When you’re an employer, it’s not uncommon to have employees all over the place. There are some examples of employees working outside of U.S. borders, without the company having an official presence in that country.

Some examples include temporary employees who go abroad for a specific project or having employees go to other countries to test things out and see if a full expansion would be a good move.

There is also the case of having employees who are nationals of the country they’re working in. A company in the U.S. might hire someone from Honduras as an example, and that person would be doing work on behalf of the American company.

Compliance is important, and businesses that don’t approach these situations in the right way can find themselves in a lot of trouble. This is actually becoming a more pressing problem for many organizations because the use of technology allows for such ease when it comes to working across borders.

You can pay employees using convenient services like Remitly, but what else should you know beyond that, especially regarding compliance?

Is It Best To Register in the Country?

What businesses need to first consider is whether or not it’s best just to go ahead and register with the country where they’re doing business.

Your business can register appropriately, and get a local taxpayer ID. Then, employees who are working in that country are on local payroll.

Businesses will have to pay for things like set-up and administrative fees, but it is the best way to avoid regulatory problems.

However, if a business is simply testing the waters or has employees working on a temporary basis, they’re probably not going to spend the time and money registering in the country.

Classifying Employees As Contractors

Most businesses will go a different route aside from registering in a foreign country.

Instead, they’ll classify the person working overseas as an independent contractor. When businesses do this, the contractor will likely have to generate their own check stubs and the business itself can sidestep local tax and compliance regulations in the country where the contractor is working.

What can happen ultimately, however, are compliance-related problems in both the U.S. and the country where the person is working.

Most countries, including the U.S., have some pretty specific requirements as to what constitutes a contract worker.

For example, these people have to be short-term workers, and they should be self-employed. If someone was at one point an employee for the business, and they had all the benefits of being an employee, and then they become a contractor when working in another country, it can be problematic and regulatory bodies might take notice of this change.

There are other risks of hiring contractors or classifying an employee as a contractor. It can be scrutinized by not only the tax authorities but also immigration authorities. For example, it may be perceived that you’re trying to go around visa and work permit requirements with contractor classifications.

Check If A Payroll Law Compliance Option Is Available

Before making any other decisions, it can be worth it to check and see if the other country has what’s known as a payroll law compliance option.

This means that foreign employees who aren’t officially living in the country they’re working on can be registered as payroll only. This makes the employee legal in terms of payroll, and there are unique in-country tax requirements for this kind of situation.

In the U.K. and Thailand, some exceptions let businesses hire and pay local staff, and they don’t have to make local withholdings and contributions. That person can then work as an independent contractor, so they’re responsible for their own taxes and social security filings.

The situation mentioned above, with payroll-only registrations, are available in countries including France, Sri Lanka, and Estonia.

Some countries have also created an option where employees can say they are foreign payrolled as they report to local tax agencies.

There’s also something called shadow payroll. This means that the overseas part of the business is different from the U.S. division.

There’s not one specific option that’s going to work best for all businesses, all situations and all employees. The best thing a business can do is consult with compliance experts in the U.S. as well as the country where their workers will be, to see what options are available and what could create red flags.

Not doing so can leave a business very vulnerable not only in the other country, but also here at home in the U.S.

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