21 Apr 2022

What is Payroll Compliance? Payroll Compliance Checklist

What is Payroll Compliance? Payroll Compliance Checklist

Payroll Compliance is one of the challenges that companies sometimes struggle to overcome. It becomes particularly complicated when international remote employees or contractors come into the equation.

Since more companies take advantage of being able to access a more diverse pool of talent by hiring internationally, staying compliant with all the international labor regulations might seem overwhelming.

Here is a guide on understanding everything from what payroll compliance is, the advantages and disadvantages of using a payroll compliance company, to a payroll compliance checklist.

What is Payroll Compliance?

In short, payroll compliance means adhering to state and federal law requirements in order to make sure that employees are paid fairly and in a timely manner.

Complying with these laws will save your company from unwanted taxes and penalties that will hurt your bottom line and, at the same time, will keep your work organized and employees happy.

How do you ensure Payroll Compliance?

The first step that any company needs to do to ensure payroll compliance, is to choose the right employment status for its remote workers.

This includes:

  • Independent contractors
  • Full-time employees
  • Part-time employees

On top of making sure that remote workers are classified correctly, a company needs to understand all the legal requirements of the country or state the employee is located in, such as:

  • Minimum wage requirements
  • Hiring and onboarding practices
  • Overtime and paid vacation laws
  • End of service laws
  • Retirement laws
  • Social security laws
  • Exchange rate for inflationary currencies
  • Disciplinary issues

While all of this might seem overwhelming, especially for a small-sized company, there are payroll solutions and companies that can do all of this for you.

Should I use a payroll compliance company?

Using a payroll compliance company means outsourcing a company for all your legal, tax, and accounting needs.

This is particularly useful for companies that hire internationally and do not have a dedicated team or department to handle these issues. Besides, it helps the company to avoid unnecessary bureaucracy and expenses associated with opening legal entities in all the countries where the remote workers are located, which is a must if you decide to work without using a payroll compliance company.

Outsourcing payroll compliance services will enable your company to:

  • Hire globally
  • Calculate pay
  • Calculate benefits
  • Register and control incidents

Advantages of working with a payroll compliance company

Minimize costs and HR resources

While at first glance, outsourcing a payroll compliance company means additional costs, overall, such companies help minimize costs by avoiding establishing legal entities in the countries where remote employees are located and not having to hire compliance experts in all these locations.

Ensure compliance

Payroll compliance companies guarantee that your company is not only following all the tax and accounting regulations in each country or state where your employees are located but also keeps you updated with all the changes in requirements so that you don’t have to do it yourself.

Save time

Most payroll compliance companies are using payroll software which means that the payroll process is smooth and timely, unlike a payroll process that would be done manually by an in-house team.

Minimize risks

Hiring a payroll compliance company whose sole responsibility is to be up to date with legal requirements minimizes the chances of missed deadlines or late payroll tax filings.

Disadvantages of working with a payroll compliance company

Outsource

Outsourcing can be extremely helpful but this basically means that you are handing over the control of your internal matters to a third party, and some companies are not comfortable doing that.

Data protection risks

Data protection is of utmost importance when deciding to outsource services for your payroll needs. Not only for you as a company, but as well for your employees. When choosing a payroll provider make sure that they are compliant with all the confidentiality and data protection policies.

How to manage payments for remote employees?

This is a question that many companies that use the Dynamite Jobs platform to find remote talent have.

For example, companies in the US that wish to hire internationally are not restricted by the US labor laws to do so, however, the laws governing the employment contract, are the laws of the country where the employee is located. This means that the employer has to know, understand and adhere to that country’s employment and tax regulations.

For independent contractors, things are a bit easier, as usually, the contractor is responsible for paying their own taxes, however, this needs to be taken into consideration before signing a contract, especially for long-term collaborations.

Handling international payments for remote employees or individual contractors can be overwhelming. Being on top of all legal requirements and paying your workers according to local customs, which differ from country to country and change constantly, requires a dedicated team to ensure you remain compliant.

Having said this, the most common methods of payment that companies use to pay remote employees are either international bank transfers that the company handles directly or through a payroll compliance company.

Paying independent contractors is more straightforward, and depending on the agreement, any of the following can work: wire transfers, online payment services such as PayPal, Revolut, Payoneer, and Wise for international money orders, or even cryptocurrency.

Payroll compliance checklist

Payroll Compliance checklist

  1. When hiring a new remote team member you first need to classify them (employee or contractor).
  2. Check their work eligibility status.
  3. If you decide to hire someone as an employee, you need to set up a legal entity in their country in order to be able to hire them legally. If they will be hired as contractors, this will not be needed as they are responsible for their own taxes. If you do not want to open a legal entity in another country, you can use a payroll compliance company, such as Panther, Deel, or Oyster. Choosing which one is right for you depends on your needs.
  4. Create a salary benchmark framework that you will use as a guide to paying salaries and any other benefits.
  5. Craft a compliant offer and contract and agree with the future employee on all details regarding compensation, days off, and other benefits before you both sign it.
  6. Once the contract is signed, collect all the information that you need such as full name, address, bank details of other payment method details, that you need in order to register the employee on your payroll.

Do I need to register international remote contractors?

In the US, for example, according to the IRS, the most important aspect when sourcing independent contractors internationally are whether their income is US-sourced.

This is established by the location of the contractor, where they perform the job, regardless of the company location (e.g. USA). If the contractor is not a US citizen and his job does not require travel to the US, this means that the income is not US-sourced, in which case the company does not need to withhold or report taxes.

Once this is established, you must file the right documentation according to their classification. You must ensure that their classification is correct in order to avoid penalties. You can do that by using IRS’s 20-factor test.

After classifying a remote contractor, the next step is to craft a robust contract that includes all details regarding the scope of work, ownership of work, payment, etc.

After signing the contract it is imperative to have your new team member sign a Form W-8BEN, in order to make sure that the person is not a US citizen. If you don’t collect a W-8BEN form, by law you are required to withhold 30% of their pay for income tax purposes.

Regardless of the type of collaboration, employee or independent contractor, all remote workers need to be registered. A company cannot outsource workers without any legal forms.

We hope that this guide will help you better understand payroll compliance. This article does not constitute legal advice and it’s for informational purposes only.URL: payroll-compliance