Startup - How to do Payroll Right with A Global Remote Team
2020 has been a year for the books. Many companies are in uncharted territory as remote work is both mandatory and possibly inevitable. Several major tech companies are already going remote permanently. It might be time to rethink your hiring strategy and possibly hire talent at a more affordable salary rate.
So, how do you hire a remote team and stay in compliance, especially if everyone lives in different countries? As a startup CPA, we get asked this question now more than ever. Let’s go over the pros and cons of the two most common ways to handle payroll for remote teams so you know which way works best for your startup.
First, what are the benefits of hiring a remote team:
1. Access to a larger talent pool and can find the right candidate faster.
2. The foreign currency exchange rates might work in your favor so you can hire for cheaper.
3. Time saving if you coordinate the team from time zones efficiently.
4. If you are expanding to that country, you need employees there to do the work you can’t do while you are in the U.S.
Indeed, hiring a remote team has its merits. A common issue we have seen is that startups often wire money directly to remote hires in different countries once they get hired. Making international wire payments is probably the easier way to go. However, payroll regulations are complex, not to mention they can be vastly different depending on the country. What many realize later is they missed important local and U.S payroll regulations. By then it’s too late. Sound familiar? You’re not alone. If not, you’re just in time to get ahead of the problem.
So let’s talk about the two most common ways to handle payroll when your team spans across different countries, and you’re in the U.S.
1. Open a foreign subsidiary and then hire employees
A subsidiary company helps if you have a long term plan to stay in that foreign country, have key employees like a director, and/or plan to hire more employees.
To open a subsidiary, your company needs to:
Register with the foreign government
Open payroll tax liability accounts with the government
Open local bank accounts
Get familiar with local employment laws and compliance
Advantages:
1) Having an international company with foreign subsidiary gives your startup full autonomy when operating in that country, and adds to your global footprint.
2) Your company has the freedom to tailor the hiring process to your needs.
Disadvantages:
1) You are liable for following local employment regulations like making localized employment contracts, filing taxes with the local government, complying with any country-specific hiring regulations
2) All the financials need to be reported back to the U.S. and consolidate your financials.
2. Find a PEO to run payroll for remote hires
A professional employer organization (PEO) is an outsourced firm that does all HR services including international payroll, benefits, and tax reporting. If you choose to work with a PEO, the PEO will sign the employment contract with your remote hire, and run payroll on your behalf. On paper, your remote team is employed by the PEO but you pay those employees through the PEO. It’s best to find a PEO that operates in many different countries, so if you expand, you can use one PEO to hire in more foreign countries.
Advantages:
1) It saves time. The PEO has all the paperwork setup to hire remote employees right away.
2) It may be cheaper to pay a PEO than opening a foreign subsidiary in the short term. It costs around $30 or more per employee per payroll cycle.
3) You’re free from payroll liability. The PEO preps all legal and other paperwork for filing taxes in the local government, so you don’t have to.
Disadvantages:
1) Your remote employees are technically your PEO’s employees. This can lead to low morale if teams don’t feel connected to your company's goals or vision.
2) In the long run, it’s more expensive. One way to cut costs is to hire a local CPA in that foreign country so they can take on the payroll work for you at a cheaper rate than a PEO.
3) Either way, you’ll eventually have to open a subsidiary once your company reaches a certain scale, regardless of whether you have a PEO..
A CPA’s 2 Cents:
If you’re under a time constraint, hire a PEO:
The good thing about hiring a PEO is it’ll save you time. This way, you can skip the process of learning local employment laws, tax regulations, etc.
If you are planning for the long run, open a subsidiary:
When your company reaches a certain size, you’ll be required by the local government to register your business there. So, eventually you’ll need to set up your subsidiary. Once you hire a local CPA or CFO, they can take on the payroll work in house.
Many startups do a combination of these two things. They initially hire a PEO to do payroll so they have more time to focus on business goals. Then later, open a foreign subsidiary and resign the employment contracts to transition remote employees under the same company.
Takeaways:
Employment laws in foreign countries can be complex. But, one thing is for sure: wire transfers are the easier way, however setting up a subsidiary or hiring a PEO is the better way. Hiring a PEO saves time and shields you from any payroll liabilities. Opening a foreign subsidiary gives you more freedom on the hiring process and expands your global footprint. Failure to comply with them will cause severe consequences, so it’s best to pick an approach soon. Be sure to talk to a local CPA to get a full understanding of local employment laws.
