Five areas of international payroll you need to understand
Posted on Feb 20, 20 by Marco Pasqualin
Marco Pasqualin leads Global Payroll at Boundless and has learned the ropes of payroll operations over the past 13 years working for the likes of Apple and Aldi. He has picked up unique insights on the complexity of global multi-country payroll, juggling dozens of inputs to produce correct payslips and compliance with local rules and laws. He shares some international payroll fundamentals in this post.
Irrespective of where in the world it's done, payroll is the process and system by which a company pays its employees, pay period in and pay period out. It involves keeping employee financial records, calculating their paycheck taking wages, taxes, tax credits, allowances, and benefits-in-kind into consideration, and issuing those paychecks. Regardless of where the company or its employees are based, every employee must receive the accurate pay (and payslip) with all withholdings and deductions submitted to the local tax authorities.
Before a company can run payroll in a new country, it needs to look into a host of country-specific items: from immigration and employment law compliant contracts, through to corporate presence and tax registrations, all the way to social security registrations and mandatory employer contributions. As you may have seen us mention before, as far as any of these are concerned, countries vary massively. I learned first hand how big the step was from "doing payroll in Italy" to "doing international payroll." In this article, I want to tell you about five elements of payroll you will encounter as you pay people compliantly beyond the borders of your HQ country.
The same gross salary will yield different net pay
This is the most fundamental thing to understand about international payroll. Due to all the varying taxes, tax bands, allowances, contributions and tax credits that both the employee and the employer are liable for, the same gross salary number for an individual will produce different net values depending on the country.
Calculating cross border salaries is no easy feat. Our CEO, Dee recently wrote about her struggles with that as a few employees decided to relocate from the HQ of the company she was working for. She had to figure out what the company's employees' current net salary based on the Irish tax system would translate into at their new location. That called for doing both a gross to net (looking at capping the company cost at its current level) and a net to gross (looking at keeping the employee at the same level of take-home pay) calculation for each employee.
Once she got to the numbers, she could have an informed discussion with the employees. I will give you an example to see how international payroll numbers could change between two jurisdictions.
Mary works for a British startup, but with Brexit going ahead, she has expressed an interest to move to the Republic of Ireland as she wants to live in an EU country. Her annual gross salary in the UK is £50,000 (€60,039). After tax, Mary, who is single, doesn't have children or a mortgage, takes home £37,536 (€45,072). However, if she moved to Ireland on the same gross salary (equaling to €60,039), her net pay will be €41,957(£34,933.5) or €3,115 (£2,602) less. She knows that Ireland is as expensive as the UK and wouldn't like to receive less just because she has decided to move countries. For her to receive the same net pay, her employer would have to increase her gross salary to €66,087 (£55,024.50).
A lot of the information needed for this kind of calculation is particular and not readily available online. At Boundless, we have developed a calculator to help us make international payroll calculations easily. As we can already serve your Irish and UK-based remote workers, the calculations would look very similar to the one I showed you above. Below are five distinct aspects to payroll that go in the backend of this calculation.
Personal income tax
Unless an employee is based in one of thirteen countries that do not withhold any personal income tax, a percentage of the income will have to be deducted. Some countries will not start taxing people until a specific salary is reached (e.g. £12,500 in the UK). Once the income is taxed, the percentages vary drastically between countries. Some countries such as Hungary have a flat income tax rate of 15%, while others increase progressively as the income increases.
There is no unified way of progression among countries. In Ireland, there is only one change, doubling the percentage from 20% to 40% when income passes €35,300. Chile's lowest band is at 4% and highest at 35.5% while Sweden's first is 32%, while the highest is 57%. In other countries such as Spain, there are four bands: 19% until €12,450, 24% until €20,200, 30% until €35,000, 37% until €60,000 and 45% for everything above.
The US adds a level of complexity to income tax because there are federal and state income taxes applied to personal income. Federal and state taxes vary significantly across the US. All federal income taxes are progressive, while only some state ones are progressive (Hawaii has 12 bands), while others are flat. Some states do not charge income tax at all, such as Florida.
A variety of other taxes
Beyond income tax, many other taxes need to be taken into consideration as the payroll of an employee is calculated. Again they will vary significantly between countries and within regions, states and provinces, which impacts international payroll. While most jurisdictions have a version of healthcare, social welfare, and pension contributions and taxes, there are some very country-specific taxes. I will give you five examples below:
In Germany, the Catholic, Jewish and Protestant churches are entitled to collect a tax from their members. When registering in Germany, each individual is asked to confirm their religious belief, and the charge will be consequently applied on top of the standard income tax (8% or 9% more depending on where the individual lives).
Many European countries have different regional taxes that residents have to pay based on which part of the country they live in. Italy takes this one step further, with a town tax on top of the regional tax. Each city or town decides how much their percentage tax should be. As with all other taxes, it's the responsibility of the company to submit the payments to the cities.
