Can US Businesses Hire Abroad? Taxes, Contracts, & NDAs
In a post-Covid world — with the emergence of home office, the awareness of the changing, political and economic dynamic in many countries (i.e. China), having more billionaires in the world, and the US dollar finally catching up to that of the Euro — many companies are asking themselves if it is time to expand into the global market. Additionally, many wonder how to utilize the global workforce, and how to do so legally.
Can American Businesses Hire from Anywhere in the World?
The short answer is yes, but not without knowledge of local tax regulations, the appropriate paperwork, and of course, awareness.
When you think about it, American businesses and corporations have been outsourcing their work for generations. The biggest difference now is that we have become a more global economy and conversation than we ever have been before largely due to Covid and internet accessibility. As countries are establishing themselves, so too is their workforce, and so too must our cultural and equitable awareness.
International Taxation Navigation (A Hiring Adventure)
The big thing that you need to know as an American company, start-up, and/or corporation, is that hiring employees from abroad concerning taxes is much easier for the employer than the employee. Much of the paperwork and fees fall onto that of the employee. It is vital for an employer to be aware of a country’s tax laws and regulations. For example, in China, an employer is responsible for making contributions to housing and social care schemes. While living in Germany, citizens are forced to pay an ARD tax which equates to about €200 a year to support the local public and television radio broadcasting system (according to velocityglobal.com). In addition to a slew of other different local taxes, each German state has a different set of environmental regulations. If employed outside of Germany, these taxes will often fall to that of the employee, rather than the employer causing them to have to pay a significant amount of taxes. Be sure to consider the following things when creating employment contracts.
Important Aspects of Creating Employment Contracts:
- Residency or permanent establishment: the company has to determine whether or not it is established in the United States, or a foreign country. If it is established in the United States, the employees are often excluded from the United States local state, tax, however, has to pay taxes in their country state. However, if the US company is based in the local country, you were often subject to local state taxes.
- Labor laws and unions: every country has its own set of labor laws, including maximum work week, minimum holiday, pay, and employee compensation. Be aware of the local governments, and labor regulations. Have them clearly established in the employment contract. For example, the European Union also has a unique set of labor laws that must be adhered to. Not doing so will result in heavy fines.
International Employment Contracts
In many cases, to employ an employee from abroad, an employment contract generally must be drafted with a minimum one-year contractual agreement. While the appointment contract can be freelance, honorary, part-time, and/or full-time; there must be stipulations stated in the contract in order for the employee to work for the company, including NDA, taxes, length of employment, wage, etc.
Each country has its own regulations concerning what needs to be legally included in the employment contract. Be sure to check it out:
- Correctly calculated contributions: it is up to the US company to be aware of the foreign employees in country requirements and include them in the employee’s salary and contract. Not doing so can result in finding a massive legal battle.
- Full-time, part-time, freelancer, contractual, fee-based, project base, etc.: every country has unique classifications of various jobs and contractual obligations. Misclassifying a job on a contract can lead to issues between the employee, employer, and the target country — sometimes resulting in significant fines, legal battles, or possibly losing one’s residency. There can be serious consequences for not drafting a contract correctly and be sure to consult your legal department and HR when drafting employee contracts.
International Non-Disclosure Agreements and Protection Acts
Non-Disclosure Agreements (NDAs) and international protection laws are a big deal in certain countries safeguarding confidential information to any third party without explicit consent. NDAs are often used when dealing with overseas employment to protect business information internationally. Information such as trade secrets, publications, and how to dominate in a global market, whatever it may be, can be distributed unless explicitly stated in an NDA.
Check out the list below to make sure you have all of the necessary pieces.
Information Needed to Create a Strong NDA
- Is it a unilateral or mutual agreement?
- Define “confidential information:” Having a broad definition will result in ambiguity and will not hold up in court. Whatever information you want to remain confidential, you must make sure to explicitly state it.
- Length: days, weeks, years, it doesn’t matter, but it NDA has to have an end date and cannot be infinite.
- Reasonable parameters: a bit tricky, but essentially if it is unreasonable for the parties involved to be able to adhere to the NDA, in some cases, the court cannot find the NDA valid. It’s best to research what parameters are defined as “reasonable” to ensure that you are following the explicit requirements of the employee’s country.
- Location: Make sure your NDA clearly states where it applies (locally, internationally, print, online, etc.). If the party is overseas or even in another state, make sure you account for this.
- Written: Make sure it is a written agreement. While this might seem obvious, some countries still recognize verbal agreements as binding, for example, Germany.
American Business and International Tax Facts
The good news is that US companies can apply for withholding tax and are not forced to pay taxes in the United States as it falls to the foreign employee. The IRS states “wages earned by non-resident aliens for services performed outside of the US for any employer are foreign source income and therefore not subject to reporting and withholding of U.S. federal income tax”.
But! There is paperwork that needs to be filled out correctly in order to do so, by both the employer and employee.
Forms Both Employers and Employee Must Complete
- Form W-8BEN: Form W-8BEN is for a foreign-based employee that is a non-U.S. citizen whose work is performed outside the country
- Form 2555: Form 2555 shows that the employee does not reside in the United States, determines how much qualifying taxable income is excluded, and if the employee has any housing exclusion deductions.
- Form 1040: Form 1040 or 1040X determines the length of the taxation period. It must be for at least one year period of time, you must have proof of residency/housing (rental contract with your name, Anmeldung, etc.)
Remember, location is important! If the employee does any work within the United States, it is subject to U.S. Tax.
Q1. Which forms do I need for tax completion?
Generally, you must attach a Form W-8BEN, Form 2555, Foreign Earned Income, and Form 1040.
Q2. Do remote employees pay taxes?
Yes, and it’s best to look into whether or not there is a foreign income tax exclusion agreement between the two countries involved in the agreement.
Q3. How to secure a job overseas?
One tried and true way to secure a job overseas is to check out some online Internet job search databases such as LinkedIn or Indeed.
It is helpful to seek jobs aligned specifically with your field of interest, and profile companies in advance that fall into that category. After initial contact, you can begin conversations about employment requisites before you have achieved the position.
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