Hiring Overseas Talent: Expense and Tax Considerations

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Embarking on the journey of hiring overseas can prove to be a rewarding move for businesses ready for international growth. However, this venture calls for careful navigation of the potential expense and tax considerations that are inherent in overseas talent acquisition.

In this guide, we’ll explore essential factors such as determining foreign worker status, deciding between an employee or independent contractor role, and steps to set up business entities.

We’ll also shed light on the visa process and highlight pertinent tax matters in comprehensive, easy-to-understand terms. So buckle up. It’s time to dive into the global talent pool!

Who is Considered a Foreign Worker?

A foreign worker is identified as an individual who is living and working in a country different from their nationality or birth. They might be on temporary visas or permits or have permanent residence status in the host country.

If you’re hiring someone who isn’t a citizen of your firm’s home country, whether they reside overseas or not, they’re considered a foreign worker.

This means if your US-based company hires a Canadian living in Canada, or a Canadian living in America, both are regarded as foreign workers and could impact how you handle expense and tax considerations. However, the cost you’ll pay will depend on where your worker lives.

Employee vs. Independent Contractor

When hiring overseas talent, you need to decide between hiring an employee or a contractor.

If you select an employee, you’ll shoulder the responsibility of complying with the host country’s labor laws and tax requirements. This includes agreed-upon benefits, contributions to social security, and income tax withholding. Typically, hiring an employee is more expensive.

On the other hand, if you opt to hire independent contractors, the financial obligations shift predominantly to the worker. They’re generally responsible for their taxes and insurance.

However, bear in mind that various countries have different definitions for contractors and employees, which could impact your firm’s legal standing. Therefore, it’s essential to understand these distinctions carefully while making your hiring overseas decisions.

How to Hire Overseas Employees or Independent Contractors

There are two ways to hire a foreign worker. You can either go through the employee or independent contractor route. The employee route is the more expensive and longer option.

Step 0: Set Up as a Business Entity

We wanted to include this as a step because you may not know that you need to be a business entity before you can hire employees, whether they’re at home or abroad. While it’s uncommon for U.S. businesses to hire overseas talent before they scout locally, it’s been known to happen.

Therefore, if you’re an independent contractor looking to incorporate, it’s important to know your expense and tax considerations when you do so. An independent contractor can technically get what they need to hire employees, but you get way more tax benefits if you’re a corporation. It’s also very unlikely that you’ll qualify for certification to hire foreign employees as a contractor.

An independent contractor has a few options to incorporate, and the process of incorporating typically costs a fee. Your tax requirements are also based on your business type.

For example, S-corps have pass-through taxation, meaning they report their income on their individual income tax returns and are not subject to corporate income tax. Corporations do have to pay corporate income tax, but this is often lower than personal income tax.

Once you incorporate, you’ll need to:

  • Get an Employer Identification Number (EIN), as this is necessary to hire employees and to withhold taxes on income paid to nonresident aliens (a person without a green card).
  • Get a state or local tax ID, if applicable. Seven states have no income tax, and another two only impose income tax from dividends. States that do tax income will determine your figures based on your business structure (incorporating often lowers your taxes).
  • Adopt an internal or external payroll department that’s knowledgeable in international payroll. While you’ll need to create a W-2 and receive a W-4 form from US-based employees, every country has its own rules and regulations for payroll.
  • Know how long you need to keep payroll records for. The U.S. requires you to keep all of your employment tax records for up to 4 years, but this may be different overseas.
  • Report payroll taxes on a quarterly and annual basis. This requires you to have up-to-date records and knowledge of what you need to pay per quarter.

All of the above tasks will require you to pay an upfront, bi-weekly, monthly, quarterly, or yearly expense. With that said, it’s highly recommended that you hire an accountant to help you with these tasks. You may make a mistake unless you know about international tax laws.

Step 1: Apply for Certification From the United States Department of Labor

The Department of Labor (DOL) has an invested interest in protecting the rights and work opportunities of U.S. citizens. For this reason, the DOL needs businesses to prove that there are insufficient qualified U.S. workers who are willing to perform the job at the prevailing wage.

To get this certification, you’ll have to pay a sizable fee that can be several thousands of dollars. Once you get a foreign labor certification, you can then petition the U.S. Citizenship and Immigration Services for a visa. DOL approval doesn’t guarantee visa issuance.

In general, employers need to complete the following steps to get certified:

  1. Ensure the position meets the qualifying criteria for the requested program.
  2. Complete the ETA form and include supporting documents (i.e., the resume of the applicant).
  3. Ensure the wage offered exceeds or equals the prevailing wage for the occupation.
  4. Ensure that the compliance issues affected are completely understood.
  5. Submit the completed ETA form to the Department of Labor office.

If accepted, the employer will be notified of the determination of the Department of Labor.

Getting this document as soon as possible is important, as you’ll be able to extend offers to qualified candidates quickly. Waiting could disrupt your hiring process or halt it entirely. Keep in mind that this certification is also necessary if you’re hiring a remote foreign worker.

