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What is a Non-Residential Payroll

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Erez Greenberg
November 21, 2022
Non residential payroll

In 2022, it’s becoming more and more common to run a business in a foreign country without officially setting up an office. And with the right information, you can also easily hire remote resources from another country without breaking any local laws with a status called non- residential employer.

A non-residential employer is a business that’s allowed to operate in a country outside of their local market. This status is for employers that aren’t permanent residents in a country, but have non-resident employees.

Just as with a residential employee, you’ll need to consider tax and reporting requirements. In the next few minutes, you’ll learn:

  • Several implications of a non-residential payroll
  • The process for hiring a non-residential employee
  • Which countries permit businesses to hire non-residents

Let’s start by understanding how you can start the process.

How can a non-residential employer hire an employee?

Just like you need the proper documentation for a resident-employee, the same is true for a non-residential employee. Requirements may vary from country to country. In the U.S. for instance, you need to complete the following steps:

  1. Apply for a certification from the United States Department of Labor
  2. Interview prospective foreign workers
  3. Apply for a work visa from the U.S. Citizenship and Immigration Services
  4. Check the tax laws that apply to your company and the foreign worker

In fact, the United States has even partnered with countries and created tax treaties that make it easy for businesses to operate internationally without needing to establish a legal office. One of these partnerships is with Canada.

In 2016, the Canada Revenue Agency issued employer certification Form RC473, Application for Non-Resident Employer Certification. The Minister of National Revenue for foreign employers then approves the authorization and allows foreign employers to operate in Canada.

The approved non-resident employer status means foreign employers don’t need to withhold Canadian taxes from salary, wages, and other payments to qualifying non-resident employees.

Aside from getting familiar with the process, it’s also important payroll and compliance managers note any obstacles ranging from a few bureaucratic to organizational acts.

A few common challenges of hiring a non-residential employee

Just with any move associated with growing your company, preparation is key. When hiring non-resident employees and expanding global mobility, knowing which hurdles you may face will help you understand how to navigate them. Here are a few common challenges of hiring a non-residential employee:

Navigating unfamiliar labor laws – Each country has its own labor laws and payroll regulations and understanding those nuances takes time and effort. Then, there are the consequences if you break local laws and face fines or penalties.

Setting up payroll – Payroll setup and legalities can vary from country to country. If a US company doesn’t accurately calculate payroll and contributions for foreign employees, they could face fines and risk misclassification.

Risk of misclassification –  Misclassification is when a company hires a contractor, but treats them like a full-time employee. When businesses misclassify independent contractors as employees, they can face fines, civil lawsuits, and may even need to reimburse the employee benefits.

Making sure the employee has the right documents – When businesses wish to hire foreign workers, they need to make sure the employee has a permanent or temporary employment visa or be willing to sponsor them.

Hiring a non-residential employee comes with serious risks if you don’t comply with local and international regulation. When businesses want to make sure they’re meeting all requirements of hiring abroad, some turn to an Employer-of-Record.

What’s an Employer-of-record?

An Employer-of-Record (EoR) or Global PEO is a way for companies to compliantly hire employees abroad without a local entity in the relevant location. A local in-country partner hires the employee for the company and takes on any legal responsibilities. As the official employer, the partner needs to manage taxes, payroll, compliance, and benefits.

EORs allow companies to hire workers fast in a new country, so they don’t waste time emerging into a new market. If your company found the perfect candidate for a role, but isn’t set up in their country of residence, an EOR would be a great option to hire talent compliantly.

Of course, step one before deciding on an EOR or non-residential employer, is knowing when it’s possible to hire non-resident workers. As you may have guessed, many countries have their own criteria.

Which countries can foreign entities hire employees

As we slowly shift out of the pandemic and return to work, more and more countries are giving foreign entities the option to hire local employees without requiring employee relocation.

Switzerland is one example. The European country allows businesses to hire Swiss employees and gain access to local suppliers that support non-residential payroll. Other countries have their own requirements.

