Today’s U.S. companies are finding many benefits to hiring remote employees from around the globe. However, along with those benefits come a myriad of tax compliance considerations.

This article highlights a few of those considerations and practical solutions so companies can proactively prevent problems and ensure compliance.

Important Considerations When Hiring Workers Overseas

When a U.S. company hires a remote employee who lives outside the U.S., it’s important to consider the following:

Consideration #1: Income Tax Compliance

U.S. companies must comply with the income tax laws of the U.S. and the worker’s home country. This can involve several complexities, including:

  • Classification of the Worker. Several items (like tax withholding, reporting obligations, and compliance requirements) depend on whether the worker will be an employee or an independent contractor.
  • Reporting Obligations. A non-U.S. citizen located overseas that is hired as an independent contractor may need to provide Form W-8BEN or W-8BEN-E. These IRS forms certify the foreign status of the worker and help to clarify the U.S. income tax withholding requirements.
  • Permanent Establishment Risk. When a company hires workers in another country, this creates a “” that may result in foreign corporate tax liabilities for the U.S. company.

Consideration #2: Payroll and Social Tax Compliance

When foreign remote workers are classified as employees, the hiring company may become a foreign employer with all that entails.  Different countries have different requirements regarding contributions for social security and employee benefits. Companies may need to contribute to social tax systems outside the U.S. and/or provide certain benefits mandated by those laws.

Consideration #3: Employment Laws and Regulations

Each jurisdiction has its own set of labor laws, including regulations concerning:

  • Working hours
  • Leave entitlements
  • Termination procedures
  • Data protection laws (e.g., General Data Protection Regulation (GDPR) in Europe)

Obtaining in-country legal advice is imperative when hiring foreign employees.

Solutions that Help Simplify Tax Compliance

The following solutions can help prevent problems and address challenges along the way.

Solution #1: Hire Independent Contractors

By engaging remote workers as independent contractors rather than as employees, companies can minimize the complexity surrounding employment laws and tax compliance.

Solution #2: Use a Global Professional Employer Organization (PEO)

Acting as an intermediary, a Global PEO handles employment-related tasks on behalf of the U.S. company.  Although there is less direct control over the employee relationship and fees will increase labor costs, using a PEO can reduce the administrative burden and minimize risk in the following ways:

  • Local Compliance. The PEO ensures compliance with labor laws, tax regulations, and social security contributions.
  • Simplified Payroll. The PEO manages payroll processing, including local tax withholding and benefit administration.
  • Risk Mitigation. Because PEOs specialize in local regulations and tax laws, a PEO can minimize the potential for compliance-related issues.

Solution #3: Leverage Global Payroll Solutions

Leveraging a global payroll solution can streamline the process of paying remote employees outside the U.S. These platforms enhance accuracy and efficiency and often include the following types of benefits:

  • Multi-Country Payroll Processing. Many systems can integrate with local tax and social security systems to ensure accurate payments and compliance.
  • Regulatory Updates. The U.S. company has more peace of mind when these payroll systems include regular updates on changes in local tax laws and employment regulations.

Solution #4: Establish a Local Entity

Having a registered local entity can enhance and simplify compliance with local labor laws and tax requirements. Plus, the U.S. company will have more control over employment practices and tax planning.

Learn More

There’s no doubt that companies can expand their available talent pool and increase operational flexibility by hiring remote employees from overseas. However, advance planning and ongoing oversight are critical to ensuring tax compliance and mitigating risk.

With a strategic approach and the support of experienced professionals, U.S. companies can leverage talent from the global workforce to drive a competitive advantage.

We specialize in international tax strategies that help clients ensure compliance and maximize operational efficiency as they expand their workforce overseas.