Remote work has opened doors to lucrative growth opportunities. For once, you aren’t limited by geographic borders and can hire a diverse workforce with robust talent to work with you.
While we can go on and on waxing poetic about the numerous advantages of hiring a remote team, one overwhelming goal is understanding how to pay remote workers. Particularly, if your remote team consists of numerous professionals from all over the world, things like local labor laws, permanent establishment risks, and employer deductions can impede your growth.
Here’s your one-stop guide to help you understand all you need to know about paying remote teams.
7 Things to Keep in Mind While Paying Remote Employees
Processing payroll for remote workers is just one of the things you’ll juggle as an employer. Usually, companies hire a payroll partner or an in-house specialist to pay employees – in-house or remote.
However, as a business owner, you run a few additional risks such as employee misclassification, payrol errors, non-compliance with payrol laws, etc., when you pay remote employees. Staying aware of the following seven aspects would help you pay remote workers with lesser liabilities and risks.
1. Employee classification
Before understanding how to pay a remote employee, you must accurately define the employee’s role in your company.
Generally, in-office or remote, employees are classified into:
Workers who are employed by your company and receive employee benefits such as healthcare, paid holidays, and parental leaves.
Workers who are employed for specific projects on fixed-term contracts.
Do note that the definition of ”employee” varies with each country. You must run through the local labor laws that lay stipulations that categorize employees and contractors.
Understanding these stipulations ensures employers do not mismanage contractors beyond their scope of employment and avoid the penalties of employee misclassification.
2. Payroll laws
When understanding how to pay remote employees, remote payroll laws in the employee’s home country is another factor you must consider. Employment laws of the remote worker’s home country largely influence how and when you pay them.
For instance, most countries in Europe, such as Ireland, Germany, France, and the UK, have a national minimum wage. If you are an employer in the Qatar or UAE, where there are no laws concerning minimum wage, this can be new to you. In countries like the USA and Singapore, minimum wage laws cover part of the private sector while minimum wages don’t constrain many industries.
Another aspect of payroll that global employers must be aware of is social security deductions or employer contributions.
Although this is discussed in detail in a dedicated section later in the article, here’s a heads-up for you to check out our talent wiki to learn about employer-employee contributions in over 50 countries globally.
Note that in larger countries like the USA and India, payroll laws can vary with each state.
In China, the government adopts a decentralized taxation policy enabling each city to set up laws concerning minimum wages and social security contributions. In such cases, the laws adopted by the province overrule any national-level laws.
Additionally, collective bargaining agreements (CBAs) are another factor that accompany pay-related laws. An employee union and an employer enter into a collective bargaining agreement (CBA) that governs their employment relationship. Countries with strong labor unions such as Indonesia, France, and Vietnam have pay-related statutory requirements that are often influenced by CBAs.
Paying heed to changing payroll laws to pay remote workers ensures you are compliant and do not run into disputes.
3. Payroll forms
Unless the remote employee is an independent contractor, employers must manage the onus of maintaining all payroll forms and offer accurate payslips to their employees.
For example, if both the employee and the employer are in the USA, employers must keep track of documents such as Form I-9, Form W-4, and State W-4 form (where employers have to withhold state taxes). All these forms must be stored for at least three years.
Even when the remote employee lives in a different country to where the employer is located, the latter is still responsible for maintaining tax forms.
Although not universal, many governments worldwide are rapidly adopting e-governance which can help you obtain local tax forms online from governmental websites with ease. They also have dedicated portals for tax registration, filing, and claims.
For additional help, you could contact local tax authorities and get a thorough understanding of what is required to pay your remote employees. It is wise to choose an Employer of Record (EOR) to offload all these tasks and remain compliant with tax laws while you manage your core business tasks.
4. Payslips and stubs
Payslips or pay stubs must contain accurate depictions of gross pay, employee-employer contributions, income taxes, and net salary. Many countries like the UK, France, Ireland, and Australia have statutory requirements that mandate employers to offer payslips.
Usually, the components of a payslip remain the same worldwide.
