What is non-residential payroll?
Non-residential payroll is when a company processes payroll for employees in another country while operating as a non-resident employer. In this case, the company does not have a permanent establishment or legal entity in that country and is only managing payroll obligations for its workforce there.
The possibility of having a non-residential payroll setup varies based on several factors, such as bilateral tax treaties, and may not always be an option.
What is the difference between residential payroll and non-residential payroll?
- Residential payroll occurs when an employer has a legal entity in the country where payroll is processed.
- A non-residential payroll applies when an employer does not have a legal entity in the country where some employees work and are being paid.
How do I know if I have a non-residential payroll in my current employment setup?
To establish if you are operating a non-residential payroll, consider if any of your employees are working and being remunerated for that work in a country where you don’t own and operate a legal entity.
What are the challenges and risks of having non-residential payroll?
Operating a non-residential payroll comes with several challenges and risks for employers, including:
- Tax regulations - ensuring proper tax withholding and reporting without a legal entity can be complex, and this varies by country.
- Social security and benefits compliance - each country has their own rules and failing to comply with these rules can lead to penalties.
- Permanent establishment risk - the local authorities can determine that the employer has a business presence in the country which may then require full corporate tax compliance.
- Payroll processing challenges - some banks may require a local entity to process payments and paying employees in foreign currencies can lead to additional costs.
What alternatives do I have to process non-residential payroll?
There are two alternative methods to running a non-residential payroll, these alternatives will reduce risks.
- Establish a legal entity: The conventional approach is to set up your own entity in the country where you have employees on payroll. This enables you to operate legally there and allows you to hire more employees, process payroll, and manage the employment relationship. However, creating an entity demands a considerable investment of time and resources. If you plan to have employees across multiple countries, the costs and logistical challenges can quickly become overwhelming.
- Use Oyster’s employer of record (EOR) solution: an EOR becomes the legal employer of your employees in locations where you do not own an entity. This means the EOR handles contracts (employment agreements), onboarding (hiring), compliance, payroll, benefits, and more. In most cases, using an EOR speeds up the process of employing and paying talent compliantly, ensures faster access to employment knowledge, and saves significant costs that are typically used to set up and maintain legal entities.