Technological development coupled with the lockdown due to covid has brought a revolution in the work culture around the world. A lot of companies and employees have realized the benefits of working remotely. Companies are not bound to find talented employees within their geographical location, rather they can hire suitable talent from anywhere around the world with the added benefit of lowering their business expenses.
Employees are also preferring working remotely as it provides freedom to manage their work schedule, saving commute time, being able to spend time and take care of family, or simply just work from anywhere. Remote working, which started out as a fad, is rapidly becoming the norm. Many large companies, employing 1000s of employees, have adopted remote working. It also saves a lot of overhead costs like office rent, office infra, employee transportation, and so on.
Smaller companies, start-ups, and small business owners are also showing great interest in hiring global talent. Many websites have sprung up that allow employers and job seekers to meet and hire remotely. Small location independent business owners are now able to search from a vast pool of talented remote workers.
Still, a lot of businesses are trying to understand how to manage remote workers, their payroll, and taxes.
Managing Remote Employees
A lot of traditional face-to-face work business owners and managers find it repulsive to hire remote workers. Inefficiency of communication and time lags also contribute to this fear.
However, there are a lot of tools available to manage your workers remotely now. Communications tools like Microsoft Teams and Zoom have come up to provide solutions which allow real time meetings and work tracking with your employees.
Tools for collaborative work have already been a thing for a while now, thanks to cloud computing softwares like Google drives, etc. Project management software allows you to assign tasks and check progress in real-time, give directions just like working in a physical office. Many physical office managers also use these tools to improve efficiency of the workforce.
However, managing a remote worker living in a different part of the world in a different time zone can become asynchronous, thus it depends upon your business whether using them is worth the hassle or not.
Choosing the Nature of Employment
The structure of employment is a very vital thing to consider, not just from a business point of view, but it also affects the way taxes will be applied to you and your employee. Drawing a proper work contract after taking into consideration such as the nature of the job, duration of job, tax laws of the home country and the employee’s country (if you are hiring someone from outside your country), payment transfer expenses, etc.
If you are looking for an employee working in a substantial position for a long term, full-time employment might be your choice. However, in many countries you cannot hire someone without having a physical presence in the country. This means you will need to get registered in the country and follow all the labor laws of the country.
If your employee is performing an income generating activity like sales, you may also be required to get yourself registered in that country and pay income tax. For a small business, all this hassle isn’t practical.
Many of the companies that hire remotely, prefer this method of hiring instead of full-time employment. Contract hiring doesn’t constitute an employer-employee relationship, hence the employer is saved from managing the payroll taxes of the employees in their home country. Companies even hire contract workers at higher wages than employees, to avoid all the troubles and expenses of payroll tax compliance.
Freelancing is also a very flexible form of work where employees are allowed to work in their time as per their own convenience, instead of micromanaging their entire work. Moreover, it allows the workers to work with multiple clients. Thus, it is beneficial to both employer and employee. On the other side, you have less control over the worker in this type of arrangement. So if the nature of work requires more control and confidentiality, contract hiring isn’t the right choice.
Paying remote employees has become similar to paying normal employees. If you are already using a payroll provider service to systemize your local employees, the same can be used for remote employees.
With the globalized banking systems, it is easy to remit salaries quickly almost anywhere in the world. Wire transfers are available to schedule payments to your employees by paying a standard fee. Paying your workers in a different currency also has some exchange rate costs, which you have to take into account. These are the additional costs of paying an employee living in a different country.
The more important part is the extra responsibilities attached to employers relating to taxes and social security benefits of the employees. When you are employing people from various countries, you will have to abide by the labour and tax laws of those countries.
When you are employing an overseas worker, you will have to study the labour laws of their country including minimum wages, social security benefits, insurance and other obligations, if you are hiring in full-time work capacity.
Employee Income Tax
The burden of collection and payment of the income tax on the salary of the employee is on the employer. The employer is supposed to deduct and pay the income tax of the employees from their salary. The employee will be taxable as per the income tax laws of the country of their tax residency. Thus, you as an employer will be required to know about the tax laws of each employee and comply with them.
Even when you go for contract hiring options, many countries require you to withhold a certain amount of money from the payment to your contractor, if it crosses a certain threshold.
Things get further complicated when you are hiring an employee in another country. You will have to consider the tax laws and tax treaties between your country and the employee’s country to ascertain the amount of withholding tax. Most countries also have a lot of bureaucratic compliance requirements like obtaining tax certificates, FATCA compliances, etc. for cross-border payment. Usually, these burdens are passed over to the contractor.
Social Security Contributions
Employers are required to deduct social security contributions for Medicare, unemployment benefits, and pension plans from the wages payable to the employee. Every country has specific provisions for this. When you are hiring a remote worker, you will be subjected to these laws. These laws also have compliance requirements like return filing which also carries the onus on the employer.
When you are hiring a freelance contractor, you aren’t responsible for their social security. They will have to manage their own social security as per their local laws just like an independent business owner.
So, are you saying it is all too complicated to hire remote workers? It is complicated if you’re trying to stay fully compliant. The reality is that there’s plenty of remote workers out there that simply get their invoice paid without worrying further about being formally employed or paying social security contributions.
There’s also a couple of freelancing platforms out there that even include not only one-off contracting jobs but offer the option to hire people for a certain period.
This can be one way for employers to deal with the issue. Another way can be to engage outsourcing companies or an Employer of Record. An Employer of Record (EOR) is a third-party organization that hires and pays an employee on behalf of another company and takes responsibility for all formal employment tasks. Using an Employer of Records allows companies to legally and efficiently engage with overseas workers either in a new country or state, without having to set up a local entity or risk violating local employment laws.
An Employer of Record may not be suitable if you’re looking to hire more than 10 employees in one country. In that case, you’re really making an entry or an expansion into a country and you should consider incorporating an entity.
As you can see there are several solutions out there if you want to hire remote workers. It is important to be very open and honest with your employees and contractors especially if they work full time for you.
You can have remote workers that are freelancers, contractors, or full-time employees. Just make sure that you keep in mind any compliance risks especially if you’re hiring full-time employees. The risks are simply not worth it. You could risk creating a Permanent Establishing by having a manager work full time in another country which means a tax obligation in yet another country. So, weigh your options before hiring.
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NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.