However, in some countries like India, payslips must contain a breakdown of what is folded into the gross salary.
Generally, in India, the gross pay is the sum of the Basic Salary, the Dearness Allowance, and House Rent Allowance, Income tax, and Employer Deductions. Employers can fold other components into the gross salary: Conveyance Allowance, Leave Travel Allowance, Medical Allowance, Child Education Allowance, and Special Allowance.
In countries where payslip components are much more straightforward, employers can fold allowances for work expenses into the employee’s salary. This must be depicted in the payslip so that the employee can claim tax returns on these allowances.
Employers must understand how salaries are calculated as each these component can be subjected to tax. With a clear breakdown of these components, your remote employees can avail of tax exemptions from the government if they can produce documents to justify spending and investments.
For example, if you include a House Rent Allowance in the payslip of an Indian employee, your remote worker can claim the allowance at the end of the year by producing proof of rental agreements.
5. Payroll cycles
Payroll cycles are the frequency at which employees receive their salary.
Each country has statutory requirements regarding how frequently employers must pay their employees. Some laws stipulate a national payday as well.
Here’s a table featuring a few countries with such requirements.
When you pay remote employees, one is expected to be aware of the local state and federal laws concerning payroll cycles.
In countries like the USA, each state regulates how often your remote employee should be paid.
Contrastingly, in countries like Venezuela, Oman, Yemen, and Zambia, the employment contract terms dictate how often you must pay your remote workers.
6. Permanent establishment risks
Since the permanent establishment is a notoriously gray area, this section only elucidates the effect of the Permanent Establishment within the scope of remote workers.
The Organisation for Economic Cooperation and Development (OECD) defines a permanent establishment as a fixed place of business from where revenue-generating activities are conducted either wholly or partially.
In simple terms, it’s the scenario where businesses carry out revenue-generating activities in a foreign country for a prolonged time.
Most international businesses function without risking any permanent establishment. They trigger small non-compliance risks when they send employees to sign contracts or carry out sales but this is usually sorted out by with a local legal expert.
However, with the pandemic accelerating global hiring and the creation of globally distributed remote teams, businesses must understand tax laws and pay taxes appropriately in all jurisdictions they generate revenue.
When paying remote workers, look for cases where you could trigger a permanent establishment. For example, when you have remote workers working abroad carrying out sales activities such as business development, introductions, and lead generation, the permanent establishment risk, albeit low, is cautioned.
Employers can tackle this by looking out for double tax treaties and consulting local tax authorities. However, most businesses use a local payroll partner to solve this issue.
7. Locally relevant benefits
It would be quite insufficient to skip the importance of employee benefits when understanding how to pay remote employees.
Aside from improving talent retention and your employer brand, employment benefits boost your remote employee’s morale and loyalty to the company. In a virtual setting, where positive facial cues and frequency of recognition are less, employment benefits help you express gratitude to your remote employee.
However, your work doesn’t stop with simply allocating big budgets for annual bonuses and healthcare insurance.
Employers must craft a compensation strategy that ensures there is no inequity among peers of a remote team. More importantly, these employee benefits must also be useful in the employee’s country.
Plan a Pay Policy for Remote Workers
Having a remote pay policy strategy to pay remote workers not only helps you stay true to your workplace’s culture and values but also enables you to hire and retain talent. It contributes greatly to your employer brand, particularly on the aftermath of the Great Resignation.
How does a poor remote work pay policy affect employees?
A poor remote work pay policy can drastically affects your in-house, hybrid and remote employees. Regardless of how employees work, their camaraderie and casual catch-ups will involve discussions around salaries and benefits.
If your in-house employee senses that there is a certain bias for remote workers and vice versa, this may lead to extreme dissatisfaction. And with the rising cost of hiring talent, this would add a huge load onto your hiring budgets.
Also, without a strategic way to ensure homogenous salaries and benefits are paid across remote and in-house teams, your managers may have poor or no direction in disbursing and negotiating salaries.
