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Global payroll vs. local payroll

What are the main challenges of global payroll?

How can you handle global payroll services?

What is global payroll

Global payroll is a centralized process of calculating employee wages, withholding taxes, administering benefits and bonuses, and delivering payments to your employees in different countries in compliance with their local laws.

Global payroll involves tracking employees’ working hours and paid time off, keeping payroll records, delivering payslips to overseas employees, protecting their data, and organizing international payroll data.

Some people consider paying international contractors a part of global payroll, especially if a company and contractor have an ongoing partnership. Technically, independent contractors are not on employee payroll: companies only cover payroll taxes and employee benefits for employees, not contractors. However, paying foreign contractors introduces complexities, and many global payroll providers can help you pay contractors abroad.

Global payroll vs. local payroll

The difference between domestic and global payroll is that in global payroll, you have to account for various labor laws, provide local benefits, calculate wage conversions, and send payments to a host of unique countries.

For example, say you hired people from the Netherlands, Colombia, and Nigeria. These countries have different:

Understanding all of the above for one international hire is a big task. Doing so for a global team spread across countries is even more challenging. Non-compliance penalties are steep, so it’s not surprising that many companies prefer a global payroll solution to streamline global payroll and save time, money, and effort in handling it in-house.

What are the main challenges of global payroll?

When embarking on global expansion, hiring and paying international employees becomes more complex. You must comply with a new set of labor laws each time you hire an employee from a different country. Some specific areas of compliance include:

Employment laws: When you hire someone in a foreign country, you must adhere to the employee’s country’s labor laws, not the company’s. Labor laws determine the employee’s minimum wage, maximum weekly working hours, and mandatory employee benefits (such as paid time off, maternity leave, health insurance, and social security). All these aspects of employment vary by country and even by employee. Minimum wages might differ depending on the employee’s level of education or the job they perform.

A US company, for example, must provide 30 days of PTO to anyone they hire in Brazil and 52 weeks of maternity to anyone they hire in Serbia, even though US laws don’t require doing so.

Tax regulations: When you hire internationally, you must learn about the country’s federal and regional income taxes, payroll tax, tax deadlines, tax withholding regulations, and so much more. 

For example, a work-from-home stipend counts as taxable income in some countries but not in others. Even in the US, the stipend only counts as taxable income if an employer provides funds to purchase equipment, but not if employees reimburse the expenses.

Even if you use payroll software to automatically calculate your total employer costs, you need to learn a lot before you can rely on automation to pay a global workforce.

Data management and security: Payroll involves sensitive employee data, like social security numbers and bank account information. 

Remote companies that store and pass around data online are at risk of exposing sensitive data, data leakage, unauthorized access, phishing scams, and ransomware attacks.

Once you go global, you have to comply with international data regulations. For example, if you handle payroll data for EU employees, you’ll have to meet GDPR standards. If you outsource global payroll to another company–an EOR or a local payroll service provider–signing a Data Processing Agreement (DPA) with them protects you from liability should noncompliance issues arise.

Check out our payroll security tips for further reading.

International money transfers: Whatever method you use, international money transfers involve fees that can add up. You may also need to maneuver situations where an employee can only accept a specific payment method. 

You need to pay attention to:

  • The payment methods available in each employee’s country of residence: SWIFT, Payoneer, and similar money transfer services, debit cards, cryptocurrency, and so on

  • Currency exchange rates: employees must be able to receive payments in fiat (or the local legal) currency

  • Other types of bank fees, such as transfer fees and intermediary bank fees

  • The time necessary for global payroll to process, money to be transferred, and your employee to receive their payment

Also, international money transfers sometimes require additional documentation from the employer so that the employee can prove the transaction is legitimate, like invoices or transaction statements.

How can you handle global payroll services?

You have three options to pay your international workers:

Hire non-employee workers: Hiring independent contractors, freelancers, or sole proprietors are more affordable and less demanding than hiring full-time employees in terms of payroll. You won’t need to manage recurring payments, payroll taxes, or local employee benefits. Instead, you pay invoices one at a time.

Check out our guide on paying foreign independent contractors for more information.

Use an employer of record (EOR): An employer of record (EOR), sometimes called an international PEO, is a third-party company that takes care of global hiring, payroll management, and compliance. EORs set up local entities worldwide and act as the legal employer and global payroll manager of the people you hire.

Using an EOR means a hands-off global payroll process, consistent real-time reporting, a single payroll data source, and trusted payroll experts to work with.

Plus, outsourcing global payroll and human resources (HR) gives you more time to focus on core business needs. The EOR is responsible for generating contracts, onboarding providing payments, filing taxes, and helping with workforce management and compliance wherever you hire.

Open a foreign subsidiary and outsource to a local payroll provider: Your last option is to open a foreign subsidiary or local legal entity wherever you want to hire an employee. Then you can outsource payroll to payroll partners with local expertise.

Opening a foreign subsidiary is the most time-intensive option: you have to open a business in a foreign country so you can hire there. From there, you can handle payroll operations in-house or call up a local payroll provider and use their payroll system.

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