You've decided to build a distributed team—congratulations! This is a smart decision, especially if your company is based in the US, Europe, Israel, Australia, or the UK. Hiring employees in these regions can be very expensive, with taxes quickly consuming any investments. Thanks to the internet, we can now work from anywhere across a wide range of industries.
An important question arises: how do you pay international employees? First, let’s clarify who we consider employees.
Options for engaging individuals who work for you:
Employment Contract: This can only be entered into if you have a legal entity in the country where the person is located.
Direct Service Agreement: You enter into a service agreement with the individual and pay their invoices.
These are the basic options at a glance. Now, let’s dive a little deeper.
EOR - Employer Of Record
You cannot enter into an employment contract if your future employee is a resident of, say, France, and you do not have a legal entity there. However, you can turn to Global Payroll providers like Deel, Oyster, Papaya Global, or Remote. These companies, for around $600 per month, will employ your workers under their entity, pay their salary, handle social contributions, and fulfill all legal obligations in the employee’s country of residence. In return, you sign a service agreement with the Global Payroll company.
This is a comprehensive way to pay international employees, but it comes with significant drawbacks:
Cost: Besides the $600 fee, you’ll need to cover all labor taxes, which in some countries can amount to up to 70% of the net salary. Additional benefits like health insurance or visa support are extra and can be very costly.
Labor Law Risks: In some countries, labor laws are strict, and companies may be required to pay significant severance packages when terminating employees. In case of legal disputes, the Global Payroll provider will prioritize its interests, which could result in severance costs amounting to a year’s salary.
For example, here’s a real cost calculation for an employee in France through Deel: Annual gross salary – €89,000. After adding taxes and Deel’s fee, the total comes to €144,122. Visa support would add approximately another €13,000.
Establishing Your Legal Entity
This approach is beneficial if you have 10 or more employees in a specific country. The process is as follows:
Identify a target hiring market, such as Mexico.
Establish a legal entity in Mexico and appoint a director.
Hire an accountant, typically an outsourced accounting firm.
Enter into a service contract between your main company and the new Mexican entity. Ensure no profit is generated in the new company to avoid additional taxes.
If tax incentives exist (e.g., for tech companies), apply for tax preferences.
Service Agreement via Global Payroll
Yes, you can also pay international employees through Global Payroll services like Deel, Oyster, Papaya Global, or Remote. Additionally, less well-known companies such as Mellow, Easy Staff, and 4Dev offer similar services. While Deel is considered the most popular service for international payroll, I recommend considering the latter three. These lesser-known startups may offer lower prices and greater flexibility. Moreover, they often provide faster and more attentive support. Many of these services are also comfortable working with jurisdictions under sanctions and allow payments to international employees in cryptocurrencies. On average, such a service will cost you $40–50 per payment.
Here’s how it works:
Choose a Global Payroll provider and sign a contract.
Your employees, who are legally contractors, receive a link to register.
You create tasks, employees mark completion, and you pay your international team.
The convenience lies in paying one invoice instead of many, and then sending money to each contractor with a single click. Additionally, the Global Payroll provider handles all paperwork and legal form submissions.
However, there are significant downsides: when you choose to pay your international team through a Global Payroll service, you automatically assume several important risks:
Misclassification Risk: Regulatory bodies may determine that a service agreement is being used as a way to evade taxes.
Intellectual Property (IP) Transfer Risks: When a third party is involved instead of a direct service agreement, you may face IP transfer risks. There have been cases where companies were denied investment during Due Diligence due to IP transfer risks from using a Global Payroll service. In response to these concerns, Global Payroll companies often offer an Employer of Record service. It’s important to remember that the primary business of these companies is selling insurance services.
Cost: When you have a team of 10, the price of $500 per month for paying remote employees may seem acceptable. But what happens when your team grows to 50? You’re already paying $8 for Notion, $9 for Slack, and $10 for Google Workspace. The most expensive mass-market SaaS services cost at most $25. Yet here it’s a whopping $50!
Is There an Alternative?
Direct Service Agreement The most efficient way to pay international employees is through a direct service agreement. You enter into a simple standard service contract and pay directly via bank transfer. For example, with the startup bank Mercury, such a transfer is free.
However, there are a few important rules to follow:
Do not enter into service agreements with actual employees located in countries where you have a legal entity.
A service agreement in a country where you have a legal entity can only be concluded if the contractor is genuinely independent, meaning they perform limited work for you and you do not provide any social benefits.
Pay on different days and in varying amounts. Differences can be minimal. This is especially important if you pay from a legal entity within the European Union.
Be sure to specify the transfer of intellectual property rights (IP).
If your company is registered in the US, the contractor must fill out W-8BEN and 1042-S forms.
Situations Where a Payroll Service Is Necessary
There are situations where you cannot pay your international employees through a direct bank transfer. Some jurisdictions and territories prohibit payments from the US, European Union, UK, and many other countries due to sanctions policies. There are countries where payments are simply difficult to make, and your money could take months to arrive or even get lost.