This may lead to:
- Low morale
- Employee dissatisfaction
- Feelings of workplace injustice
- Strain on peer relationship arising out of pay inequity
- Lower productivity
- Promotion inequality
Questions to ask yourself to form a remote work pay policy
You need to be sure of the following aspects when planning a remote work pay policy.
- Should we pay remote workers based on their location?
- Should the policy cover expenses about workplace equipment?
- What are my payment options?
- Do we have the expertise to manage payroll laws and expectations worldwide?
- How do we manage benefits for remote workers?
How to formulate a remote work pay policy?
Between employee value and operational viability, you must strike a delicate balance. In addition to paying each employee what they deserve, pay policy discussions must consideration:
- Fairness and equality within the workforce
- Financial benefits and limitations of remote work
- International compliance
- Long-term organizational goals
Here are four techniques to formulate policies to pay remote workers:
Salary benchmarking: Salary benchmarking is researching industries, job roles, experience levels, and benefits to arrive at an appropriate package informed by the dynamics of the local employment market.
Surveying: You can also conduct surveys and qualitative interviews to gauge the expectations of your employees. This gives you an overall picture of expectations which you could compare with salary benchmarks.
Consider financial viability: Although the above process expresses your employees’ desires and helps you manage their expectations, it is equally important to align with your revenue and financial viability.
Consider in-house expertise: Are there global compliance experts who can help you navigate foreign payroll laws when paying remote workers?
Payroll errors can heavily cost both your business and your employee. Severe penalties pounce on employers who are non-compliant with the payroll laws of the remote worker’s state or country. Similarly, when you err on paying your employees, you damage your reputation, fuelling employee turnovers.
Thus run an internal audit of your payroll teams. If they are overwhelmed already, consider partnering with EOR and payroll services to run global payroll with ease.
Risk assessment: You can use a risk assessment to determine if a specific location raises any red flags for your business or the worker. The risk assessment reports can provide local information on HR, tax, immigration, and compliance concerns, highlighting concerns regarding permanent establishments. By understanding these local conditions, you can develop universally beneficial salary packages.
How to Calculate Employer And Employee Contributions for Remote Workers?
Employer-employee contributions are too important to give the go by when paying remote employees. Employers must ensure they deduct contributions based on the payroll laws of the employee’s home country.
Commonly, employer-employee contributions are:
- Pension fund contributions
- Healthcare contributions
- Unemployment payment contributions
- Social security contributions
- Additional cess for education and government initiatives
- Voluntary contributions
The table explains how social security contributions vary from country to country:
Employers must thoroughly review laws in each jurisdiction to pay compliantly. Moreover, understanding pension, healthcare, and social security contributions can also help you set benchmarks for designing robust benefits packages – for e.g., you can understand how extensive health insurance coverage is and offer even better private health insurance for your remote worker.
Which Currency Should You Use to Pay Remote Employees?
If both the employee and employer aren’t present in the same country, the latter can pay their remote workers in the local currency. The added effort is only required when employees are in a different country from the employer.
Here is where employers need to be mindful of a few things. Employment laws in Indonesia, and Vietnam regulate employers to pay in their remote worker’s currency.
Some countries allow employers to decide the terms of payment concerning currencies. If the employment contract stipulates that the remote employee will receive the payment in their local currency, employers must be aware of the foreign currency’s volatility.
Foreign currency exchanges are prone to fluctuations and can cause your employee to lose money. This can contribute to employee dissatisfaction in the long run, especially in a remote setting, and can cause deep distrust and envy.
Need help with paying employees in their home currency? Partnering with Employer of Record solutions like Multiplier can help you pay your remote employees across 120+ countries in their local currency.
What Is Income Tax for Remote Workers?
It is the company’s responsibility to pay employee income tax in the country where its employees are tax residents – not in the country where it is headquartered.
Residency status for remote workers is determined by the country they live and work in, their citizenship, and the length of time they have lived and worked there.
In some cases, workers pay more than one form of income tax. As an example, the United States has a federal income tax, and some states and localities have additional income taxes.
