What Are the Legal and Tax Risks of Remote Employees Working From Abroad?

Introduction

International remote employment can be rewarding for remote employees and the globally expanding companies recruiting them. The nature of remote work means employees and contractors can work anywhere there is an internet connection and in almost any country. For the companies doing the hiring, the talent pool is instantly expanded the moment recruiting crosses international borders.

As rewarding and profitable as remote work can be, it does not come without risks. There is the risk of non-compliance with local employment laws, for instance, which cover the treatment of employees by employers and the rights of employees. When employing individuals remotely who live in a foreign country, it’s essential to follow that country’s employment laws.

Each country will also have its tax laws and regulations, requiring employers to withhold income taxes and contribute to social security and unemployment insurance programs. The specific taxes and contributions differ by nation.

Other potential liabilities include work visas, making sure anyone required to have a visa has the appropriate visa, and ensuring your company’s intellectual property rights are safe as your employees conduct work in other nations with differing intellectual property laws.

The legal and tax risks of employing employees abroad can be mitigated with careful planning, working closely with lawyers and tax experts, and partnering with a reputable global payroll and HR solution with its team of legal experts.

Remote employee income tax & contributions

Employees have their income tax withheld from their paychecks. This helps them when they file their taxes. Over-payments of taxes throughout the year result in a refund. Employers must withhold and remit the correct amount to avoid the employee having to pay taxes at the end of the tax year or pay interest and penalties.

Independent contractors do not have any taxes withheld because they are paid by invoice and pay their taxes either quarterly or annually. When companies pay independent contractors, they do not need to make contributions to social security or insurance such as health insurance or unemployment insurance.

In addition to income tax being withheld, employees must also make contributions to the programs mentioned above for which independent contractors do not pay, such as social security. Contractors may have to make social security or self-employment tax payments and unemployment insurance.

Paying employer contributions

There are certain contributions that the employer must make based on the monthly earnings. In some countries, there is a maximum amount of earnings that can be used to calculate the contributions, or there may be a maximum amount of payment. The percentage of the earnings will differ by country.

Contributions include payments for social security or pensions and insurance such as unemployment insurance, work injury and accident insurance (also called workers compensation), disability insurance, illness insurance, and health insurance. Timely payments must be made to the local government tax agencies.

If your company has a subsidiary and is a registered business in a country, your company would have a tax ID number and be able to make tax payments. If your company uses an employer of record, payroll and taxes can be paid on your company’s behalf by the local entity owned by the employer of record.

Tax implications of working remotely from another country

The following is an example of employer and employee contributions. All percentages are based on monthly earnings. In this example, a global employer has remote employees in the Central African Republic.

Employer contributions — the maximum monthly earnings for contribution calculation are 600,000 CFA francs:

• Social insurance: 4%
• Work injury: 3%
• Family allowances: 12%

Employee contributions — the maximum monthly earnings for contribution calculation are 600,000 CFA francs:

• Social insurance: 3%

Central African Republic income taxes:

• 0 – 378,000 CFA: 0%
• 378,001 – 1,680,000 CFA: 8%
• 1,680,001 – 3,360,000 CFA: 15%
• 3,360,001 – 5,040,000 CFA: 28%
• Over 5,040,000: 40%

Companies with up to 19 employees can pay contributions quarterly, while companies with 20 or more pay monthly.

In the above example, the company employing remote workers who live in the Central African Republic would make contribution calculations based on the monthly earnings of the employees. In this example, the total employer contributions would be 19%, and the total employee contributions would be 3%.

If the company is a small company with up to 19 employees, quarterly contribution payments can be made; otherwise, monthly payments must be made. For the payroll calculations for each worker, the amount of income tax to be withheld and remitted to the tax authority differs depending on each employee’s tax bracket.

Work permits

Work permits, or visas, are proof of permission from a government to work temporarily in a country. In some cases, employees and contractors traveling for work, also known as digital nomads, may stay in a country for a brief period without needing a visa. Visas have a set duration, such as six months or one year, and may be extendable in some countries.

Foreign nationals living in a country can be hired as employees or contractors by a foreign company as long as the individuals are legally able to work there. Suppose your company works with a global payroll and human resources outsourcing partner. In that case, the partner can ensure that all workers hired through the service are legally capable of working and have the appropriate visas, if necessary.

Intellectual property

Intellectual property laws vary around the world. Your company needs to be familiar with the intellectual property laws where it’s headquartered and the laws of each country where your company has employees conducting business and transferring work between entities.

All intellectual property must be protected from the potential loss of your company’s rights regarding the IP information, including agreements, contracts, and terms of service. All intellectual property should be transferred according to the local intellectual property laws.

To ensure intellectual property remains the employer's property, legal experts can draft legally compliant agreements that provide all intellectual property assigned to your company when transferred.

The transmitting and transferring of data also needs to be secure. When partnering with an employer of record, the EOR will control all data transfers without using third parties. Hence, your company’s data is safe from potential hackers or other parties.

When should we worry about legal and tax risks?

Legal and tax risks should be assessed and planned for before any international recruitment undertaking takes place. It is important to seek legal counsel before making any plans for hiring internationally. Additionally, your company could partner with an employer of record to use a dedicated local legal team that could help with legal risk assessments and working taxes remotely abroad.

Employers of record own a legal entity in every country where you hire employees. In addition to having a local entity from which to hire employees, the employer of record works with local law firms that understand the local laws, regulations, and customs.

The legal experts who work with the employer of record can help you with questions regarding the local employment laws, the local tax regulations, where to remit taxes, and other issues regarding compliance.

While an employer of record works with local legal experts to ensure compliance with tax laws, the employer of record will ensure that payroll is processed accurately, so employees are paid on time and in their currency. The employer of record will ensure taxes are correctly paid, including employer contributions. Employee contributions and income tax withholding will also be processed.

Many of the risks of working abroad tax implications are lessened for the client company when working with an employer of record. This is largely thanks to the accuracy of adequately calculating payroll and taxes, ensuring compliance with all local tax laws and regulations, and the timely payment of taxes.

How Skuad can help you hire abroad compliantly

Hiring international remote employees comes with a sizable amount of risk. There are potential legal complications and pitfalls when companies hire workers from other countries that could be financially disastrous, especially if the company hiring the employees or contractors doesn’t have a team of local legal experts.

These risks can involve:

• Compliance with local employment laws
• Following tax laws and making contributions properly
• Withholding taxes or making errors with payroll calculations
• Working remotely from another country and taxes

There are solutions, however. Expanding companies can partner with a global employment and payroll platform like Skuad. An employer of record, such as Skuad, can legally and compliantly hire employees on your behalf, taking away much of the risks of global recruiting and hiring.

The employer of record can ensure compliance with local employment and tax laws, ensuring the employees have the correct paperwork and visas, if necessary. Payroll can be accurately calculated, and employee contributions and taxes will be paid on time. Skuad can make sure employees are classified properly, onboarded seamlessly, and ready to get to work for your globally expanding company.

Book a demo today to see how Skuad can help your company hire employees compliantly.