The table below provides an overview of where Non-Residential Payroll setup our local partner can support and from which locations:

Country Which foreign entities can be supported? 
HungaryAfrican Countries, APAC, European Union, Israel, LATAM, Middle East, Switzerland, United Kingdom, United States 
CanadaAfrican Countries, Asia-Pacific (APAC), European Union, Israel, Latin America, Middle-East ,Switzerland, United Kingdom, United States 
BelgiumAfrican Countries, Asia-Pacific (APAC), European Union, Israel, Latin America, Middle-East, Switzerland, United Kingdom ,United States 
FranceAfrican Countries, Asia-Pacific (APAC), European Union, Israel, Latin America, Middle-East, Switzerland, United Kingdom, United States 
IrelandAfrican Countries, Asia-Pacific (APAC), European Union, Israel, Latin America, Middle-East, Switzerland, United Kingdom, United States 
LithuaniaAfrican Countries, Asia-Pacific (APAC), European Union, Israel, Latin America, Middle-East, Switzerland, United Kingdom, United States 
NetherlandsAfrican Countries, Asia-Pacific (APAC), European Union, Israel, Latin America, Middle-East, Switzerland, United Kingdom, United States 
SwedenAsia-Pacific (APAC), European Union, Israel, Latin America, Middle-East, Switzerland, United Kingdom, United States 
Italy European Union 
Luxembourg 
European Union 
Portugal European Union 
Romania 
European Union 
Switzerland European Union 
PolandEuropean Union, Israel, Switzerland, United Kingdom, United States 
MaltaEuropean Union, Israel, United Kingdom 
GermanyEuropean Union, Switzerland, United Kingdom 
BulgariaEuropean Union, Switzerland, United Kingdom, United States 
SpainEuropean Union, UK 
DenmarkEuropean Union, United Kingdom 
Slovak RepublicEuropean Union, United Kingdom, United States 

At this point, we’ve talked more about the logistics and complications of hiring non-resident employers in overseas branches, but haven’t discussed the reason many companies complete the process in the first place.

In other countries where your can establish a foreign subsidary, the worker needs to report and pay their tax burden. In these specific cases, the employer (your business) won’t need to withhold tax through the payroll system. This brings us back to the importance of fully understanding tax and reporting requirements.

A global mobility solution will help you compliantly hire overseas

Feeling confident in your overseas expansion is one thing. Following all of the rules and regulations for non-residential payroll is another. Papaya Global is the global payroll platform trusted across 160+ countries to sync all employee information, automatically check for compliance, deliver payments, and give you the breathing room you need to focus on hiring the best talent. Schedule a demo today.

Who qualifies you as a non-resident?

The classification of a non-resident is determined by set circumstances by the IRS. If you are not a U.S. citizen, you’re considered a nonresident of the United States for U.S. tax purposes unless you meet one of two requirements. If you have a green card or pass the substantial presence test for the calendar year (January 1 – December 31), you are a resident of the United States for tax purposes.  

When does a non-resident employer apply?

A non-resident employer is any business that is allowed to operate in a third party country outside of their home market. This status is for employers that do not have permanent residency within their target country and work with non-resident employees. An international employer status usually saves the employer from having to pay income tax  for non-resident employees. 

Do non-residents pay income tax?

Nonresident aliens typically pay U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income. Nonresident aliens must file and pay any taxes on the Form 1040NR, U.S. Nonresident Alien Income Tax Return. 

How do I know if I'm exempt from tax withholding?

If an employee qualifies, they can indicate on Form W-4 that employers do not need deduct any federal income tax from his or her wages. To qualify for this status, you need to meet two criteria. The employee can’t have any tax liability from the previous year or the current year. 

Do non-resident aliens fill out a w4?

Yes, nonresident alien employees must fill out Form W-4. Nonresidents must fill out the Withholding Exemptions – Personal Exemptions section on Form W-4. Some nonresident aliens are exempt from federal income tax withholding on wages because of tax treaties.

Do non-residents pay FICA?

If you’re a nonresident in the US you may be exempt from FICA. International students, scholars, teachers, professors, researchers, trainees, physicians, au pairs, summer camp workers, and other non-students on F-1, J-1, M-1, Q-1, or Q-2 visas are typically exempt from FICA. The exemption period covers the first five years of residence in the US if you are a full-time student at a US college or university.  

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