HR Knowledge: Payroll Processing for Remote Employees
No doubt, the Covid-19 pandemic has caused a significant shift in how companies operate. Due to a series of lockdowns imposed by countries around the world, many companies have resorted to hiring remote workers. Expectedly, working out an effective system to pay remote employees has become an issue of concern for many businesses.
In the wake of the coronavirus outbreak in 2020 and the lockdown imposed by countries, a more vibrant era of running business corporations was born. It is the remote employment industry, where people can work from the comfort of their homes, from anywhere in the world, and get paid as well.
The Hybrid Environment
There are technologies available that have made remote work possible, causing businesses to thrive regardless of local and international lockdown restrictions. Thankfully, remote work has opened doors to lucrative growth opportunities for employers and employees alike.
Some companies, especially those in the digital space, even run purely on remote teams working from all corners of the globe. For once, people aren’t limited by geographical borders. You can hire remote workers to carry out the day-to-day tasks from any part of the world. It’s the hybrid business environment made possible by technology, and it’s here to stay.
Payroll Process for Employees
When you talk about remote work and ways to pay remote workers, processing payroll can often become a dicey subject matter. This is because remote employees could be spread across different areas, states and countries. This will no doubt bring about some obvious complications that would have to do primarily with employers’ and employees’ compliance with legal requirements of remote work at that level.
Expectedly, the effectiveness or otherwise of a payroll system for remote workers is likely to impact income taxes and other forms of taxes, both local and international. In most cases, employees’ country of residence is a primary factor for the type of tax that’s going to be applicable.
To possibly take care of issues that may arise out of engaging remote employee payroll, your HR team in charge of payroll service will typically initiate a payroll system enabled to accommodate local and global tax calculations and settlements. Also, remote workers are often required to comply with state or local tax obligations. They may also qualify for tax relief options, depending on their locality.
The Challenge Of An Effective System To Pay Remote Workers and Remote Teams
In spite of the possibilities and promises, many companies are finding that it can be quite a challenge to devise a seamless strategy to pay remote employees. If your company has a number of professionals working from different parts of the world, then you need to be aware of international laws and regulations. Important factors like local labor laws, tax income laws, employment restrictions and provisions, permanent establishment risks, and employer deductions should be taken into cognizance.
This is critical because falling foul of any employment requirement as it pertains to remote work and hiring remote workers could hamper your business. However, your consideration should not be for international laws alone; you must also look out for local regulations and tax requirements, especially those relating to your employee’s home state.
Some laws require that companies hiring remote employees conform to standards consistent with global payroll regulations. It is the responsibility of your HR department to follow due protocol to ensure that your business doesn’t go against any international laws concerning hiring and paying remote workers. Even a small breach in any of the processes of paying remote employees can have very significant legal implications.
For instance, knowing exactly ‘how’ to hire a remote worker in the first place will save you a lot of trouble. That’s because the meaning of the term ’employee’ is different from one country to another. Understanding the various labor laws will help you to avoid the risk of incurring the penalties of employee misclassification as you go about setting up your remote team.
Important Factors To Have In Mind When Hiring and Paying Remote Employees
Typically, most companies hire professional payroll service companies to handle all payments for them. This is regardless of whether or not the employees of the company work remotely or on the ground. But oftentimes, as companies have found, the process of paying remote workers is different for different countries.
Processing payment to remote employees is quite straightforward for some countries and not so straightforward for others. There are individual regulations and income tax requirements unique to countries, which your HR would have no trouble finding out about. Alternatively, while your HR takes care of business in-house, you could employ the service of a payroll expert who’ll be in charge of process payroll for remote workers.
In some cases, after all, is said and done, the primary issues and complications that come to play when you run a business that has to pay remote employees cannot be erased altogether. These include issues like employee misclassification, payroll errors, non-compliance with payroll laws and regulations, and so on.
In China, for instance, they run a system of decentralized taxation policy, and it’s working for them. Under that tax system, each region is free to set up its unique laws governing minimum wage and social security taxes. Unlike countries like the US, India, and the UK, the laws adopted by individual regions in china are actually superior to laws instituted by the central government.
So without further ado, let us consider the following points to have in mind when you pay remote workers:
Employee Classification
Along with deciding on a workable remote payroll process system for your company, it’s also important that you put the issue of classifying your employees in proper perspective. What role is the remote team expected to fill up? Why are you bringing them onboard?
To this end, there are two classes of employees, regardless of whether or not we are talking about remote work – permanent employees and Independent contractors. Permanent employees refer to regular workers on the company’s payroll who are entitled to all the packages like healthcare, holidays, housing, work leave, etc.
Independent contractors, on the other hand, refer to workers engaged in handling specific projects in your organization based on special terms. Typically, contractors are not entitled to other benefits like permanent employees.
Payroll Laws
This is one of the most important considerations for any business that has to pay remote employees. Employment laws of the remote worker’s home country should not be overlooked, as they largely influence how and when you pay them, as well as what you pay them.