Countries Where Payments Are Difficult:
Argentina: Argentina faces serious economic challenges, including high inflation and currency instability, making international payments difficult. Local banks may impose restrictions on currency transactions, and exchange rates can fluctuate sharply, making the cost of contractors’ services unpredictable.
Venezuela: Venezuela suffers from hyperinflation and economic crisis, making financial operations in the country extremely difficult. Currency exchange restrictions and strict currency controls complicate fund transfers in and out of the country. Many international companies avoid payments to Venezuela due to high risks and restrictions.
Nigeria: Nigeria has complex currency restrictions and strict conversion requirements, complicating international payments. The Central Bank of Nigeria actively regulates exchange operations, leading to delays and additional costs when paying contractors.
Pakistan: Pakistan also faces issues related to currency instability and strict currency restrictions. Additionally, international payments may be delayed due to local banks' verification requirements and regulatory controls, complicating contract work and payments.
Turkey: Turkey experiences significant economic fluctuations, including the lira's depreciation and high inflation. These conditions make international payments less favorable, and local banks may impose additional fees and restrictions on currency transfers.
Ethiopia: Ethiopia has strict currency restrictions and bureaucratic hurdles that can delay or complicate international payments. Weak banking infrastructure and limited online payment options also make this country a challenging place to work with contracts.
India: While there are formally no issues with payments to India, in practice, many find it difficult to easily and quickly transfer money to accounts in India.
Countries Where Payments to Contractors from the US Are Prohibited or Impossible
Many countries make it challenging or even impossible to pay contractors due to economic sanctions imposed by various governments or international organizations. These sanctions may include financial transaction restrictions, export bans, asset freezes, and other measures that make working with contractors in these countries extremely difficult.
North Korea: North Korea is under strict international sanctions imposed by the UN and individual countries, including the US. These sanctions include a total ban on financial transactions with North Korean state and private entities, making it virtually impossible to pay contractors working in this country legally.
Iran: Iran is also subject to numerous sanctions, especially from the US and the European Union. These sanctions include export and import bans, banking restrictions, and prohibitions on working with certain sectors of the economy. This makes it extremely difficult to carry out any financial transactions with contractors in Iran, including payments for services rendered.
Syria: Syria is under sanctions due to the ongoing civil conflict and links to terrorist organizations. These sanctions include bans on technology exports and financial transactions, making legal payments to contractors in Syria impossible.
Russia: Sanctions against Russia include bans on financial transactions with major Russian banks and companies, complicating payments to contractors, especially if they are associated with sanctioned financial institutions.
Cuba: Cuba has been under a US embargo for over half a century. While there are some exceptions, general sanctions make financial transactions with Cuba extremely difficult, including payments to local contractors.
Belarus: Belarus is also under sanctions from the US, EU, and other countries due to political repression and human rights violations. These sanctions include banking transaction restrictions, making payments to Belarusian contractors challenging.
Top Countries for Hiring Contractors
India: India is one of the most popular destinations for hiring contractors, especially in IT and software development. India offers low wage rates and a large pool of highly skilled professionals. The high level of English proficiency also makes this country particularly attractive to companies from English-speaking countries.
Russia: Russia attracts attention as a leading destination for hiring highly skilled professionals in IT, engineering, and other technology sectors. Despite international sanctions, Russia's internal economy and its rich pool of specialists continue to draw international companies. Labor costs remain competitive.
Belarus: Belarus is quickly becoming an IT outsourcing hub thanks to its highly skilled specialists and relatively low wage rates. The country has developed its technology sector in recent years, attracting international companies and creating favorable business conditions.
Philippines: The Philippines is well known as a hub for business process outsourcing, including customer support and administrative services. Low labor costs and high-quality work make the Philippines an attractive choice for companies looking to reduce costs.
Ukraine: Ukraine attracts companies thanks to its highly skilled specialists in IT and engineering. Ukraine also offers competitive wage rates and is geographically close to the European market, making it one of the leading outsourcing destinations in Europe.
Poland: Poland is a key IT outsourcing hub in Europe thanks to its highly skilled professionals and stable economic situation. Wage rates here are higher than in Ukraine, but still significantly lower than in Western Europe.
Mexico: Mexico is becoming increasingly popular for hiring contractors, especially for companies from the US. Proximity to the US, cultural similarities, and low wage rates make it attractive for hiring in IT and engineering fields.
Argentina: Argentina offers highly skilled professionals at low rates, making outsourcing attractive. However, economic instability can be a challenge despite the benefits.
Serbia: Serbia is becoming increasingly attractive for hiring contractors, especially in IT and technology. The country offers highly educated professionals with competitive wage rates. Serbia is also geographically well-positioned, making it an attractive choice for European companies.
Pakistan: Pakistan offers access to highly skilled labor at competitive wage rates, especially in IT and software development. Pakistani professionals have good English proficiency, making communication with international clients easier. Although economic and political instability can be a challenge, Pakistan remains an attractive option for companies seeking quality work at an affordable price.
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