Our top financial tips for employers when hiring abroad

The rise of remote work and accompanying tech solutions have made internationally distributed teams a possibility even for small businesses, with a growing possibility for the globalisation of companies’ recruitment pipelines. Whatever the reasons, from attracting a wider range of talent, through to establishing a presence in particular markets or time zones – or even taking advantage of lower-cost regions – hiring abroad is likely only going to become more common. But what does recruiting cross-border mean financially for businesses? We explore the rules and guidelines and give some financial tips on what to expect.

How can you legally hire in a different jurisdiction?

First up, let’s have a quick overview of your options if you’re looking to recruit somebody in another jurisdiction, as this can impact the costs of doing so. You have four main ways to engage them:

1. Set up a local entity

You can register your company as a local business in that country and proceed with employing local hires that way. This option makes sense if you’re planning significant expansion, but can be deeply complex if you’re only intending to hire one person, for instance.

2. Recruit an employee without a local entity

There is technically also the possibility of hiring abroad without setting up a local legal entity. This is, however, a relatively grey area, as your company may in some countries run the risk of being considered as having created a “permanent establishment” due to the presence of the employee.

During the pandemic when this problem became more widespread due to people moving to different areas, the OECD issued guidelines in which it advised that permanent establishment is likely if there is a “degree of permanency”, in which case you’d turn into option one.

3. Use an intermediary legal entity

A growing option is to use what is commonly called an employer of record (EOR). These are locally registered entities with whom your recruit signs their contract – and it is they who are the legal employer of your recruit. This means they are also fully responsible for legal liabilities in the hiring process.

Of course, the EOR in return takes a fee from you. These can either be a percentage of your new recruit’s compensation or a flat fee, ranging from the low hundreds to thousands of dollars.

4. Engage them as a self-employed contractor

Your fourth choice is to engage your chosen candidate as a self-employer contractor. In other words, they would set themselves up as a self-employed entity – either a sole trader or a limited business – and the pair of you would sign a service agreement rather than an employment contractor.

This is in many ways the simplest way of hiring abroad, but it is still important to be careful: depending on your home country, using a full-time employee may be considered as disguising their employment if they aren’t properly declared. Many companies do it, but make sure you’re on the right side of regulations.

What are the income tax costs of hiring abroad?

This is one of the most important issues for most employers looking to recruit in another country.

The basic principle to keep in mind is that in options one, two and three in our list above, your employee is highly likely to pay personal income tax in their country of residence and not in yours. We’ve covered an example of how this looks from an employee’s perspective in our article on receiving a UK income while abroad.

From an employer’s perspective, however, this means you may have recording and/or withholding responsibilities.

• Recording: Your company will sometimes be required to register a new overseas hire with their tax authority. In the UK, for instance, a new employee hired overseas and with no intention of them performing duties in the UK may be assigned to an NT (no tax) tax code.
• Withholding: You may be responsible for withholding certain amounts of tax before paying a salary. In option one of our list above, this is almost a certainty for all jurisdictions. In option two, there will sometimes instead be an obligation for the employee to pay the tax – meaning you would pay the salary to them gross. In option three the EOR will withhold the correct sum, but you will pay the total gross amount to them. In option four, you will pay gross.

Note that your recording and withholding responsibilities may differ if you’re transferring an existing employee abroad, rather than hiring abroad.

Do you need to pay social security costs if you recruit in another country?

Social security and pension expenses are just as important to take into account for your overseas employees.

Self-employed contractors will normally be on their own when it comes to sorting social security and pension payments. In other cases, however, the employer will be involved.

If you have a local entity, you will be expected to pay the same costs as any other local company. As we’ve covered in our guide to international payroll, this can cause quite variable costs: if you’re hiring in the US, for instance, you’ll be expected to match employees’ 1.45% Medicare and 6.2% social security payments.

If you use an employer of record, they will handle the administrative and payment side of this, but of course the sum you pay them gross for your (legally their!) hire’s compensation must cover the same sum.

Likewise, you will be subject in the same way to that jurisdiction’s sick pay rules.

Again, the grey area is if you don’t have a permanent establishment, as paying local social security could in fact create a good case for your business’ presence to be considered “established”. If, however, you don’t and you continue to pay your employee gross, then they will most likely be responsible for paying the entirety of their social security through their own tax return.

What are the costs of off-boarding from overseas?

It might seem strange to discuss off-boarding in hiring, but it’s inevitable that it will happen at some point for most employees – so it’s important that you calculate these costs from the beginning. Consider how you will ensure data protection in, for example, recuperating equipment like laptops from abroad, both in the collection costs and the customs dues. Consider too any legally mandated severance pay, plus how long the legal notice period will be (and therefore how long you will expect to pay during a handover period).

What currency do you pay salaries in?

There’s no hard-and-fast rule in this one, but generally those living in a jurisdiction with a relatively strong currency like the US dollar, the pound sterling or the euro will find it easier to be paid in their local currency. Some in other locations may prefer payment in a non-local currency like the US dollar.

Being able to respond to these recruitment market demands can help make your position more attractive to the future employee, but it does mean the onus is then on you to control the fluctuating value of their fixed salary in your currency.

A forward contract can lock in the same exchange rate for a chosen period, meaning you know now exactly how much your overseas team’s salaries will cost you in three, six, twelve months’ time.

Plus, if you’re hiring abroad at scale, you can reduce hours of time spent on large payment batches with our mass payments solution, making short work of a lot of administration.

In the meantime, don’t hesitate to contact us if you have any questions and would like to open an account to get the best out of the currency markets for your business.