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If your company plans to hire employees or independent contractors in other countries, having the systems and processes in place to pay them is essential. But global payroll involves much more than simply cutting paychecks.

Before issuing a worker’s pay, companies must first calculate their earnings, determine how much income and social security taxes to withhold, account for business expenses, factor in commissions (if relevant), and provide benefits. Companies also have to pay taxes to local authorities and monitor work hours and paid time off.

This work is complex, to begin with. When employees and contractors are dispersed across different countries — each country with its own labor and tax laws — managing global payroll in-house can seem almost impossible.

In this post, we’ll cover everything you need to know about global payroll, as well as how to remain compliant every step of the way.

This is part of an extensive series of guides about managed services.

Contents hide

What is global payroll?

Why managing global payroll is so complex

Which global payroll model is right for my company?

1. In-house model

2. Aggregate model

Can independent contractors serve as an alternative?

How to ensure global payroll compliance

Don’t let the challenges of global payroll stunt your growth

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What is global payroll?

As mentioned above, global payroll refers to the processes of calculating and delivering payments to all of a company’s employees and independent contractors around the world. Specifically, it includes:

Calculating and delivering compensation: This involves determining each worker’s earnings, bonuses, benefits, expenses, and commission; issuing payslips; and delivering payments in the local currency. If you work with freelancers, this includes reviewing, approving, and paying freelancer invoices. You must also record all of these data points and centralize them in one system to accurately measure your labor expenses against your net income.
Withholding and paying taxes: Employers are responsible for withholding the correct amounts for income taxes from workers’ paychecks, as well as relevant healthcare and Social Security taxes. Companies must also pay payroll taxes to the local tax authority.
Ensuring compliance: Companies must pay special attention to complying with labor laws, especially those related to worker status, overtime, paid time off, and worker’s compensation.

Those responsible for managing payroll — usually HR and finance teams — must ensure compliance with local tax and labor laws in each country where they hire workers.

Why managing global payroll is so complex

Managing payroll can be complex even if a company only hires employees and contractors within one country and is subject to one set of labor and tax regulations. So, when tasked with managing international payroll processes, complexity rises significantly.

Here’s why.

1. Labor laws and tax codes vary according to multiple factors. The labor laws and tax codes that determine things like tax withholdings and benefits not only vary from country to country, but they also might change from person to person. For example, individual tax rates take multiple factors into accounts, such as salary, age, and family status, which means variance can occur within the same country.

2. Getting “Local” Right. As simple as it may sound, language and cultural differences can be a huge barrier when it comes to paying employees or contractors in other countries. Dealing with government agencies, filing tax forms, and communicating with auditors who speak a different language and practice different customs adds an extra layer of complexity to already complicated processes.

3. Adhering to privacy laws. Payroll data is a hot commodity for hackers as it offers all the information needed for identity theft. Therefore, many data privacy regulations are forcing companies to meet strict security protocols to protect their employees’ and contractors’ payment information.

This not only means that managing wages, expense reports, commission data, and bonus records via spreadsheets is no longer an option, but it means that employers need to ensure all of their procedures and tools are meeting the local data privacy regulations. For example, employers need to ensure they are not collecting more information than the bare minimum needed per the local law. They must secure employees’ payslip communication (no more email attachments), and they cannot store data on local FTP servers or SharePoint. Everything from start to finish needs to meet all relevant local regulations.

The most popular example is GDPR, which all companies paying employees in the European Union (EU) must meet.

4. Issuing payments. In addition to distributing employees’ compensations, companies are also responsible for paying local tax authorities and the vendors who distribute benefit packages in the local currency. Extra costs due to exchange rates and international transfer fees can add up quickly. Although there are ways to alleviate these costs — such as through borderless accounts — identifying and implementing the most cost-effective way to pay workers internationally can be complex and costly.

Which global payroll model is right for my company?

Companies that want to reap the benefits of a global workforce need to establish a global payroll process. There are several ways to go about it. There are two global payroll models and several different options for managing payroll operations within them.

The main question a company is faced with is whether they incorporate in a certain country or not. The reasons to do so are if the company has 10 or more employees in that location or strategic importance that would justify investing the required resources.

If there’s no justification, companies will choose to outsource the local incorporation and then need to choose the best model for them.

1. In-house model

In this model, your company will need to incorporate locally to manage the payroll for all of the employees in that country. There, you would hire local professionals who have expertise in the local labor laws, tax codes, and culture to handle all payroll operations and ensure compliance. The most flexible and most common way among tech companies is to open a foreign subsidiary in each new location.

If the in-house model makes the most sense for your company but you don’t plan to open an official office in a certain location, you can still establish a local entity by getting incorporated there.

2. Aggregate model

If there is no strategic reason to open a local office and put down roots, and you have just a few employees and no plans to hire additional employees, you should probably opt for the aggregate global payroll model, in which you rely on local payroll suppliers to manage this work.

You can choose from several different options depending on what other services you may need beyond payroll, and whether you need such services in other countries:

Employer of Record (EOR): An Employer of Record service is a third-party organization that takes care of all of the formal employment requirements related to hiring and paying workers in different countries. It allows companies to legally — and more efficiently — access talent in other states or countries without worrying about violating local labor or tax laws.
Global Employment Organization (GEO): A GEO is another type of third-party entity that manages global payroll and assumes liability for compliance with tax and labor regulations. A GEO utilizes different EORs for each country where a company hires employees. It operates as another layer of oversight between the original company and each EOR, and provides continuity between them while ensuring there are no compliance issues. In addition to global payroll services, a GEO also provides global HR services for every employee. A GEO speeds up and simplifies the hiring process by relying on its local partners, who have expertise in the area’s labor and tax laws.

Can independent contractors serve as an alternative?

If you hire workers as independent contractors and not as employees, it does reduce almost all the legal and financial issues and leaves you only with the question of how to pay international independent contractors.

However, if you hire workers as independent contractors to do an employee job – you need to learn the local laws regarding workforce classification. Classification tests define when a company can define a worker as an independent contractor and when they are forced to define them as an employee and therefore pay taxes and social benefits. The risk of misclassifying these workers — and facing the costly consequences — usually steers companies away from this option.

How to ensure global payroll compliance

With so many shifting labor laws and complex tax codes to keep track of in each locality, the feat of ensuring compliance is often enough to dissuade companies from expanding globally.

However, global payroll compliance is achievable with a proper foundation. By enlisting the services of local legal and tax experts, you can rest assured that the individuals who assume responsibility for compliance know exactly how to calculate wages, withhold the correct tax amounts, and stay on top of labor laws.

And, by adopting technology that is designed to automate and centralize all of the relevant data, managing payroll processes is drastically simpler.

Don’t let the challenges of global payroll stunt your growth

It’s true that establishing the necessary foundation to successfully manage global payroll requires time and resources. The challenges of identifying which global payroll model is best for your company, selecting the right vendors, and hiring talent in different countries are real. But in the current era, where companies are facing rising competition for the best talent, being constrained by borders won’t help you gain an edge.

The first step to accessing the best talent around the world is to be prepared for the payroll requirements that go along with hiring them.

See Additional Guides on Key Managed Services Topics

Together with our content partners, we have authored in-depth guides on several other topics that can also be useful as you explore the world of managed services.