The ins and outs of expatriate payroll

September 23, 2021

Expatriate payroll

Global economy, digital nomads, citizens of the world. 

Given all the terms referring to the shrinking distance between people and countries, you’d think running a multinational business would be getting easier. 

In some ways it is—but expatriate payroll can still be thorny.

If you relocate a U.S. citizen to work at a facility in another country, you may create tax liabilities in both countries. And there can be administrative hoops to jump through if you don’t want to face double taxation. 

If you have expats, it’s time to brush up on the ins and outs of paying them.

What is an expatriate?

An expatriate, or expat for short, is an employee that takes an assignment in another country (apart from their citizenship). This employee temporarily or permanently relocates abroad for the purpose of work. 

It’s not an uncommon arrangement. There are at least 50 million expats working abroad at any given time. Plus, that number continues to climb in proportion to global business growth.

Expatriates are most commonly found in skilled labor and highly specialized professions where it’s more difficult to recruit the right talent. This makes them expensive. In most cases, expats not only earn more than they would at home, but they fare better than the local economy of workers, too. 

This often means a high price tag for your business if you want to use expatriate labor.

Advantages of expatriate payroll arrangements

Why are so many global companies putting expats on their payrolls? There is a compelling list of advantages that come along with expatriate employees:

Quality employees

HR managers know how difficult it can be to find the right talent. If you favor quality hiring over quantity hiring, you won’t be worried about the cost of expat employees (compared to local labor). Most savvy hiring managers know to consider the cost of expat labor in terms of the drain on resources low-quality labor causes. 

Access to unique talent

Speaking of talent, finding the right employees only gets more difficult as skills become more specialized. This is why highly skilled professions see the highest number of expat recruits. Expats are particularly common when the local labor market cannot provide talent where it is needed, or the cost of that labor is extraordinarily high due to demand.

Operational control and standardization

Even when talent is available in a local market, many multinational companies send workers from their home market in the name of quality control. These expats are used to train and manage global operations. The impact of standardizing the company's operations can be valuable to the success of the organization.

The complicating factors of expat payroll 

While there are some significant benefits to employee expatriates, adding expats to your global payroll is not all unicorns and rainbows. There are also some complicating factors when it comes to payroll operations.

How are expatriates paid?

Your expatriate employees need more financial support than you may be accustomed to providing. Since these employees have uprooted their lives in service of your business goals, it’s customary to design your expatriate payroll to include comp for things like:

  • Base salary and premium
  • Cost-of-living differential
  • Housing allowance
  • Education support for dependents           
  • Home leave

Plan to spend up to five times the cost of employing a local employee to cover these expenses. And that just covers what they should be paid for. 

Calculating these payments—and making them happen—is a whole different ball game. 

Should you calculate pay based on the standards of the home country, host country or headquarters country? Cost of living, for example, may be quite different between the U.S. and the Philippines. 

There isn’t necessarily one correct answer to this question. What works well for one company may not transfer to all companies dealing with expatriate payroll. Tax and regulatory compliance, as well as healthcare requirements, also heavily influence these decisions.

Why is an expat normally paid higher?

The biggest reason expats are often paid higher than other employees is because living in a different country is usually a pretty big inconvenience. The employee deals with this hassle to benefit the company. The premium pay is used for reciprocity.

But there is a bit more to it than that. 

Higher pay can also account for differences in the cost of living, exchange rates and relative hardships faced while living in another country. While local pay is determined by the local market, expatriate payroll is typically determined by the home country market, with adjustments that account for the anticipated hardships. 

Tax liabilities, payroll compliance and immigration

It can also be tricky to navigate the legal risks associated with immigration requirements and tax liabilities. 

An expat is typically bound by the governance of the home country. This means the business is responsible for withholding payroll taxes as part of the home country payroll. But that doesn’t necessarily remove the expat’s liability to pay taxes in the country where they are working. Or your company’s liability for withholding tax for the host country.

For example, U.S. employees working as expats in Canada are required to pay taxes in both countries. However, the IRS allows these employees to deduct the foreign taxes paid on their U.S. returns, preventing double taxation.

Do American expats pay U.S. taxes?

The simple answer is yes. Whether the expat is a U.S. citizen living abroad or a foreign worker placed in the U.S., the IRS is going to take their share. For U.S. citizens, all gross income earned worldwide should be reported to the internal revenue service via a tax return. 

Net pay is always, unfortunately, a bit less.

One opportunity to explore is the Foreign Earned Income Exclusion (FEIE), which typically requires that the employee is physically present in a “tax home” outside of the U.S. for a period greater than one year. 

Do other expats pay home country taxes?

Yes, the worker is responsible for paying taxes in the home country regardless of where they work and earn income. For example, anyone residing in Germany is liable to tax in Germany. Even if you did not spend time in Germany during the fiscal year in question (perhaps because you were working abroad as an expat), the tax liability is based on your place of residence. 

The good news is that many countries cooperate when it comes to protecting workers from double taxation. Double taxation treaties governed by international law exist between states to lay out which countries get to collect. 

Depending on the countries in question, they may determine home country and host country tax liabilities by: 

  • Country of residence: taxed in country of residence
  • Source country: taxed where income is earned
  • World income: when earning in more than two countries, taxed in country of residence
  • Territoriality: taxed partially in each country based on where the income was earned

If you have expats on your payroll, it’s important to understand the double taxation treaties between your home country and the countries hosting your workers.

High expat expectations lead to high burnout

Even when your business does everything by the book, moving to another country can still take a big toll on your expat employee. The expatriate arrangement can be isolating and stressful—even when loved ones make the move with them.

All in all, these arrangements tend to be short-term solutions more often than long-term placements.

Get your expat payroll right

If you decide to send some employees abroad, you have the option of mastering the intricacies of expatriate payroll yourself. Or you can use a Global Managed Payroll partner that’s already got it down to a science. 

Of course, expats aren’t your only options for getting work done around the globe. You might also want to explore:

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