Compliance is a serious issue for any type of business, especially when expanding globally. The term ‘payroll tax’ is one of the basic and fundamental concepts in international compliance. Let’s deep-dive into the idea to see if and how it applies to your business. 

• Introducing Payroll Tax 
• Payroll Tax: Who Pays What? 
• Modern Payroll Challenges
• EasyStaff Payroll: Ultimate Solution for Remote Teams 
• Best Practice of Payroll Tax 
• Conclusion

Introducing Payroll Tax 

Payroll tax is an umbrella term for a range of mandatory deductions made to a salary or wages earned by an employee. Payroll tax is managed by the employer in most jurisdictions; however, some degree of tax management is also a shared responsibility of the worker. This form of tax is an essential part of any government’s social security system, so payroll tax money is paid to the government which invests it into national health programs, unemployment insurance, and other social projects. 

What exactly is labeled as payroll tax? Surprisingly, the answer depends largely on where you ask the question. Across the board, the meaning of payroll tax is made up of several components:

• Income tax withholding where a part of wages is levied as income tax
• Social security contributions encompass retirement and disability payments, as well as survivor benefits
• Healthcare contributions to national health insurance programs
• Unemployment insurance that helps build resources for funding those unemployed 
• Compensation is paid out as coverage for work-related injuries or illnesses 

Not every company takes a percentage of workers’ salary towards these forms of taxation. As mentioned above, what exactly goes to payroll tax in every given workplace depends on the country and its government. 

Take these examples of how payroll tax structures vary significantly around the world. For instance, the United States implements a 15.3% combined rate for Social Security and Medicare taxes that is split equally between employers and employees (the condition is true at the federal level in every state). In turn, Germany has a broader definition that includes church taxes and higher employer contributions. Canada divides its payroll taxes into Employment Insurance and Canada Pension Plan contributions shared by both parties, and Singapore focuses primarily on higher Central Provident Fund contributions. Another example is France that uses a complex system of social charges alongside standard social security contributions, varying by salary level, while Sweden integrates payroll taxes with income tax for a seamless calculation. The United Kingdom uses National Insurance Contributions with differentiated rates for employees, employers, and self-employed individuals. 

Clearly, countries elaborate their payroll tax policies to achieve a greater good for the employed in the country, while also creating a safer environment for companies and businesses that hire people there. 

When a business from abroad reaches into the country’s workforce, it needs to stay compliant with the local payroll tax regulations, regardless of whether the company has a hub in the destination or not.

EasyStaff Payroll is a B2B partner that operates through a B2B contract and removes payroll tax responsibility for the company. As a European entity, EasyStaff Payroll enables companies to go global and hire internationally by placing itself as a bridge between a company and a worker. 

Payroll Tax: Who Pays What? 

The rule of thumb is, payroll tax is at least to some capacity divided between the business and the worker, and the split may vary dramatically. To illustrate, let’s go back to the countries discussed above. 

The US’s 15.3% for Social Security and Medicare is split into 7.65% between the worker and the company, similar to Canada’s Pension Plan and Employment Insurance contributions. Some countries, like Singapore, set the rate higher for employees (20% towards Central Provident Fund) and add an additional burden to employees (17% towards Central Provident Fund). In contrast, Germany and France seem to shift the burden to the employer where companies pay 30.9% and up to 42.5% of payroll respectively. 

Modern Payroll Challenges

Whether a startup or a seasoned company in the market, any business has equal chances of encountering these payroll administrator and tax management pitfalls. 

Employee Benefits. In our previous article, we discussed that supplemental pay may be a strong foundation for low staff turnover. However, calculating the final pay, given how accurate data tracking is supposed to be, may be difficult and even more so the larger the staff number is. 

Compliance. Any successful business knows that even at home tax regulations may be tricky. With the growing gig economy, businesses increasingly diversify their staff by attracting outsource freelancers and independent contractors. In some cases, a business seriously relies on outsource workforce beyond a single one-off engagement. Therefore, paying freelancers poses an additional challenge to payroll tracking systems a business may have in place. 

High payroll costs. Fully official and 100% transparent payroll to anyone working with a business and in a company is quite expensive. So some companies opt for freelancers – not only as a means of attracting the right professional for a limited period of time but also as a way to avoid payroll tax at all. 