Most countries have labor laws that have to do with minimum wage; the least amount that workers should earn as salary. This figure can be applicable, regardless of whether or not it’s remote work. While this is true for countries in Europe – the UK, France, Germany, Italy, and Switzerland – it is not applicable for countries like Qatar or the UAE, where there are no minimum wage laws.
Payroll Forms
The company must maintain payroll forms and offer accurate pay slips to their employees when due consistently. This is for the purpose of documentation and to avoid legal complications that may spring up anytime in the future. As an example, employers are expected to keep track of payment and tax documents and information such as Form I-9, Form W-4, and State W-4 forms.
These documents must be kept properly, even if the remote employee resides in a different country from where the company is located.
Many governments these days are moving to adopt e-governance, which will make local tax forms accessible online from governmental websites with ease. To save yourself the trouble, you could simply contact the local tax authorities to get a thorough understanding of what is required to pay your remote employees.
Pay Slips And Stubs Services
Also, for the purpose of record keeping, do ensure that your company’s payslips or pay stubs contain accurate information on gross pay, income taxes, and net salary. In some countries, in fact, it is mandatory by law to issue payslips to your employees. In countries like India, payslips are also required to contain a breakdown of the gross salary, amongst other information.
In similar countries where payslip details are pretty much straightforward, employers may fold allowances for work expenses into the employee’s salary. But this must be clearly outlined in the payslips to ensure that the employee can claim tax returns on the allowances.
Furthermore, it is in the interest of employers to understand how salaries are calculated, as each of the various components that make up the total salary can be subjected to tax. At the end of the day, remote employees may qualify for tax exemptions if they can produce documents like pay slips to justify their spending.
For example, if you were to include a ‘House Rent Allowance’ as part of the information on your payslip, the remote worker might be able to claim the allowance afterward by simply producing proof of the rental agreements.
Payroll Cycles
These refer to the frequency at which employees receive their salaries. Now, as a business hiring remote workers, you have to understand the statutory regulations of the country where your remote workers come from concerning when or how frequently workers get their salaries.
So you must constantly have it in mind as you pay remote employees. You have to be aware of the local, state, and international laws that govern hiring remote workers and payroll cycles. In the US, the individual states are responsible for regulating how often remote employees should get paid.
Permanent Establishment Risks
According to the description of the Organization for Economic Cooperation and Development (OECD), permanent establishment refers to a fixed business environment from which revenue-generating activities are carried out, either wholly or partially.
Essentially, a permanent establishment is a scenario where companies carry out business activities in a foreign country for a prolonged time and generate profits from those activities. However, due to the impact of the covid-19 pandemic and the new trend of global hiring, it is the onus of businesses to come to terms with international tax laws and remit taxes appropriately when due.
Companies paying remote workers must look out for cases where they are likely to trigger a permanent establishment risk. For companies with remote teams working abroad and carrying out sales activities, and generating revenue in those countries, the permanent establishment risk is evident.
In order to take care of this risk, employers could aim to double tax contracts and reach out to the local tax authorities. Alternatively, to avoid prolonged complications in the process, your business could simply hire a payroll partner in the particular country to handle it more professionally.
Positive Remote Work Pay Policy
Essentially, it’s about your business sustainability. It’s all going to come back to you! When your HR is unable to come up with a great remote work pay policy, the backlash will catch with your business revenue in a matter of time. A poor, remote work pay policy will potentially hurt your business expansion drive.
Locally Relevant Benefit
The core needs to put in place a reward system for your remote teams is predicated on the fact that workers respond kindly to reward stimuli. So with benefits relevant in the countries your employees are working out from, there’s likely to be a boost in the morale of your remote employees.
In addition to boosting morale and sustaining employees’ loyalty, benefits are also important as a mechanism for talent retention. Your workers are not likely to go anywhere in search of greener pastures if they feel appreciated.
Acceptable Currency to Pay Remote Employees
This is not really straightforward, so employers need to be absolutely sure. In a case where the employee and employer are not in the same country, it is generally accepted that the salary is paid in the local currency of the country where the remote workers live.
However, the US dollar seems to be the de facto global currency and is therefore preferred as payment currency by almost everyone who works remotely. Most experts who work remotely for international businesses often fix their rates in dollar terms. Still, it is not against the law to pay remote workers in their own local currencies.
For instance, employment laws in Indonesia and Vietnam require employers to pay remote workers’ in their local currency. In contrast, there are a few countries where the decision pertaining to payment currency is left at the discretion of the employer. He decides which currency works for his establishment.
Income Tax For Remote Workers
According to international tax laws, the company is required to pay employee income tax in the country where the employees are tax residents rather than in the country where the company is located. Usually, an employer may choose to withhold income tax from an employee’s paycheck and remit it directly to the respective tax authority.
Depending on technicalities, workers sometimes have to pay more than one form of income tax. As in the case of the US, for instance, workers pay federal income tax, and the states also have income taxes as well. To prevent your business from being sanctioned over tax offenses, it is in your place as a business owner to determine that each remote worker’s income has been taxed appropriately.
