Top 10 international payroll tax mistakes and how to avoid them

The last few years accelerated an already growing trend of remote work. This, in turn, led to an increase in international hiring.

While onboarding top talent abroad is a massive advantage for companies wanting to expand their business into other countries, it leaves a host of administrative challenges in its wake. Including staying compliant with the local payroll tax laws.

Knowing the common pitfalls of trying to remain on top of international payroll taxes can help you avoid them, and of course, consulting with people in the know is highly recommended.

Watch out for these common mistakes as you seek to establish your business abroad.

#1: Inaccurate Employee Classification

A common international payroll tax mistake is incorrectly classifying employees as independent contractors or vice versa. Each classification comes with distinct tax implications, and failing to identify and apply the correct type of employment can lead to non-compliance and potential tax liabilities.

It may be tempting to classify employees as contractors while you’re in the process of setting up an entity in another country. However, employees in some countries have strongly defined and protected rights. If the local authorities determine that you’ve intentionally misclassified workers, you could face harsh penalties, including huge fines and a ban on doing business there.

To avoid these devastating consequences, businesses should research and understand the legal definitions of employee vs. contractor in each country where they employ talent.

#2: Overlooking Reciprocity Agreements Or Tax Treaties

Overlooking international tax agreements can result in overpaid taxes or, in some cases, taxes being withheld incorrectly. Businesses must familiarise themselves with relevant tax treaties between countries and ensure proper documentation and withholding procedures when processing their international payroll.

#3: Incorrect Tax Withholding

International payroll taxes often require businesses to withhold taxes from employees salaries and remit them to the appropriate tax authorities. Mistakes in these calculations can lead to under or overpayment of taxes, causing financial losses and potential penalties. It’s imperative that businesses understand the tax rates, allowances, and deductions applicable in each country and regularly update the withholding amounts.

#4: Inadequate Records

Maintaining accurate and up-to-date records is critical for international payroll tax compliance. Incomplete or disorganised records can lead to errors during tax tilings and audits, increasing the likelihood of penalties. Employers should invest in robust record-keeping systems that centralise all payroll data, making tracking and verifying payroll transactions easier.

#5: Non-Compliance With Local Tax Laws

Operating in foreign jurisdictions means being subject to different tax laws and regulations. Ignorance is never an excuse; non-compliance can result in hefty fines and damage to your business’s reputation. It’s advisable to conduct regular compliance audits and seek advice from local tax professionals who are well-versed in the specific tax requirements of the relevant country.

#6: Failing To Account For Cross-Border Employees

Businesses with employees working across borders must understand the tax implications of such arrangements. In some countries, employees must pay income tax where they work, and in others, where they reside. Employers should analyse the tax laws of the host country and the home country to ensure compliance and unexpected tax liabilities. Expert advice can help avoid pitfalls.

#7: Incorrectly Handling Expatriate Taxation

Sending employees abroad can lead to complex tax situations, especially regarding expatriate taxation. There are several ways that expatriates can be taxed, and failure to handle this correctly may lead to double taxation or tax inefficiencies for both the employer and the employee. Outsourcing this to experts is highly recommended to ensure compliance.

#8: Overlooking Fringe Benefits Tax (FBT)

Companies looking to onboard top talent often offer appealing fringe benefits, such as company cars, housing allowances, and other perks. But these are subject to FBT in many countries. Ignoring or miscalculating FBT on an international payroll can lead to financial losses and

#9: Misunderstanding Social Security Agreements

Social security agreements between countries aim to avoid dual coverage and protect the rights of individuals working in different countries. Failing to understand and apply these agreements can result in double contributions or denial of benefits. Employers must always ensure compliance and understanding of social security agreements between countries.

#10: Lack Of Regular Tax Compliance Training

Employee turnover and changes in tax laws are common in the business world. Without regular tax compliance training, mistakes are more likely to occur. It’s essential for international businesses to keep up with the most recent laws in the home and host countries.

Avoiding International Payroll Tax Mistakes

There are a couple of solutions that can take international payroll tax out of a company’s hands, helping them to avoid costly errors.

Establishing a legal entity in a foreign country

Establishing a legal entity in a foreign country is the only compliant option when onboarding talent abroad under your company’s name. You will need to employ staff with expertise in tax compliance and other issues in those countries to manage your payroll. This is a highly complicated, time-consuming, and expensive way of managing crucial administration.

Employer Of Record

The alternative is outsourcing to an Employer of Record (EoR) partner.

The EoR will handle the employment of staff in the host country. On paper, they will be listed as the employer and will therefore deal with compliance, taxes, and benefits. Without having a legal entity in the foreign country, you will not be liable for tax there.

Setting up a global payroll and outsourcing it to a company with its own legal entities in the host country takes the headaches out of managing your payroll taxes. It also allows you to employ staff abroad quickly, rather than going through the expense and red tape of setting up a legal entity in that country.

Final thoughts

When a company expands into different nations, managing an international payroll can be a massive headache. While individuals may be responsible for filing their own taxes, every company, big or small, has to ensure they adhere to the law and file or pay taxes accordingly, too. While it’s essential to remain abreast of the host country’s laws as far as possible, outsourcing the administration to organisations with expertise in the foreign country’s payroll taxes and HR laws is the intelligent way to overcome the pitfalls and mistakes that come so easily.