6 Key Components of International Payroll
A multinational company with a global mobility program will face the challenge of running an international payroll in one or more countries. Taking into consideration that the laws differ in each jurisdiction, there is no one approach to paying employees on foreign assignment.
A multinational company with a global mobility program will face the challenge of running an international payroll in one or more countries. Taking into consideration that the laws differ in each jurisdiction, there is no one approach to paying employees on foreign assignment. The six key components of international payroll need to be thoroughly reviewed for each country of business activity, and primary distinctions need to be identified for full compliance.
A company will have the option of running a host country payroll using in house resources, or using a local partner or GEO to facilitate withholding and contributions. That decision is often based on the degree of business commitment in the country and the complexity of local payroll rules. There is also the choice of payroll method to be used, as discussed in this whitepaper.
Regardless of the payroll method used, the six primary components remain the same in each country.
Every employee will be paid a salary while on assignment, as a fixed payment at regular intervals, typically monthly or bi-weekly. Monthly salary based on an annual compensation amount is paid to executives, managers and office staff. Non-professional positions and independent contractors may be paid hourly, based on the minimum wage rate of the country where work is performed. Even part-time and commission-based employees are entitled to a legal minimum wage.
Salary amounts for international assignments may be structured differently than in the home country, depending on benefits in kind and whether a split payroll is used. There are also ‘flexible salary’ strategies available to compensate expat employees to minimize tax burdens and increase net pay.
2. Individual Income Tax (Federal and Regional)
Almost every country in the world will levy an income tax on any worker registered on a local payroll. The rates for income tax vary widely, and may necessitate a company tax equalization policy to ensure fairness for both employee and employer. There are two types of income tax: federal, and regional or state. Both are based on income and subject to monthly withholding from pay.
Federal Income Tax
Federal income tax is levied by the national government based on income level. For example in the US, federal income tax withholding is mandatory for any employee, whether a resident or non-resident. Although there may be tax treaties or other credits that offer relief from double taxation, even non-residents must file an annual tax return. There may be deductions available that lower the tax rate, but tax must still be withheld based on the employee’s current status.
Regional/State Income Tax
In some countries, employees are also responsible for paying a regional or state tax rate, which can vary widely in amounts between regions of the country.
In the US, several states do not have tax, but employers still have to register with the state taxing authority and declare their employees’ income to payroll providers.
3. Employer’s Social Security
Social security contributions may be mandatory for employers in some countries, but may be offset by any treaties with the home country to avoid double payment. The employer social security contribution may cover items such as government pensions, disability, medical care and workers’ compensation for job site injuries.
For example, in Australia the employer contribution is equal to 9.5% of the employee’s monthly salary for registered pension and retirement funds. In India, the amount is 12%, allocated between pension and other benefits, but withdrawal of pension funds is restricted for expats who leave the country.
4. Employee’s Social Security
Employees are also often required to contribute to social security, which could allow them to receive some benefits even when they leave the host country. The employee contribution covers similar benefits, but may have a lower contribution rate than the employer portion. For instance, the employee social security rate in Australia is only 2% of base earnings.
5. Payroll Tax
Payroll tax is withheld by the employer on behalf of the employee, usually based on the earnings of the employee. However in Australia, the payroll tax is assessed based on the total wages of a single employer for all employees, if they exceed a certain amount.
Payroll taxes may be collected by both federal and regional or state governments, and are used to fund items such as unemployment insurance, workers’ compensation for jobsite injuries, healthcare and the social security contributions discussed previously.
When a worker is sent on foreign assignment the benefit and compensation structure will differ from that of the home country. Benefits in kind and monetary allowances are frequently a significant part of the compensation package for an expat employee, but there can be complications due to local laws on inclusion or exclusion from income and specific tax policies. There are variable rules on housing allowances, meals, relocation expenses and childcare, which must be considered to arrive at a true after-tax compensation amount.
Despite a trend to reduce benefits packages for expat assignments, it remains a key attraction for many workers due to the opportunity for saving a larger part of salary while abroad.
Unique Payroll Practices
Countries may have unique payroll components that require further effort to administer, such as the practice in Italy, France and Switzerland to pay a 13th and 14th month of salary as a bonus. Usually this type of bonus is stipulated in the employment contract, but may also be mandated by statute.
Method Used For Payment
A decision must be made on how international payroll is paid, either by electronic bank transfer, paper check or other alternative depending on company policy and/or employee preference. In some countries, security may also be an issue for payment, and there can be delays in confirming transfers.
Timing and Frequency of Running Payroll
As with domestic payrolls, international payroll should follow a set schedule for payment date and frequency (monthly or every two weeks). These dates should allow for time zone and date differences if payment schedules are set in the home country office.
Payroll requirements may be set by statute in some countries, and to be fully compliant those rules should be followed closely. Examples of statutory payroll requirements include:
- Necessity for a registered legal entity to run the payroll
- Prohibitions against running a remote payroll
- Complying with local withholding rules while running a dual or split payroll
The six key components of running international payroll will be familiar to all HR professionals, but there are specific rule distinctions in each country that must be followed to be compliant in all areas. Payroll considerations include salary, income tax withholding, social security withholding, payroll tax and benefits in kind. These components affect both the employer in terms of the net cost of the assignment, as well as the employee, whose total compensation package can be affected by host country laws.
Some of these challenges can be offset by the use of a GEO solution such as Shield GEO, who will provide a local employer of record to run payroll and can ensure compliance with all local statutory nuances. This can save the company the expense of administering the foreign payroll, and allows for a quick entry into a new market.
About Shield GEO
Shield GEO provides Employer of Record solutions in more than 90 countries around the world, ensuring legal compliance and rapid deployment of staff into any market for our corporate clients. We make international employment simple. To find out more about us, please get in touch.