Global economy, digital nomads, citizens of the world.
Given all the terms referring to the shrinking distance between people and
countries, you’d think running a multinational business would be getting
easier.
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, you
may create tax liabilities in both countries. And there can be administrative
hoops 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 in
another country (apart from their citizenship). This employee temporarily or
permanently relocates abroad for the purpose of work.
It’s not an uncommon arrangement. There are at least 50 million expats
working
abroad at any given time. Plus, that number continues to climb in proportion
to global business growth.
Expatriates are most commonly found in skilled labor and highly specialized
professions where it’s more difficult to recruit the right talent. This makes
them expensive. In most cases, expats not only earn more than they would at
home, 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 use
expatriate labor.
Advantages of expatriate payroll arrangements
Why are so many global companies putting expats on their payrolls? There is a
compelling 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 you
favor quality hiring over quantity hiring, you won’t be worried about the cost
of expat employees (compared to local labor). Most savvy hiring managers know
to 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 as
skills become more specialized. This is why highly skilled professions see the
highest 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 is
extraordinarily high due to demand.
Operational control and standardization
Even when talent is available in a local market, many multinational companies
send workers from their home market in the name of quality control. These
expats are used to train and manage global operations. The impact of
standardizing the company's operations can be valuable to the success of the
organization.
The complicating factors of expat payroll
While there are some significant benefits to employee expatriates, adding
expats to your global payroll is not all unicorns and rainbows. There are also
some complicating factors when it comes to payroll operations.
How are expatriates paid?
Your expatriate employees need more financial support than you may be
accustomed to providing. Since these employees have uprooted their lives in
service of your business goals, it’s customary to design your expatriate
payroll 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 cover
these expenses. And that just covers what they should be paid for.
Calculating these payments—and making them happen—is a whole different ball
game.
Should you calculate pay based on the standards of the home country, host
country or headquarters country? Cost of living, for example, may be quite
different between the U.S. and the Philippines.
There isn’t necessarily one correct answer to this question. What works well
for one company may not transfer to all companies dealing with expatriate
payroll. 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 is
because living in a different country is usually a pretty big inconvenience.
The employee deals with this hassle to benefit the company. The premium pay is
used for reciprocity.
But there is a bit more to it than that.
Higher pay can also account for differences in the cost of living, exchange
rates and relative hardships faced while living in another country. While
local pay is determined by the local market, expatriate payroll is typically
determined by the home country market, with adjustments that account for the
anticipated hardships.
Tax liabilities, payroll compliance and immigration
It can also be tricky to navigate the legal risks associated with immigration
requirements and tax liabilities.
An expat is typically bound by the governance of the home country. This means
the business is responsible for withholding payroll taxes as part of the home
country payroll. But that doesn’t necessarily remove the expat’s liability to
pay taxes in the country where they are working. Or your company’s liability
for withholding tax for the host country.
For example, U.S. employees working as expats in Canada are required to pay
taxes in both countries. However, the IRS allows these employees to deduct the
foreign 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 or
a foreign worker placed in the U.S., the IRS is going to take their
share. For U.S. citizens, all gross income earned worldwide should be reported
to 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 physically
present in a “tax home” outside of the U.S. for a period greater than one
year.
Do other expats pay home country taxes?
Yes, the worker is responsible for paying taxes in the home country regardless
of where they work and earn income. For example, anyone residing in Germany is
liable to tax in Germany. Even if you did not spend time in Germany during the
fiscal 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 protecting
workers from double taxation. Double taxation treaties governed by
international law exist between states to lay out which countries get to
collect.
Depending on the countries in question, they may determine home country and
host 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 double
taxation treaties between your home country and the countries hosting your
workers.
High expat expectations lead to high burnout
Even when your business does everything by the book, moving to another country
can still take a big toll on your expat employee. The expatriate arrangement
can 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 than
long-term placements.
Get your expat payroll right
If you decide to send some employees abroad, you have the option of mastering
the intricacies of expatriate payroll yourself. Or you can use Payroll 360
that’s already got it down to a science.
Of course, expats aren’t your only options for getting work done around the
globe. You might also want to explore:
Schedule a free consultation
Meet with one of our payroll experts to discuss your current business challenges and how our solutions can help.