Expatriate payroll: Master the challenges of workforce management

Expatriate payroll: Master the challenges of workforce management

September 23, 2021

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Global economy, digital nomads, citizens of the world.

Given all the terms referring to the shrinking distance between people andcountries, you’d think running a multinational business would be gettingeasier.

In some ways it is—but expatriate payroll can still be thorny.

If you relocate a U.S. citizen to work at a facility in another country, youmay create tax liabilities in both countries. And there can be administrativehoops to jump through if you don’t want to face double taxation.

If you have expats, it’s time to brush up on the ins and outs of paying them.

What is an expatriate?

An expatriate, or expat for short, is an employee that takes an assignment inanother country (apart from their citizenship). This employee temporarily orpermanently relocates abroad for the purpose of work.

It’s not an uncommon arrangement. There are at least 50 million expats workingabroad at any given time. Plus, that number continues to climb in proportionto global business growth.

Expatriates are most commonly found in skilled labor and highly specializedprofessions where it’s more difficult to recruit the right talent. This makesthem expensive. In most cases, expats not only earn more than they would athome, but they fare better than the local economy of workers, too.

This often means a high price tag for your business if you want to useexpatriate labor.

Advantages of expatriate payroll arrangements

Why are so many global companies putting expats on their payrolls? There is acompelling list of advantages that come along with expatriate employees:

Quality employees

HR managers know how difficult it can be to find the right talent. If youfavor quality hiring over quantity hiring, you won’t be worried about the costof expat employees (compared to local labor). Most savvy hiring managers knowto consider the cost of expat labor in terms of the drain on resources low-quality labor causes.

Access to unique talent

Speaking of talent, finding the right employees only gets more difficult asskills become more specialized. This is why highly skilled professions see thehighest number of expat recruits. Expats are particularly common when the local labor market cannot provide talent where it is needed , or the cost of that labor isextraordinarily high due to demand.

Operational control and standardization

Even when talent is available in a local market, many multinational companiessend workers from their home market in the name of quality control. Theseexpats are used to train and manage global operations. The impact ofstandardizing the company's operations can be valuable to the success of theorganization.

The complicating factors of expat payroll

While there are some significant benefits to employee expatriates, addingexpats to your global payroll is not all unicorns and rainbows. There are alsosome complicating factors when it comes to payroll operations.

How are expatriates paid?

Your expatriate employees need more financial support than you may beaccustomed to providing. Since these employees have uprooted their lives inservice of your business goals, it’s customary to design your expatriatepayroll to include comp for things like:

  • Base salary and premium
  • Cost-of-living differential
  • Housing allowance
  • Education support for dependents
  • Home leave

Plan to spend up to five times the cost of employing a local employee to coverthese expenses. And that just covers what they should be paid for.

Calculating these payments—and making them happen—is a whole different ballgame.

Should you calculate pay based on the standards of the home country, hostcountry or headquarters country? Cost of living, for example, may be quitedifferent between the U.S. and the Philippines.

There isn’t necessarily one correct answer to this question. What works wellfor one company may not transfer to all companies dealing with expatriatepayroll. Tax and regulatory compliance, as well as healthcare requirements, also heavily influence these decisions.

Why is an expat normally paid higher?

The biggest reason expats are often paid higher than other employees isbecause living in a different country is usually a pretty big inconvenience.The employee deals with this hassle to benefit the company. The premium pay isused for reciprocity.

But there is a bit more to it than that.

Higher pay can also account for differences in the cost of living, exchangerates and relative hardships faced while living in another country. Whilelocal pay is determined by the local market, expatriate payroll is typicallydetermined by the home country market, with adjustments that account for theanticipated hardships.

Tax liabilities, payroll compliance and immigration

It can also be tricky to navigate the legal risks associated with immigrationrequirements and tax liabilities.

An expat is typically bound by the governance of the home country. This meansthe business is responsible for withholding payroll taxes as part of the homecountry payroll. But that doesn’t necessarily remove the expat’s liability topay taxes in the country where they are working. Or your company’s liabilityfor withholding tax for the host country.

For example, U.S. employees working as expats in Canada are required to paytaxes in both countries. However, the IRS allows these employees to deduct theforeign taxes paid on their U.S. returns, preventing double taxation.

Do American expats pay U.S. taxes?

The simple answer is yes. Whether the expat is a U.S. citizen living abroad ora foreign worker placed in the U.S., the IRS is going to take theirshare. For U.S. citizens, all gross income earned worldwide should be reportedto the internal revenue service via a tax return.

Net pay is always, unfortunately, a bit less.

One opportunity to explore is the Foreign Earned Income Exclusion (FEIE), which typically requires that the employee is physicallypresent in a “tax home” outside of the U.S. for a period greater than oneyear.

Do other expats pay home country taxes?

Yes, the worker is responsible for paying taxes in the home country regardlessof where they work and earn income. For example, anyone residing in Germany isliable to tax in Germany. Even if you did not spend time in Germany during thefiscal year in question (perhaps because you were working abroad as an expat),the tax liability is based on your place of residence.

The good news is that many countries cooperate when it comes to protectingworkers from double taxation. Double taxation treaties governed byinternational law exist between states to lay out which countries get tocollect.

Depending on the countries in question, they may determine home country andhost country tax liabilities by:

  • Country of residence: taxed in country of residence
  • Source country: taxed where income is earned
  • World income: when earning in more than two countries, taxed in country of residence
  • Territoriality: taxed partially in each country based on where the income was earned

If you have expats on your payroll, it’s important to understand the doubletaxation treaties between your home country and the countries hosting yourworkers.

High expat expectations lead to high burnout

Even when your business does everything by the book, moving to another countrycan still take a big toll on your expat employee. The expatriate arrangementcan be isolating and stressful—even when loved ones make the move with them.

All in all, these arrangements tend to be short-term solutions more often thanlong-term placements.

Get your expat payroll right

If you decide to send some employees abroad, you have the option of masteringthe intricacies of expatriate payroll yourself. Or you can use Payroll 360that’s already got it down to a science.

Of course, expats aren’t your only options for getting work done around theglobe. You might also want to explore:

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