Why You Shouldn’t Pay Your Offshore Software Developers Directly

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So, you embraced an offshore tech staffing strategy to expand your team. You probably don’t have issues exploring your options for hiring offshore developers – they are talent marketplaces and freelance platforms, traditional recruitment agencies, and tech staffing companies like TurnKey. 

However, hiring offshore software developers is only the first step; then, you need to figure out the administrative stuff, and the payroll question arises. What international payment method should you choose for your offshore developers? Do you need to provide any paperwork to the IRS when offshore developers work for your US firm from abroad?  And what about compliance in their country? And, well, what exactly should you do so the money will appear in your developer’s bank account?

Understanding these intricacies is essential for avoiding penalization and payroll delays, but it takes a full-time payroll specialist or even a whole department to make sense of things. Yet, there is a shortcut that you can take, and we will reveal it in this article.

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International Payment Challenges

Paying compensation to the overseas developers located, say, in Colombia or Romania is more complex than paying US-based staff. Every country has its own regulations and tax system; some countries are more bureaucratic while others are pioneers in digitalization. Either way, you need to comprehend the administrative aspect of hiring a global workforce, and here are the main points you need to look out for. 

Compliance with Local Laws

Every country has laws that determine employment, overtime, job security, PTO, benefits, and payroll. When you hire from all over the world, you can be impressed by the difference in regulations from country to country. There are so many details and nuances you might overlook by accident and receive a fine or penalty. You can also miss some opportunities to optimize payroll simply because you are not aware of local laws.

Tax Implications

As well as employment laws, taxation can be challenging and incomprehensible in your country of interest. You need not only to navigate your taxation implications in the country of your developer but also understand how to process the employment of international developers within the US tax system. Double taxation is not a joke, and you need to know how to handle it appropriately when sending monthly compensation to your software engineers. 

Banking and Payment Systems

Banking systems significantly vary across the globe. And don’t forget about different regulations regarding international payments: there might be a limit a resident of a country can receive. For each state, you need to choose a payment method that will be acceptable there, won’t cause delays in the payroll process, and won’t waste a huge amount of your budget on transaction fees. Again, navigating different options and understanding the local context might be pretty demanding, especially if you encounter this challenge for the first time.

The Price of Mistakes

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Let’s get real: what will actually happen if you slip up on handling the legal and tax stuff with your payroll to the offshore development team?

First up, legal issues. Imagine you’ve just hired a brilliant team in Poland, but you’re not quite up to speed on Polish employment laws. The moment you sidestep local legal requirements, you’re essentially setting the stage for a legal drama you would want to avoid. It’s not just about facing a lawsuit; it’s about the line of events that follows. You could be looking at injunctions that halt your operations, orders to pay back wages or benefits you unwittingly skipped, and even ban from operating in certain jurisdictions. The legal battle itself is a problem — it drains resources, consumes time, and diverts your focus from growth to damage control. And remember, the legal system in another country can operate very differently from what you’re used to, potentially dragging the resolution out for years.

Second, misunderstanding tax obligations or failing to comply with tax laws in the jurisdiction of your offshore remote developers can unleash a series of unpleasant surprises. It starts with audits — exhaustive, time-consuming reviews of your financial records, often going back several years. If discrepancies are found, the immediate fallout is financial: back taxes, plus interest and penalties, which can accumulate to staggering amounts. But the ripple effects go further, affecting your ability to secure financing or enter into partnerships, as your financial stability comes into question. Tax issues can also trigger more frequent audits in the future, keeping you in a cycle of scrutiny and compliance challenges.

Third, and perhaps one of the most insidious effects of making mistakes with offshore employment is the damage to your company’s reputation. This damage is less tangible but no less real. News of legal troubles, tax evasion, or compliance failures can spread quickly, painting your business in a negative light. Customers, partners, and potential employees may distance themselves, wary of associating with a company perceived as unethical or unreliable. Rebuilding your reputation is a long road, requiring not just rectifying the mistakes but also demonstrating a commitment to doing better and moving forward.

Solutions for Safe Offshore Developers’ Payroll

Handling international payroll might seem scary, but it doesn’t mean that you need to give up on the idea of hiring offshore developers. Offshore software development offers you unprecedented access to top talent, and figuring out how to pay your developers is a one-time challenge you need to solve. And here are a few options for that.

Establishing Your Own Financial Department for International Payments

Creating an in-house financial department dedicated to managing international payments can offer you unparalleled control over payroll processes. This approach allows for customized solutions tailored to your company’s specific needs and the regulatory landscapes of the countries you’re operating in. It provides the flexibility to adapt payment schedules, currencies, and methods to suit both your business and your offshore developers.

However, setting up such a department is no small feat. It requires significant upfront investment in hiring experienced staff familiar with international finance and regulatory nuances. Additionally, the ongoing costs of maintaining such a team — from salaries to professional development to ensure they stay abreast of changing regulations — can be substantial. So, in case your offshore staff count is less than, say, 50 or even 100 specialists, building a specialized department will be an overkill.

