When your company hires employees from other countries such as China, the first question that arises is how you will pay them. This is not as simple as it appears, and the solution will vary depending on the type of worker, the country in question, and the length of employment.
If you don’t have a branch, office, or registered entity in the foreign country to run payroll, you may want to consider paying them remotely from your home office.
Is it, however, possible to pay Chinese employees remotely?
Consider the following scenarios in which you may wish to pay an employee remotely:
- Hiring a foreign employee who will be working remotely from home
- Sending an employee on a six-month project abroad
- Building a remote team based on skills rather than location
- In order to expand into a new market, you are hiring local marketing and sales representatives in China
The temptation in each of these cases is to simply pay the employees remotely from your home payroll and treat them as if they were actually working out of your location. This can work for temporary foreign assignments of home-country employees, but for longer engagements, a different solution may be required.
The issue that arises is that when you hire a resident employee in another country, you are now accountable in two different tax and payroll systems. For example, if you’re hiring overseas for a US company, you’ll need to understand both US tax laws and foreign tax laws. You already know how to comply with local laws for your employees, but how do you comply with China regulations if you are new to hiring in the host country? Here are some things to think about when it comes to paying your overseas employees.
Factors to Consider When Deciding How to Pay an Overseas Employee
There are a few factors that will play into the decision of how to pay the employee:
1. Type of worker (remote employee or contractor)
Contractors are becoming more popular, and they appear to offer a simple solution to the international payroll problem because they are self-employed and work on a B2B basis. However, there is a risk of misclassification, in which their home country views them as your employee based on how you structure and manage their work.
Formal employees (both locals and expats) are entitled to a full range of benefits and labor protections in the host country, which cannot be ignored. You will need to find a way to comply with and meet local regulations at some point.
Currency fluctuations can have an impact on a foreign employee’s net pay, so you may need to fix the salary in their home currency. Another option is to have a currency exchange agreement in place to offset fluctuations in either direction, such as if an employee is paid in your home currency but pays their expenses in another currency.
3. Tax and Social security
Employees who are residents of the host country will pay tax and social security at the statutory income tax rates, just like any other employed citizen. Those amounts must be correctly calculated and withheld in the payslip. Employees from their home country who are on assignment abroad are usually required to pay tax in the foreign location, but your company may also be required to withhold tax at home. Expats’ tax residency is usually activated when their stay exceeds six months. To avoid double taxation, research tax treaties between the two countries. Similarly, both the home and host countries will want social security contributions to be paid by both the employer and the employee. Some countries have tax treaties that allow for exemptions from this.
How can you pay your overseas employees remotely?
You have four basic options to pay your overseas employees:
1. Pay the employee on your home country payroll
You may be able to keep the employee on the home payroll for short-term assignments or projects overseas. Some countries allow it and will have special rules for remote payment, which may include some type of registration without the need for a legal entity.
However, if you hire a local, they will be required to have a payroll in their home country for tax and social security purposes, and they will not have a tax ID or presence in your home country regardless. It may be possible for expats, but they will have to deal with two separate tax systems if they stay abroad for an extended period of time and become tax residents.
2. Pay them as independent contractors
This can be useful for certain positions or projects that are more self-starting and where the company has no control over the worker’s time or methods. Salespeople on commission, for example, as well as hourly specialists such as lawyers or accountants, could be safely hired as contractors. For more information about independent contractor, you can click and read this article.
3. Ask a local partner or third party company to place them on their payroll
If your company already has business relationships in China, you could request that your employee be paid locally. For payroll administration, the third party becomes the ’employer,’ and your company remits the salary through them for withholding and required contributions.
4. Outsource payroll to handle your remote employee
You can use a payroll provider like China Payroll, You can hire an employee from abroad but leave all staffing issues to a payroll agency. If you choose a payroll service agency such as China Payroll you won’t have to worry about all the risks above.
Contact us now if you have any payroll questions about how to pay your Chinese employees.