Aside from the ordinary income tax, there are some countries that operate with progressive income taxes. This means that people are taxed higher every time they make more money. It’s not fixed. So the more someone earns, the higher the tax percentage they’ll be taxed.
Taxes Applicable To Independent Contractors
For the purpose of cutting added or overhead costs, a number of companies prefer to hire independent contractors other than full-time remote employees. Part of the reason companies are making this switch to contractors is due to bottlenecks in the process involved when you’re hiring international workers.
However, the contractors don’t mind the arrangement. Because their employment is not officially full-time, it means they get all their money directly, and their employer doesn’t have to make tax deductions from their salaries. It’s also good for the employers because then they don’t get to take the fall for the contractor if he fails to remit his taxes, and it all goes south.
For most countries, it works that way, and both employers and contractors are happy. In the US, however, the employer is required to still issue 1099 forms, even if he’s dealing with a contractor, so long as the contractor is also located in the US.
Potential Risks Involved In Payroll For Remote Workers
As with most endeavors, there are risks involved when you pay remote workers. Let’s consider the following risks as they relate to payroll for remote workers:
Timekeeping And Payroll Fraud
This is one of the most common risks involved. Because the employees are essential in places where you can’t readily see them physically, you cannot control or check the hours they actually put into the work as contained in your agreement. Your workers could just be getting paid for hours they don’t really dedicate to the job.
Thankfully, there are ways you can use to protect your company from timekeeping and payroll fraud.
• You must limit remote working opportunities to establish employees you can count on; you can’t hire people you’ve not proven to work remotely for you. If in doubt, perhaps you should contract an outsourcing expert to recruit for you.
• Take advantage of software to track remote workers’ productivity while at work. Monitor your team.
• If it’s within your power, assign someone to routinely check in with remote employees. If possible, do it yourself, especially if it’s within your city or country.
• Offer flexible hours for remote workers to discourage time theft; this should lighten up the work environment; make it more relaxing for the workers.
• On hiring your remote workers, have them sign a timekeeping fraud policy that clearly defines fraudulent activities and consequences. This should keep them guided.
The Way Forward Toward A Viable Remote Payroll Solution
We reiterated it already; the world has evolved, and the remote work trend is here with us for good. Businesses that haven’t decided to join the trend will discover that they have placed themselves at a disadvantage soon. Businesses have moved on at a pace unprecedented. The system of hiring workers and paying is not the same anymore.
People are more empowered to demand flexibility in both when and where they work. You can have professionals from various fields, working from different parts of the world, yet working together. In the final analysis, the responsibility of attracting and retaining top talent rests squarely on the shoulders of the business owner.
Techniques To Create Policies To Pay Remote Workers
As we’ve reiterated, having in place a veritable payroll policy to pay your remote workers will not only help you stay true to your workplace’s culture and values but would also place you in a good position to hire and retain the best talent.
In view of the changing phases of global business, the covid-19, and the Great Resignation that affected many companies adversely in the wake of the pandemic, this policy will contribute greatly to shaping and repositioning your brand as an employer.
Assessment of risk: in creating a policy to pay remote workers, try using a risk assessment strategy if a specific business location is right. If you see the red flags, you know what to do. The importance of assessing likely or potential risks can arm you with necessary information on HR, tax matters, immigration issues, as well as compliance concerns. Ultimately, the understanding of these factors will help you develop what can be described as a beneficial salary package for remote workers.
Conduct surveys: conducting surveys and interviews will help you know where your business is at and how to take it a step further. With it, you can accurately assess the expectations and aspirations of your employees. Surveys should contain questions relevant both to the company and the workers themselves. At the end of the day, a quality survey leads to a realistic pay policy that would be agreeable to all.
In-house expertise: In hiring and paying remote workers, you don’t want to go against regulations. So you might want to secure the services of an expert who is adept at global compliance issues and can help you navigate foreign payroll laws.
Financial viability: Even as you aim to make your workforce happy with rewards and bonuses, it is important you’re your business is viable and on solid ground. If you pay salaries from lean resources and the business can’t keep up, very soon, even the employer will be out of a job. So it is essential that you align employees’ expectations with your revenue and financial viability.
Salary benchmarking: For this, you have to do a general survey across the industry to find out what an ideal pay package should look like. It would be best if you researched companies identical to yours, the job descriptions of employees and their experience levels, etc. All of this put together can help you decide on a salary benchmark for your team.
Making the switch to remote payroll management can look challenging, but it’s one your business has to make, considering the rapidly evolving world we live in.
In any case, it’s not all that daunting once the basics are in place and you take cognizance of international laws concerning paying remote employees. Thankfully, the technology to plan, organize your payroll processing operations, and coordinate your remote team is available at your fingertip.
With a team of professional HR staff interfacing with relevant experts, you can streamline your remote payroll management process seamlessly, ensuring the profitability and growth of your business without running into conflict with the law.