1. Payroll processing is an essential business function for any enterprise with employees. It primarily involves managing payments to employees, making any deductions from their gross pay and remitting employment and payroll taxes to authorities. Payroll does not usually process independent contractor pay
2. International payroll processing presents challenges to both operational efficiency and compliance
3. Useful payroll strategies for international businesses may include automation, regional processing hubs, process optimization, outsourcing and global PEO solutions.
Here we explain what payroll processing is, set out some key challenges for international payroll processing, and offer five payroll strategies.
For an in-depth look at paying employees working globally check out How to Pay Remote Employees Working Around the World.
What is Payroll Processing?
A company’s ‘payroll’ is the list of everyone who is on that company’s ‘list’ of employees. ‘Payroll processing’ is the function within a business that deals with the payments to employees. The payroll processing unit of a business deals with:
International payroll processing is payroll processing across international borders (including ‘shadow’ payroll).This brings distinct operational and compliance challenges compared to processing payroll domestically. We consider these challenges below.
Does International Payroll Processing Cover Contractors or Freelancers?
It is becoming increasingly common for businesses to draw on independent contractors or freelancers for their workforce. In many cases, this provides flexibility and cost savings that cannot be rivaled by traditional employment.
In a colloquial sense, independent contractors are on the list of individuals paid by the enterprise so we might be inclined to say that they are ‘on the payroll’. This is a mistake, however. It is important for compliance, legal, and operational reasons that an enterprise treats its employees and independent contractors distinctly. The reason is that businesses only withhold taxes, and make necessary contributions on behalf of employees.
Independent contractors are required to file their own taxes and make necessary contributions themselves. This means that contractors need to be dealt with separately on an operational level to ensure that taxes and contributions aren’t mistakenly withheld.
In addition to the operational risks, there is a serious compliance risk if payments to contractors are processed alongside payroll processing: This is the risk that tax authorities and other regulators might perceive it as employee misclassification.
Incorrectly classifying a worker as an independent contractor can result in significant back-taxes, penalties, and payment of missed contributions.
In order to properly distinguish payments to employees and payments to independent contractors, many large enterprises assign the tasks to distinct business units (e.g., vendor management, rather than payroll) to ensure that separate procedures are followed. However, it is possible for both employees and contractors to be paid by the same business unit, as long as the payroll policy and procedures make it clear how the two are to be distinguished.
How to Process Payroll
How is payroll processing actually carried out in reality? While processes differ, depending on the country (or where within a country, depending on state or territory), the general process is as follows:
Why Does Payroll Processing Matter?
Payroll processing is probably not your core business. However, it’s something that your organization needs to get right. The same goes for international payroll processing. In New Zealand, a poorly implemented payroll solution nearly un-seated a Government.
In 2012, the New Zealand Government introduced a payroll solution from Australia called ‘Novopay’. It was an unmitigated disaster. Thousands of teachers went unpaid, with 90% of schools affected. This ended up costing the government $45 million to rectify. It also resulted in the resignation of several senior bureaucrats, as well as a seriously bruised reputation for the sitting National Party Government.
While introducing any new payroll process carries an element of risk, you cannot afford to continue with outdated, overly complicated payroll processing systems.
Below we look at some of the key challenges that are faced by international payroll processing and set out several payroll strategies for responding to those challenges.
The Operational Challenge for International Payroll Processing
Some of the challenges of operating an international payroll include:
The Compliance Challenge for International Payroll Processing
Being responsible for payroll across several international locations means ensuring that complex payroll requirements comply with each location. Some matters that need to be taken into account include:
Five International Payroll Strategies
Given the challenges involved, what can an international enterprise do to improve its payroll processing? Payroll strategies to improve operational efficiency and compliance include:
Ensuring international payroll processing is integrated across different countries, as well as sensitive to local differences, is a major challenge for international businesses. That challenge partly arises from operational processing issues: managing various payment methods, promptly correcting errors, dealing with employee leave and absences, integrating software systems, and managing local variation. But it is also a result of potential compliance risks, including tax and employee benefit liabilities and data protection.
A range of payroll strategies exist to help deal with these payroll processing challenges. New Horizons Global Partners can help with a fully outsourced payroll processing solution or a global PEO solution.
Get in touch today to work out which solution is best for your enterprise.