Understanding International Payroll Processing: Challenges, and Services

According to a recent Gartner report, 70% of tech CEOs are dealing with international expansion at least on some level.

And as international expansion increases, so does the need for paying employees abroad. That’s where international payroll processing comes in.

International payroll processing refers to managing and executing international payments to overseas workers.

But figuring out the best strategy for getting payments to employees abroad is easier said than done, often involving convoluted regulatory requirements, time zone considerations, and fee-heavy bank transfers.

What Does International Payroll Processing Entail?

International payroll processing gets complex. Here are some of the considerations you’ll need to be taking into account when you’re building your global workforce:

1. local laws and regulations

   Each country has its own complicated laws and regulations in terms of salaries, data storing, and tax reporting – especially when it comes to international payroll taxes.

   Knowing how to navigate these requirements is only part of the challenge. There’s also the matter of being able to keep your finger on the pulse regarding any changes in a country or region’s requirements. These requirements are far from static and are apt to change often. That means you need a boots-on-the-ground method to ensure compliance is always up to par.

2. Employee compensation and benefits in different countries

   Policies and attitudes towards employee compensation are likely to differ significantly between each country, whether it’s to do with salary, commission, stock options, or insurance.

   Reporting compensation accurately to the relevant authorities can get complex and requires in-depth local knowledge of how to navigate the necessary regulations.

   On top of that, there is the matter of cultural differences in terms of what benefits are most valued by employees. Here, too, there is a big need for local expertise, since not understanding local values and priorities can leave you missing out on the best talent in that given region.

3. Domestic and international tax laws

   Taxes are a taxing affair. But they can quickly become excruciating when you’re operating in multiple countries. Each legislation has its own layered international and domestic tax requirements. Staying in the know of these can become difficult, as changes are always happening.

   In the US, for example, the Employee Retention Credit (ERC) was a tax credit provided by the US government in 2020 to help small businesses whose employees were affected by the pandemic. This year, the IRS said the number of legitimate ERC claims have declined significantly as we get further away from the pandemic, which may lead to this tax credit no longer being applicable.

4. Bank charges and exchange rates

   Transferring funds to your employees abroad using only banks can leave you quickly racking up fees, whether it’s to do with currency conversion, exchange rate volatility, intermediary bank charges, or other factors. But it’s not just that banks can add unnecessary expenses, they can also lead to delays in payments, and possibly errors. That, in turn, can leave you dealing with penalties for being non-compliant.

5. Data protection

   Protecting data when you’re operating in multiple countries requires comprehensive security measures that can protect you against bad actors, regardless of region. More specifically, these measures must answer to the employee data protection policies of the local government.

6. Expansion of human resources in a company

   If you’re recruiting in multiple countries at once, you need a hiring strategy that accounts for efficiency, cultural understanding, and bureaucratic expertise. Without these components, your onboarding methods become a whole lot less effective, as you can quickly lose talent to competitors and/or hit some unpleasant fees along the way.

How to process international payroll

How you choose to process international payroll may differ depending on your company’s size, strategy, and goals.

Here are some examples of methods that may be used to process international payroll. Note that you may choose to combine more than one of these methods.

International payroll software

The right software can be used to automate and streamline the payroll process across multiple jurisdictions at once. The software of your choice, however, should be one with a track record of comprehensive security measures.

Global payroll provider

A global payroll provider often promises extensive compliance knowledge in different legislations and an ability to navigate multiple regulatory ecosystems. With that, it’s important to be careful here, since choosing a provider that isn’t equipped to handle the challenges of global payroll can backfire and lead to depleted resources and damage to reputation.

Employer of record (EOR)

You might choose to outsource your international payroll to an employer of record (EOR). In this case, the EOR becomes the official employer of employees living in a specific country. As a result, you don’t have to worry about opening an entity, withholding taxes or processing payroll. If you do choose to work with an EOR, we strongly recommend working with an intermediary who can properly vet the EOR and take your side in cases of disputes.

Payment transfer provider

If you’re working with international contractors, rather than employees, then a payment transfer provider may be your go-to. However, once you start hiring full-on employees in other countries, a payment transfer provider will no longer be enough, and you will need full employment solutions to manage the more nuanced demands concerning benefits, salaries, insurance, and taxes.

What are the challenges of managing international payroll?

International payroll presents its share of challenges. These can include data analysis, compliance and local practices – to name a few.

Communication challenges

Ease of communication isn’t granted when you’re operating global payroll. Cultural and language barriers and time zone differences can lead to delays and potential errors in the payroll data.