Step 2.1: Hiring Overseas Talent Yourself

3 women sitting in a table, one is in from of a laptop and explaining on the 2 across the seat

When new business owners look at their options, they often assume that hiring foreign workers themselves is the cheapest option. This depends. If you already have an international hiring process in place and capable workers, then yes, hiring your own workers could be very cheap.

But if you don’t, you’ll need to go through the following steps:

  • Have a strong onboarding process and international payroll team.
  • Determine the qualifications and skills your ideal candidate should have.
  • Create a job description that outlines the position’s roles and responsibilities.
  • Post the job on online job sites like Glassdoor, LinkedIn, and Facebook.
  • Speak to relevant professional groups to see if they can market your job.
  • Network with professionals who could set you up with foreign talent.
  • Document your interviewing process and ask the same questions to all candidates.

This is just a general list. Your expense and tax considerations may increase depending on a lot of factors, including where you’re hiring from, and the type of employment classification you need. Not only that but going through the visa process, especially if you haven’t done it before, can be a nightmare. And if you make a mistake, you could be audited and/or pay extra to fix it.

But if you’re confident you can do this yourself, you should consider starting the hiring process early. An agency may have the connections to speed up the process, but you may not.

Setting up a legal entity in a foreign country can be very expensive, but it gives you access to remote employees in other countries. It can also improve your brand and your competitiveness.

There are three ways to set up a legal entity:

  • Representative Office: Employees work as company representatives only and aren’t involved in sales or contracts. This can help you get a foothold in a new country. Setup is generally simple and involves registering with the national and local governments.
  • Branch Office: A manager needs to be responsible for the company’s operations on-site. Setup requires registering with the host country’s government, and the person who completes registration must be a citizen or permanent resident of the host country.
  • Subsidiary: A country representative must speak on behalf of the company and meet with government officials face-to-face several times a year. Subsidiaries are beholden to the regulatory and political laws of the host country, not the United States.

Each of these options has its pros and cons, but all of them require a significant upfront cost and administrative effort. You’ll need to register your business with the host country, obtain country-specific licenses and permits, understand local laws, and set up a payroll system.

Step 2.3: Partner With a Global Employer of Record

Partnering with a global employer of record (EOR) is an alternative way of becoming compliant enough to hire foreign employees. This is the least expensive option if you want to hire foreign employees who will live and work in the US. You can also use an EOR to hire foreign employees without needing to set up a branch office or subsidiary in a host country.

An EOR will act as an employer on behalf of the business. They’ll take responsibility for all of the compliance and paperwork needed for hiring overseas employees. EORs will oversee regulatory compliance, payroll taxes, and the process of establishing relationships overseas.

While this means you’ll need to rely on a third party, this can be beneficial if you don’t have a system in place or you want to ensure the foreign hiring process is completed faithfully.

Step 2.4: Hire an Independent Contractor

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Hiring an independent contractor is incredibly straightforward compared to hiring an employee. If you decide to hire one, you don’t have to read other sections of this article.

There are many great benefits to hiring an independent contractor. For one, you’re typically not in charge of paying the contractor’s income tax, health insurance, and retirement expenses, among other things. You also have more flexibility and don’t have to commit to a long-term contract.

While employers are obligated to pay for private servers to keep customer data confidential, they don’t have to pay for office equipment, internet, sick days, or workers’ compensation. For all of these reasons, independent contractors cost much less than employees.

With that said, there are some things you have to consider when hiring a contractor:

  • Compliance: You’ll need to hire an expert in international law to ensure you don’t misinterpret any laws or miss important details that could impact your business.
    • In some countries, independent contractors automatically become employees after a period. This could cause you to pay back taxes or offer benefits.
    • Some countries won’t readily update their laws and regulations. And if they do, you may not receive a notification from that country when it happens.
    • Many countries automatically award ownership of the IP to the person who delivered the work. This is true in Canada and many parts of Europe.
    • Forms you may need on the US end include W-8 BEN, IRS 1099-MISC, and any form in the other country that you need to prove contractor status.
  • Practical Issues: Assess how you will handle working hours across time zones, potential language barriers, currency methods, and any foreign exchange fees.
  • Country-Specific Issues: The forms you’ll issue, how often you’ll need to offer payments, and payroll working rules will all depend on the specific country you hire from.

Besides these expense and tax considerations, you’ll also have to think about what tools you’ll need to communicate with contractors and how much these will cost. Developing a great contractor hiring process can ensure you get the right overseas talent for the job.

Step 3.1: Getting a Visa For Your Inbound Employee

To start the visa process, you need to get a foreign labor certification. The procedure of this process will depend on the visa requested. There are five foreign labor visas you can apply for: Permanent, H-1B, H-2A, H2B, and D-1. Expense and tax considerations vary based on your choice.

