If your business has — or is considering hiring — remote employees working outside the U.S., it’s important to know how that arrangement impacts employment tax.
Below are three considerations to protect your business from cross-border tax complications.
1. Understand Your Employer Responsibilities
If the employee has established a taxable presence in the host country, your business will likely become subject to corporate income tax on any profit attributable to this employee. So it’s critical to understand what constitutes a taxable presence.
Most countries link income to the location where services are performed. Therefore, it’s important to determine whether work performed by the employee will trigger a “permanent establishment” that will subject your business to paying taxes in that country.
What you can do:
- Gather detailed information about the role of this employee. Obtain a thorough understanding of the employee’s role, the scope of work, and how much authority this employee is authorized to assert on behalf of your business.
2. Get a Handle on Foreign Employment Laws
Very few small and medium-sized businesses realize the following fact:
A U.S. employer with an employee residing in a foreign country becomes a foreign employer.
This means your company would be subject to all the labor laws of that country. This includes health and safety, hiring practices, termination, holiday or vacation leave, etc. This applies whether or not your employee is a U.S. citizen.
What you can do:
- Determine how the country distinguishes between employee and contractor. If possible, realign the employee’s job description so this person functions as an independent contractor rather than an employee. This could help avoid creating a taxable presence for your company.
3. Explore Your Options
To manage tax compliance risk, you have several options.
One is to investigate working with an existing foreign company that can hire your employee and then bill your company.
Another option is using a professional employment organization (PEO). A PEO is a cost-effective way to navigate the process of compliantly employing a remote worker overseas.
PEOs have experience with local:
- Health insurance
- Registration and licensing consideration
And if necessary, the PEO can help your business with compliant termination.
Businesses that find themselves managing remote workers overseas for the first time can struggle to remain tax compliant.
At PBMares, we help clients — including those in construction, government contracting, hospitality, and more — manage these complex issues. Let us help you navigate as your business evolves and you encounter new international tax rules and regulations.
Contact us to learn more today.