Global Payroll: Payroll Compliance & Payroll Expense

In simple words, payroll compliance is meeting the standards of payrolling in a particular country both to the benefit of the local law and the local workforce. To stay compliant, companies need to act in accordance with a multitude of legislations: nation- and region-wide, as well as multinationally. The regulations to abide by include social insurance, statutory reporting delivery, data protection and employment conditions, which refers to leaves, allowances and benefits. Once in a period of time companies report on taxes and payrolls.

Importantly, payroll compliance goes both ways. For employers, it concerns tax payment and social security and insurance payments. From an employee’s standpoint, payroll compliance is all about being able to legally declare an income. If a business wants to stay international and lawful, then controlling these both vectors is crucial.

The current trend is to hire internationally. Be it a contractor or a full-time remote employee, companies need to stay in line with the ever-changing payroll regulations. Interestingly, it is the richest markets that are most regulated (such as European or North American). To be a long-term market player and to stay transparent with international control bodies, businesses should not neglect payroll compliance.

Normally, if payrolls are not compliant, businesses are in danger of punishment which may range from hefty fines all the way to investigations and bans. In some areas of the world, like Asia, there is a fine of 100%-300% imposed on companies on top of underpaid amounts. At the same time, in Europe, companies are publicly shamed for not paying employee expenses, such as insurance, so a business’s reputation is at stake.

When a company decides to go global (in its operations or in its hiring pool), it exposes itself to multiple controlling bodies. This necessity to comply seems the most obvious. You may think that it all comes down to filling out reports correctly. However, there are real figures behind payroll compliance — that is, payroll expenses.

Payroll expenses are a lot more than wages or salaries alone. The concept encompasses benefits, deductions, overtime pay, taxes and other various contributions. Who pays what depends on location. Understanding these parts and calculating them correctly allows companies to manage their finances effectively. Processing payroll requires collecting and managing data. Interestingly, payroll expenses tend to change frequently.

A distinction must be made between salary expense and payroll expense. Salary expense is purely the amount of money paid to an employee. Payroll expenses are, basically, some amounts of money that a company withholds from its employee’s salary and hands them over to a third party (the government, that is). While payroll expense is a wider range of costs that goes beyond wages and includes payroll taxes and benefits. Payroll expenses apply to employers, employees, and contractors.

Employers withhold some amounts of money from employee’s paychecks to pay taxes. Namely, they are state income tax, medical insurance and social security. Payroll tax is different across countries. For Europe, it starts at 23%. In the post-Soviet territory, it is on average 15%. In Asia, the gap is huge, from 17% in Hong Kong and Singapore and to 45% in China. As for benefits, it is also region-bound. For employees, it means there is a certain amount of salary that is withheld and counted towards pension, medical insurance and social security. For contractors, benefits may be calculated differently, in the form of reimbursement, for example. With freelancers, income tax management is solely on them. There are, of course, details for how contractors need to prove their legal status.

Gross wages. You may want to start with the largest part of payroll expenses, i.e. gross wages. It is the money you pay for actual work, annually, hourly or monthly.

State & Federal Income Tax. Moving on, federal payroll taxes need to be deducted from wages. The amount depends on the annual income to the employee and their number of allowances. Allowance is a sum of money to cover expenditures that may occur on top of wages, such as overtime pay. Information on how much you withhold needs to be passed on to every taxing authority. These expenses are not employer expenses.

Social Security & Medical Care. By and large, these taxes are present in every country in the world. Responsibility for them is on different parties, depending on the tax system in the country. It is either the employer who pays all (like in Europe) or the burden is shared between the employer and the employee, each paying some part of it off of the wages.

Unemployment Tax. This tax helps provide for workers who lose employment. The rules that regulate how much is withheld vary from place to place.

Benefits. Some companies offer benefits, such as health care coverage, paid leave and even life insurance.

Payroll expenses are incurred on the way a worker performs services for the business. It is recommended to use the accrual method of accounting that correlates revenue earned with expenses incurred. In this method, payroll expenses are recorded in the month that you incur them, regardless of when you actually pay them.

Once a company ventures out into the international realm, operating to meet global payroll compliance may become quite hectic and massive. Because once a business goes over the border, every single process and operation becomes so much more complex due to how it stretches across several legislations. One example of the challenge is global payroll.

Global payroll is an umbrella term used to name all practices and operations related to onboarding and managing payroll for foreign contractors and employees. Depending on the receiving party’s country, global payroll actions differ. However, the normal parts are tax payment, wage calculation, following labor laws, disturbing pay slips, etc.

Global payroll compliance seems like no easy business — and it definitely is not! Let’s consider the challenges commonly posed by global payroll.

Employee classification. Are you sure that the person you are working with should be identified as an employee rather than a contractor? Misclassification normally leads to fines and penalties or even permanent bans. It is particularly important to do your homework to make sure you are compliant.

Figuring out compensation for remote teams. It is particularly relevant for companies that choose to hire full-time employees overseas. The main question here is how much to pay. Should your remote team earn as much as the on-shore one or should you refinance based on the cost of living?

Tax management. Who pays what to whom may be very different for your remote talent from how it is for you locally. It is very important that these matters are settled beforehand, so you don’t risk meeting any penalties or hefty fines.

The challenges listed are just the top of the iceberg. Once you go in, you will see the hurdles go far deeper than this. The good news is that you don’t have to do all of it on your own. Consider partnering up with a service provider to manage global payroll for you!

These operations may be outsourced to Employer of Record (EOR) or Professional Employer Organization (PEO) service providers. EOR is a service that takes care of your entire payroll process overseas. Thanks to EORs, a business doesn’t need to establish a legal entity for full-scale presence in an overseas location. Basically, they become the employer for the international team that not only manages payroll but also assists with hiring and all other formalities. Likewise, PEO performs an HR manager’s function in a foreign location. However, unlike EOR, PEO requires your legal presence in the country because PEO means a co-employment relationship between you, your employee and a provider, as technically the employer is hired by the two parties at the same time.

There is, however, an even easier way to manage international payments, be it a contractor or an employee, a startup or a mature business. With EasyStaff, the freelance management platform that caters worldwide, global payroll is easy and compliant in any part of the world.

This is how EasyStaff works. A company creates its account on EasyStaff and tops up the balance with money. The sum is made up of the actual money to pay to a worker plus the commission charged by the platform. Once money is in the account, companies assign tasks to workers. Once a task is complete, money is sent. Delivery is fast and reliable: the other party receives as much as has been sent.

The commission depends on the tariff companies choose, but the baseline is 4% or 39 EUR per payment. Also, depending on the plan, withdrawal methods change. Some plans don’t allow bank card transfers.

What makes EasyStaff compliant, and its clients safe? On paper, EasyStaff is a European legal entity that pays your employees elsewhere. EasyStaff is a B2B partner for its clients, managed by a single B2B contract. This keeps companies risk-free. Closing documents are generated immediately in the account and are accessible any time.

EasyStaff is a perfect tool for startups that wish to go worldwide but cannot afford heavy investment into it yet. With a reliable system of payroll processing that only costs a fraction when compared to full-scale legal presence establishment and tax payments, startups may benefit greatly and accelerate their international growth.

Global payroll is a large piece of work that any company needs to do if it wishes to go international. While payroll expenses may seem easy — or at least understandable — it may become increasingly difficult once you begin researching local rules and regulations. To solve any potential issues beforehand, you may want to get proactive and turn to service providers, such as EOR, PEO or EasyStaff, that provide automation to all processes related to payroll. The freelance management platform EasyStaff, which works globally, takes all things payroll away from you, making your every payment fully compliant and fast.