In today’s age of remote work, the world is connected more than ever, and businesses are in a position to hire talent anywhere. Hiring international employees is a great stepping stone for companies based in the United States looking to explore new markets, target specialized talent, and expand their global presence.
Here’s what you need to know about hiring employees in another country:
Yes, a U.S. company can hire someone in another country; however, the process is not as straightforward as hiring employees in the U.S. Some common challenges U.S. companies face when hiring an international workforce include:
- Permanent establishment. If a U.S. company has a fixed location in another country and is generating revenue, it triggers permanent establishment, which means it is liable to local corporate taxes. Companies that don’t adhere to permanent establishment obligations are subject to tax penalties, liabilities, and legal issues.
- Unfamiliar labor laws. Each country has its own labor laws and payroll regulations, and navigating the differences from U.S. employment requirements is a complex and time-consuming process. Failure to draft compliant international employment contracts or comply with other local employment laws when hiring employees in a foreign market will result in penalties and fines.
- Payroll setup and accurate contributions. An employer's payroll setup and contributions in another country can vary significantly from U.S. requirements. Noncompliance and fines will result if a U.S. company doesn’t correctly calculate payroll and contributions for their foreign employees and the in-country requirements.
- Misclassification risk. Misclassification is most common when a company engages with a contractor and treats them like a full-time employee. For example, if the company starts managing the contractor’s work schedule or pays them a fixed salary, the individual could claim they have been misclassified as a contractor and are instead entitled to employee benefits.
Despite the challenges of hiring employees in another country, there are several options for building a workforce in any foreign market.
1. Set Up a Legal Entity
Setting up an entity in another country is the traditional method for companies looking to hire international employees and build a long-term, global presence. Establishing a foreign entity gives you full autonomy to create a local branch, hire employees, and run payroll in compliance with the country’s labor laws and taxes.
Entity establishment is a desirable option if your company has a large budget and plans to hire a sizable workforce in another country.
Even so, entity establishment is expensive and time-consuming. It also requires extensive in-country expertise in the local legal, corporate, and payroll regulations. Entity establishment is not recommended if you do not have the bandwidth, capital investment, or only plan to hire a small number of employees.
2. Partner With a Global Employer of Record
A simpler, more streamlined option is to partner with a global employer of record (EOR). A global EOR hires, pays, and manages talent in international markets on your behalf. As a legal entity, an EOR has in-country knowledge of all local labor laws and regulations to ensure that you stay compliant in supporting your global workforce.
An EOR partner also allows you to target talent in multiple countries and hire quickly, with less red tape.
Learn more: What Is an Employer of Record?
3. Hire and Engage Contractors
Engaging with an international contractor is an alternative to hiring full-time employees in another country. A contractor provides their services as a self-employed individual. Using and paying a contractor allows you to work with global talent, target specialized skills, and benefit from cost savings and flexibility.
However, as mentioned earlier, hiring international contractors leads to misclassification risks. Many countries have their own regulations around worker classification, but in general, companies cannot attempt to control the work methods or schedules of their contractors. If they do, they could face fines, employee back pay, reputational damage, and imprisonment in some cases.
To avoid the risks and costs of misclassification, employers may choose to quickly and compliantly convert international contractors into employees using an employer of record, which allows companies to bypass the need for foreign entity establishment.
Looking to hire someone in another country? Velocity Global makes it easy.
When hiring and paying remote employees in other countries, U.S. employment laws will not apply to them because they are non-U.S. residents. Here are a few common questions regarding hiring and paying remote employees in foreign countries:
How Much Does It Cost to Hire a Foreign Worker?
Hiring globally allows companies to seek top talent while maximizing their hiring budget. Still, the cost of hiring a foreign employee varies on factors like role, industry, location, and country labor laws. Below are key factors to consider when calculating the cost of hiring foreign employees:
- Visa sponsorships. If an employee is not a resident in their country, or if an employer needs to relocate talent to another country, the employer must adhere to specific visa requirements—which include paying fees for visa application and obtainment processes.
- Compensation. Compensation-related costs vary based on the foreign employee’s role and experience level, country-specific minimum wage laws, and statutory employee benefits like paid time off and severance.
- Mandatory employer costs. Employers are entitled to contribute to social security and other benefits for foreign employees. Contributions and rates vary per country.
- Competitive benefits. Employers typically offer supplemental benefits to compete for and retain top talent worldwide. Supplemental benefits include private health insurance, retirement plans, and public transportation passes.
- Cost of living. When calculating competitive wages or salaries for a foreign candidate, employers should consider the cost of living in their candidate’s country of residence.
- Work arrangement. Because of the mandatory tax contributions and benefits associated with employment, the cost of hiring a foreign employee is generally higher than engaging a foreign contractor. Still, engaging contractors puts employers at risk of worker misclassification, which leads to back pay and hefty fines.
Learn more in our complete guide to calculating employee cost.
Does a Remote Employee Have to Pay U.S. Taxes?
Remote, foreign employees do not have to pay U.S. taxes even though they are being paid by a U.S. company. Because your international employee is a tax resident in their own country, they are subject to local laws, and U.S. taxes do not apply.
Is a U.S. Company Responsible for Withholding U.S. Taxes or Reporting Wages?
U.S. companies are not responsible for withholding U.S. taxes or reporting the wages of their international employees. According to the IRS, wages earned by a nonresident alien for services performed outside of the U.S. are foreign source income and are therefore not subject to U.S. tax reporting or withholding.
Does an Employee in Another Country Need a Visa to Work for a U.S. Company?
Foreign employees who work for a U.S. company remotely from their own country do not need a visa or work permit as long as they work outside of the U.S. However, they would need a business visa if the U.S. company wanted to bring them to the U.S. for an extended stay or training purposes.
While hiring international employees and entering into a foreign market may feel like a challenge, it also provides a world of opportunity when done compliantly. Working with a global employer of record is one way to do so.
A knowledgeable and experienced global partner like Velocity Global helps simplify the hurdles of international hiring and payroll, making it easier for you to manage your global workforce. Our global Employer of Record (EOR) solution allows you to quickly and compliantly hire, pay, and support international talent without needing to establish foreign entities.
Reach out today to learn how Velocity Global can support your international team.