International banking

International banking often means several obstacles in getting the payment itself to the right employee, including the list of fees that come with intermediary banks and banks’ limited business hours delaying processing.

Financial forecasting difficulties

Siloed payroll data, whether it’s to do with onboarding or payments, can make it difficult to accurately plan or forecast for the biggest financial priorities or obstacles to come.

Compliance

Compliance is hard enough to handle in one country, let alone multiple countries. International payroll compliance mishaps can lead to damage to both resources and reputation.

Local payroll practices

Each country has its own unique payroll practices. Some of these are customary and others are legal requirements. It’s important you know the difference so that you can model your own processes accordingly. In the Philippines, for example, 13th month pay is mandatory and must be paid in full by December 24th. In Sweden, meanwhile, 13th month pay is an optional rather than legal requirement.

International payroll management outsourcing

Outsourcing international payroll management can be a huge help, saving both time and money. With that being said, outsourcing to the wrong parties can also lead to a slew of consequences, including inaccurate employee payment calculations, delays in payroll, and run-ins with compliance mishaps.

In the EU, for example, not staying in compliance with GDPR requirements, even in terms of less severe infringements, can lead to fees of up to €10 million.

How does an EOR help solve the global payroll challenges

EOR has proven to be a go-to for handing international payroll, with the ability to take on employees on behalf of the employer and replacing the need to open a local entity.

Full compliance

The ideal EOR can offer local expertise in customs and regulatory requirements concerning payroll.

Global workforce management

An EOR can drastically improve a company’s ability to manage their global workforce effectively and efficiently

Quick and easy global expansion

EORs give companies the flexibility to expand their workforce in a new country without having to open a new entity to do so – allowing for efficient hiring and onboarding.

How to choose an international payroll provider

There are 3 types of international payroll provider models

In-House Payroll Model

In the in-house payroll model, the company handles all payroll functions internally through its dedicated payroll team or department. This team is responsible for calculating wages, deductions, taxes, and other payroll-related tasks for employees across various locations worldwide. Each local payroll is managed separately, and the in-house team must comply with the payroll regulations and tax laws of each country or region.

This model grants the company full control over its payroll processes, but it can be complex and resource-intensive, particularly when dealing with multiple countries with diverse payroll regulations.

Decentralized Payroll Model

The decentralized payroll model allows each country or region to manage its payroll independently. Payroll processing responsibility is delegated to local teams or vendors familiar with the local regulations and tax requirements. This model offers greater flexibility and responsiveness to local needs. However, it may lead to inconsistencies in processes and data, making it challenging to maintain standardization and global reporting across the organization.

Centralized Payroll Model

The centralized payroll model involves consolidating and centralizing all payroll functions into a single, global payroll team or department. This central team handles the payroll processing for employees across different countries and regions. It typically comprises experts well-versed in international payroll regulations, tax laws, and compliance requirements.

By centralizing payroll operations, the company can achieve greater efficiency, standardization, and cost-effectiveness. It also ensures consistent payroll practices and provides better visibility into global payroll data for reporting and analysis purposes.

Steps to choosing the right global payroll provider

1. Create an international employment benchmarking plan

   Don’t choose a provider until you have a plan. International employment benchmarking involves analysing international employment trends, policies and practices and using the data to model your own goals and strategies, whether it’s to do with hiring, compensation, or other factors.

2. Choose a global employment model

   Once you have a plan, it becomes easier to choose an employment model that suits your business. Whether it is hiring contractors, hiring via an EOR or opening your own entity. This step requires to thoroughly weigh the pros and cons of your decision, according to your business needs.

3. Choose you global payroll provider model

   When choosing a global payroll model, consider the following: complexity, compliance, cost-effectiveness, resources, scalability, data security, reporting, communication, flexibility, and risk management. Once taking this in consideration, you can make an informed decision that supports your global workforce needs.

4. Decide whether you will want to open an entity or not

   A big decision you will likely need to make down the road is whether or not you should open an entity in the countries you are operating in. It’s important to address this question directly, based on your benchmarking, as this will likely guide your decision on which global payroll provider to choose.

Papaya as your global payroll processing provider

You deserve a solution that can streamline your entire global payroll process, from onboarding to last-mile payments. That’s exactly what Papaya built.

With our Global Expert Alliance, and our cutting-edge technology, we’re able to promise our customers smooth scaling and no-nonsense compliance – no matter where their workforce is based or how it’s spread out.

Papaya allows you to process and complete global payroll payments all within one platform. On top of that, you get full visibility of your entire global workforce, including EOR workers, contractors and employees, meaning no more jumping from solution to solution, or losing sight of essential data. Schedule a demo today.