of employment
8. Citizens Advice Bureau - What is the minimum holiday entitlement for employees in Spain

All sources checked 25 May 2022