Clearly, payroll tax is a component of employment. That is, only employed workers who are dependent on their employer are subject to payroll tax. With independent contractors, who are separate individuals performing services on demand, there is no payroll tax per se because there is no payroll. What a company pays its contractor is a project fee or an hourly wage. So, it bares no legal responsibility for the freelancer. The latter is supposed to manage their income tax on their own. But does a company that relies on a distributed team really see no challenges in pay administration? Sadly, that is not the case. 

Fluctuating currency rates. Exchange rates are unstable in some places, and a company that manages a distributed workforce needs to come up with a sound strategy that would protect employees from unfair payroll fluctuations and cause distrust and dissatisfaction. 

Payroll transparency. This challenge hits right in the bull’s eye for smaller companies that may not have enough internal accounting resources to ensure compliance. Staying on top of all regulations to create a safe workplace for the team and reporting to the tax authorities is quite difficult, and not having expertise may be a serious threat. 

Simple access to money. Sending actual money to freelancers, part-timers and full-time staff may be challenging. Yet another problem lies in receiving that money on the side of the worker. International wires may take too long to arrive and remain inaccessible unless serious paperwork is provided to the bank. This holds especially true for the CIS region where some countries are disconnected from SWIFT. 

EasyStaff Payroll: Ultimate Solution For Remote Teams

The key to overcoming compliance issues with payroll tax and contractor payments is a serious and water-tight internal expertise on accounting not only domestically, but also worldwide. This is where EasyStaff Payroll steps in. 

The contractor management platform facilitates payments to full-time staff and freelancers and frees up time and resources for core business tasks. Businesses can pay abroad with 360-degree compliance and onboard talent, not conveniences. Multiple currencies, including crypto, and various payout methods make EasyStaff Payroll an invaluable payroll manager for any business. 

The platform is a centralized access point to all international payments to any team member. EasyStaff Payroll provides closing documents for both the recipient and the sender, and documentation for every transaction is available in seconds in the personal account. The B2B contract that a company signs with EasyStaff Payroll — a Lithuanian-registered company — means that the platform acts as a service provider under European tax law. For most cross-border B2B transactions within the EU or with non-EU clients, the reverse charge mechanism applies, meaning VAT is not charged on invoices provided the client has a valid VAT number. This setup helps optimize the tax burden in full compliance with EU VAT directives. In essence, by using EasyStaff Payroll as a payroll solution, a company has access to a single-platform solution that helps hire, cooperate and pay globally. 

Best Practice of Payroll Tax 

Regardless of how complex a jurisdiction may be or whether a business relies on its internal resources or delegates its accounting to a third party, there are payroll tax management rules that really apply to all businesses across the board. Following these tips helps achieve order in payroll management. 

Automation is key. Payroll management can take up loads of time and effort, diverting attention from major business goals. This is why automation with payroll software is a must in today’s rapidly evolving and changing markets. Automation doesn’t hinder compliance and helps bind HR management and payroll administration for an effective and transparent workplace where teams have a trusting relationship with the business. 

Stay On Top of Regulatory Changes. Given how frequently tax regulations change, having someone specifically tasked with tracking these changes can prevent costly mistakes. Automated payroll systems, such as EasyStaff Payroll, are founded by teams that track the legal landscape daily to maintain compliance for their users. 

Transparent Communication. Establishing a dedicated portal where employees can view their payslips, tax deductions, and benefits information in real-time can significantly reduce administrative burden. The trend for visibility in the workplace is not going to pass. Instead, it is reshaping the demands that teams now pose to their employers. 

Plan to Scale. As your business grows, your payroll system should be able to handle increased complexity without breaking down, meaning that a transition is called for, for example, from a basic spreadsheet system to a full-fledged enterprise solution that can manage international payroll, multiple currencies, and diverse taxes levied across different regions.

Conclusion

While the fundamental purpose of payroll taxes remains consistent worldwide – funding social security systems – the way these costs are shared between the staff and the business varies greatly. Understanding these differences is crucial for multinational companies planning global expansion and for employees considering international career opportunities. One way to minimize risks when a business reaches new markets is delegating payroll management to EasyStaff Payroll. For freelancers, part-time workers and full-time teams, the platform helps send money to all types of workers, bypassing legal complexities and red tape. A strong team starts with trust. Help your team trust your business with reliable and compliant payroll now – join EasyStaff Payroll.