EOR Platforms

Employer of Record platforms, such as Deel or Rippling, offer a streamlined solution for managing offshore payroll. By acting as the official employer on your behalf, these platforms handle all the legal and payroll complexities, ensuring compliance with local tax laws and employment regulations. This can significantly reduce the administrative burden on your company, allowing you to focus on core business activities.

While EOR platforms provide convenience, they come at a cost. The fees for these services can add up, especially for startups or smaller companies with tight budgets. At the same time, these platforms provide off-the-shelf solutions, which means you lose flexibility and a customer-centric approach. There’s also the risk of service disruptions or issues with the platform itself, which could impact your ability to pay your developers on time.

Cryptocurrencies

Paying offshore developers in cryptocurrencies has emerged as a cutting-edge solution, offering fast, borderless transactions with lower fees compared to traditional banking systems. This method can be particularly appealing for tech-savvy teams and those looking for flexible, innovative payment solutions.

Despite its advantages, the volatility of cryptocurrencies poses a significant risk. The value of cryptocurrency can fluctuate wildly, potentially affecting the actual compensation received by your developers. There are also regulatory concerns, as the legal status of cryptocurrency payments varies widely between countries, with some jurisdictions imposing strict regulations or outright bans. And not all employees may be comfortable or familiar with receiving payments in cryptocurrency, limiting its applicability as a universal solution.

Why Choose TurnKey Staffing for Offshore Developer Payroll?

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There is another option – you can collaborate with TurnKey Staffing. We are the #1 offshore tech staffing firm; and while we find and select the best tech talent for our clients, we also provide EOR services, handling administrative things like payroll, compliance, and taxes. 

However, contrary to EOR platforms, we provide a boutique-like approach, as we do not issue a universal blueprint to our clients, but allow them to tailor contracts to align them with specific business needs. We adjust to you, instead of making you adjust to us.  We also provide you with a dedicated team of specialists who have studied everything there is in employment laws and banking systems of the offshoring countries we work with. So, every time you have a question, a doubt, or an inquiry – our specialists are there to address your concerns and provide solutions.

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With TurnKey, you can easily leverage all the perks of working with top tech specialists in Latin America and Eastern Europe, while having zero administrative liabilities. We handle the nasty stuff, and you get the pure benefits.

Let TurnKey handle the administrative aspects of employing offshore developers

Summing Up

When US-based companies hire developers from Poland or Brazil, the question of paying their compensation might seem like a puzzling predicament. But do not let it turn into a dealbreaker – this is simply a task you need to find a solution for. And no one says you need to do that alone. EOR providers like TurnKey Staffing can give you a hand and take all the difficulty from international payroll, employment laws, and taxation. So, don’t be hung up on the question of how to pay offshore developers – let professionals handle it.

FAQ

What is EOR?

EOR stands for Employer of Record. It is a service used by companies to hire and pay employees in a country where the company does not have a legal entity. The EOR acts as the legal employer for tax and compliance purposes, handling payroll, taxes, benefits, and compliance with local labor laws. This allows companies to quickly and easily expand their workforce globally without the need to establish a local entity or navigate complex international labor laws, making it an attractive option for businesses looking to scale internationally with minimal legal hurdles.

What are the most common payment methods for international payments?

The most common methods for international payments include bank transfers, international wire transfers, payment platforms like PayPal and Wise (formerly TransferWise), and credit cards. Each method offers different benefits in terms of speed, cost, and convenience. Bank and wire transfers are widely used for their reliability and direct process, though they can be slower and more expensive. Payment platforms provide faster transactions and lower fees, making them popular for smaller payments. Credit cards offer convenience and immediate payment but may incur higher fees and are not always suitable for large transfers.

What type of laws determines payroll?

Payroll is determined by a combination of national and local laws, including labor laws, tax laws, and employment regulations. Labor laws govern aspects like minimum wage, overtime, working hours, and leave entitlements. Tax laws dictate the withholding of income tax and social security contributions from employees' salaries. Employment regulations cover the rights and obligations of both employers and employees, including contract provisions, termination processes, and dispute resolution. These laws vary significantly between countries and even regions within countries, requiring employers to carefully adhere to the specific legal requirements applicable to their operations.

What is double taxation?

Double taxation refers to the situation where the same income is taxed twice by two different jurisdictions. This typically occurs when income is taxed at both the corporate level and then again at the shareholder level when dividends are distributed. It can also happen in international business, where income earned in one country is taxed locally and then taxed again in the home country of the company or individual receiving the income. Many countries have tax treaties to prevent double taxation, allowing for tax credits or exemptions to reduce the tax burden on the affected parties.

March 17, 2024

TurnKey Staffing provides information for general guidance only and does not offer legal, tax, or accounting advice. We encourage you to consult with professional advisors before making any decision or taking any action that may affect your business or legal rights.

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