There are some countries, such as Bangladesh, where employees can file their income taxes themselves before a year-end deadline. Generally, an employer withholds income tax from an employee’s paycheck and pays it to the respective tax authority.
To ensure that remote workers’ income is taxed correctly, you must determine each employee’s applicable tax codes, brackets, or rates. Your business may risk fines or legal action if your payroll process fails to withhold and pay the appropriate taxes.
Many jurisdictions have progressive income taxes, meaning that the more someone earns, the higher is their tax percentage. In some countries where flat-rate taxes apply to all employees, such as Romania, Ukraine, and Bulgaria, the percentage varies according to the employee’s income.
Taxes for your independent contractors
Most companies hire contractors instead of international full-time remote employees due to the difficulties of hiring international workers.
This arrangement makes life much easier for self-employed contractors as their taxes are their responsibility; they do not have to open branches and register with international tax authorities. They do not have to get caught up in the legal hoops.
If, however, your company is based in the United States, you may still be required to issue 1099 forms if your contractor is located there.
However, hiring remote employees shouldn’t be hindered by complexity. Hiring and paying remote employees can get complicated with different legal jurisdictions, legal gray areas, and edge cases.
However, with globalization now encompassing global talent acquisition and management, the benefits of setting up systems and strategies to pay remote employees are definitely worth the trouble and teething problems.
4 Ways to Pay Your Remote Workers
By now, you’d probably be wondering, “Is the stress and hassle of hiring a remote team still worth it?”
The answer: Yes. Several solutions to payroll and compliance are available — with multiple options for you to choose from — but the skillsets of the global talent pool are irreplaceable. Here are four ways with which you can confidently pay remote employees.
Keep your employee on a home country payroll
If you hire employees from your home country (the country where you and your company are based), the easiest thing to do will keep them on a home country payroll. This will usually still work if your employee is transferred overseas for a short period or temporarily moves abroad.
However, it would still be best to double-check your local labor laws to validate this, as your employee may require a special working visa while overseas or could even be required to pay taxes abroad, depending on the country’s tax residency status and laws.
Set up a local entity
The most straightforward, by-the-book method to hire an international employee directly, would be to establish a legal entity in the employee’s country. However, it is also one of the most challenging ways, given the amount of time and money needed to do so, not to mention having to navigate through cultural and language barriers in the process.
If you’re looking to employ more than 25 people from the same country and are also looking to expand your business there in the future, then this solution might just be worth it. This solution also makes sense if it is imperative for you to invoice your customers in their local currency.
However, if you have less than 25 employees from that country or have employees scattered around the globe, then this might not be the most effective solution for you.
Partner with a local company
Let’s say you have a client or partner company in the same country as your employee. One option would be to have an agreement between the client or partner and yourself where your employee would be employed by your client or partner but fully financed by your company.
Essentially, the funds to pay your employee will come from you, but the client or partner will handle the payroll and compliance with the local labor laws from their end. Of course, this would only work in particular situations, with clients and partners you trust. Still, if your employee is working directly with a local client or partner, this would be an easy and highly beneficial option.
This is also disadvantageous if your remote team is spread across different countries like the first option. The likelihood of finding a client and partner in each country is small, and the overall maintenance and back and forth can be time-consuming.
Another disadvantage is that this might cause a conflict of interest between you, your employee, and your client or partner. This can result in a position where your employee will have to choose between you and your client or partner.
Use an Employer of Record like Multiplier
One of the easiest ways to pay your remote team legally is by working with an employer of record (EOR), who can provide full payroll and employment compliance services in your employee’s country.
Instead of setting up a local entity or partnering with a local company, an EOR like Multiplier has an established entity to hire, pay, withhold taxes, and provide benefits for your employee. Multiplier’s SaaS-based solution enables companies to hire and manage anyone anywhere with just a few clicks by providing local compliance, global payroll, and international payments.
So if you’re looking for the most stress-free way to pay your remote team legally, outsourcing payments, taxes, and compliance to a third-party Multiplier is the way to go.