Here’s a brief explanation of each visa type:

  • Permanent: Allows an employer to hire foreign workers to work permanently in the US.
  • H-1B: Allows an employer to employ foreign workers in the US for specialty occupations.
  • H-2A: Allows agricultural employers to hire agricultural labor overseas.
  • H-2B: Allows employers to temporarily fill non-agricultural-specific jobs.
  • D-1: Allows employers to hire workers for sea vessels and international airlines.

Employers are responsible for the visa process, meaning they’ll need to pay certain fees.

Going through the visa process requires that the employee has a valid passport, fills out the visa application, collects supporting documents, and schedules a visa interview.

Alternatively, you could sponsor a prospective employee for a green card (requires approval from DOL and Form 1-140). This would turn your employee into a “resident alien.” While this process can take a while, it will allow your workers to stay in the United States permanently.

Step 3.2: Hire an Employee Abroad and Skip the Visa Process

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Instead of going through the visa process, you can simply hire abroad. If you don’t have any plans on bringing a worker to the US, you don’t have to read other sections of this article.

To hire an employee abroad, your company needs to have a legal entity in the worker’s country of residence. As stated, this can be an expensive process. As a rule, these employees don’t have to pay US taxes, but employers may have to pay taxes on behalf of their employees.

The benefits of hiring an employee overseas are substantial if you already have a legal entity in another country. For one, an international employee stationed in another country is more familiar with cultural differences, such as slang and etiquette. This can improve your marketability.

What’s more, you’ll gain access to a bigger talent pool, your business will have a competitive edge, you can stay productive around the clock, and you’ll have a better workplace culture.

To hire employees abroad, you’ll need the following things:

  • A completed Form I-129 and a filing fee.
  • Evidence of a valid employer-employee relationship.
  • Evidence of foreign worker’s qualifications for the position.
  • Proof that hiring the worker won’t impact conditions in the U.S.
  • Form W-8 BEN to prove the worker’s foreign classification.

In some cases, you may need to supply your workers with benefits and access to great internet. Most importantly, consider the taxation laws of your employee’s country of residence. It’s recommended that you use a hiring agency, as these specialists can handle all of this for you.

Step 4: Understanding the Tax Implications of Foreign Inbound Employees

To understand your employee’s tax implications, we need to know what category they fall in:

  • Resident Aliens: Individuals who aren’t US citizens but have a green card.
    • A resident alien is taxed on all forms of income received, foreign or domestic, and includes payments received from a pension from a foreign government. They may be able to apply for a foreign-earned income exclusion or foreign tax credits.
  • Nonresident Aliens: Individuals who are in the US legally but don’t have a green card.
    • A nonresident alien is only required to pay income tax on income earned in the US or from a US source. They don’t have to pay any taxes on foreign-earned income. Investment income is taxed at a rate of 30% unless otherwise stated.

The majority of your workers will have a visa but not a green card. This means that they would be taxed as nonresident aliens. However, a nonresident alien could become a resident alien if they reside in the US for at least 31 days during the year and have been in the US for a total of 183 days over the past three years. But like all tax laws, there are exceptions to this rule.

As stated, the cost of hiring overseas employees depends on a lot of factors. What we haven’t spoken about is how the industry you’re in could determine tax status. For example, dual-status holders and teachers may claim an exception to the residency requirement.

As a rule, foreign inbound employees will need to fill out the following forms:

  • A completed Form I-129 and a filing fee.
  • Evidence of a valid employer-employee relationship.
  • Evidence of foreign worker’s qualifications for the position.
  • Proof that hiring the worker won’t impact conditions in the US.
  • Payment of fees associated with applying for an employment visa.
  • Form W-2, as this is required for ICE to review for Form I-9.
  • Form W-8 BEN to prove the worker’s foreign classification.

Employers must withhold taxes for social security, medicare, federal and state unemployment, workers’ compensation, and income tax. They will also receive leave entitlement, social security, healthcare, and other such benefits. These employees are beholden to US labor laws.

While you’re on this step, it’s recommended to verify tax laws that may affect your company and the foreign worker so you can comply with the necessary regulations. The US has tax treaties in place with many countries to help you avoid double taxation, but this isn’t always the case.

You may also need to check federal withholdings and other information about taxes for foreign workers. Since this information is country-specific, hiring a payroll specialist is recommended.

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Hiring Overseas – Summary

As you can see, hiring overseas presents unique challenges, yet a wealth of opportunities.

Taking the time to understand global employment nuances can position your business for robust international success. So don’t let complex considerations deter your ambitions! By taking these factors into account, you’re well on your way to establishing a diverse and talented team.

Professional advice is always within reach to guide you through this intricate process, whether it’s tax consultants or an Employer of Record partner. They’ll be able to explain your expense and tax considerations plainly, so you’ll be prepared no matter where you hire from.

Guest Author Bio

Meet Rupert Jones, a friendly F.I.R.E. movement advocate who firmly believes in financial freedom for all. When he’s not guiding others toward their financial goals, you can find him happily writing about travel and his feline companion.