Another tax coming from Germany is the Solidarity surcharge tax, which was introduced after the fall of the Berlin Wall to help finance reunification and bridge the economic gap between East and West Germany. It's rate increases progressively and reaches up to 5.5% of the income tax. "Soli" as it's known in Germany will be abolished in 2021 for all but the country's richest 10%.
At the height of the economic meltdown in Ireland, the government introduced the Universal Social Charge. Very much an austerity measure, it has changed since then and as of 2020 increases progressively, starting from 0.5% on the first €12,012, then 2% on the next €8,472, jumps to 4.5% on the next €49,560 and tops at 8% on the balance.
Separately from the unemployment premiums that Canadian employers pay, Canadian employees pay 1.58% Employment Insurance (EI) premiums based on their employment income.
These are only some of the examples of taxes you would need to consider as part of the payroll for people residing in those countries.
Most countries will offer some tax credits, and deductions on the amount of tax that people need to pay based on family status, disabilities, or private pension contributions. However, many country-specific tax credits apply:
Non-habitual tax scheme - countries such as Portugal and Italy offer varying incentives to skilled labour relocating there, including a 50% reduction on income tax for a certain period. In Portugal, the income tax is decreased from 40% to 20% for up to ten years as long as the individual works in a high-value industry (scientific, artistic or technical).
Bike To Work scheme - Ireland offers tax savings when people buy bikes to use for their commute to work, offering a tax deduction of up to €1,000.
Generally, company cars that can also be used for private purposes are considered a benefit in kind and therefore taxed (see more below). However, the UK does not apply tax on electric company cars.
In the US, clarinet classes have been suggested by orthodontists as a way to correct a misalignment of children's teeth. Therefore clarinet classes can be claimed as tax credits according to the IRS.
In France, people can deduct up to 50% of the cost of a housecleaner against their taxes, up to a total value of €12,000 a year.
Voters in Spain can receive a tax credit of 20% on the contributions paid to political parties for up to €600 per year.
All these are part of the income tax calculations that you will have to make for someone residing there and add a layer of complexity to international payroll.
Benefits (typically monetary compensations such as 100% top-up of salary during sick leave, X number of weeks of additional paternity leave that is fully paid) and benefits in kind (non-monetary such as car, phone, health insurance coverage, gym membership, lunch vouchers, etc.) are certain perks that companies can decide to provide to their employees. While the benefits-in-kind are offered free of charge from the employer, the employee, in certain jurisdictions, may be liable to paying tax on them. Here are some more obscure examples:
In the UK the cost of social functions and staff parties provided by the employer to the employees could be considered as taxable income if the cost per participant is higher than £150 per year (even combining multiple events in the year).
Staff discounts on products or services provided by the business are generally non-taxable if the value paid by the employee is higher than the cost for the employer (i.e. Ireland, UK). However, in other countries such as Italy, it is non-taxable only if the total value of the discounts is below the annual threshold of €258.23; otherwise, the full value of discounts counts as taxable income.
In the Netherlands, employers may provide a company bike to an employee for commuting and private use. Similarly to company cars, these company bicycles are seen as a benefit in kind and are taxed on 7% of their value.
Beyond all the taxes, tax credits and benefits, something that needs to be part of payroll are various allowances stipulated by employment law that need to be granted to employees. Here are three examples that may surprise you:
In France, if an employer provides a working uniform (typically in Retail, Hospitality, and Construction), they are responsible for covering the cost to clean it by providing a "cleaning allowance" to the employee.
In Portugal and Italy, employees who are responsible for handling cash (i.e. cashier at the supermarket) are entitled to an additional 5% allowance on their salary to compensate for the risk of handling money.
In Belgium, employers can grant a cycling allowance to their employees that consists of a fixed amount per kilometre for all employees that regularly use the bike to go to work. That is calculated through the shortest route from their homes to the workplace.
How do you stay on top of all international payroll?
While these examples may feel a bit overwhelming already, we have only scratched the surface of complexity here. As you decide to expand payroll to other countries, the only way to stay on top is to make sure you find the best possible partners. Connecting with local accounting, tax and other fiduciary associations, such as the Global Payroll Association (Boundless is a member) can be of great help. Changes usually happen at the beginning of each year, so that's the best time to do your research.
Alternatively, you can look into working with an Employer of Record such as Boundless that takes care of payroll, tax filings, and all other legal obligations for your local employees. Learn more here.
Need help in figuring out how to employ your international workers?
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Written by Marco Pasqualin
Marco Pasqualin leads Global Payroll at Boundless and has learned the ropes of payroll operations over the past 13 years working for the likes of Apple and Aldi. He has picked up unique insights on the complexity of global multi-country payroll, juggling dozens of inputs to produce correct payslips and compliance with local rules and laws. He shares the steps to set up international payroll in this post.
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