Paying overseas contractors and employees can be complicated. Especially since foreign countries have different tax and social security considerations. This guide sets out to simplify the process by providing you steps you can take that suits your situation.
How to Pay Overseas Contractors and Employees
Paying your employees or contractors located overseas, while ensuring your company remains compliant with tax and social security can be challenging. Below are 3 steps you can take to successfully employ people overseas:
- Review the tax and tax withholding position of your employee
- Review the social security position of your employee
- Next steps – paperwork for tax and social security obligations
- Determine how, when and where payments should be delivered
1. Taxes for Overseas Contractors and Employees
If you are an Australian company and you are recruiting a person overseas for at least 60 days, then Australian tax obligations applies to you.
The geographical location of your employee doesn’t matter. If you are an Australian employer you need to follow Australian tax guidelines. That said, your overseas employees could also be subject to local employment laws. It is therefore important to check whether any conflicting provisions exist.
For example, if your overseas Australian employee faces double withholding tax. You may be able to find out whether there is a tax agreement between Australia and the country where your employee lives.
Australia has ‘double tax agreements’ with over 40 countries. The terms and conditions of these agreements can change in any given year, so it is important to be aware of any changes.
Tax rates for your foreign resident employee can be anywhere between 10-30%. This depends on where your foreign employee is located and whether they have a treaty with Australia or not. To avoid withholding tax at a higher rate of 47%, you need to provide a current overseas address of your employee overseas.
This calculator from the ATO makes it easier for you to decide whether your relationship with the person doing business with you is your employee or a contractor for tax and super purposes.
Here are 3 different tax scenarios. Choose which one applies to your situation.
a.) Tax Payments for Australian Residents Working Overseas
If you have Australian resident employees that are working in a foreign country you may have pay as you go (PAYG) withholding obligations.
However, some foreign earnings are subject to exemptions. For example, some payments for foreign services that relate to certain development projects, and charitable or government activities are exempt from tax.
Your employee should include non-exempt earnings in their income tax return as assessable income. They may also be entitled to a foreign income tax offset for amounts of foreign tax paid.
b.) Tax Payments for Australian Non-Residents
A foreign resident is someone who is not an Australian resident for tax purposes.
The withholding requirements for foreign resident employees are similar to those that apply to Australian workers. However, a foreign resident:
- can't claim the tax-free threshold
- is subject to different rates of withholding
c.) Tax Payments made to Overseas Contractors or Freelancers
In Australia, you usually need to withhold taxes from payments made to foreign contractors if the payments made are for interest, unfranked dividends or royalties. You may also have to withhold additional tax if any of these payment types have been reinvested or capitalised on behalf of the non-resident.
In addition, you will need to withhold tax from payments made to non-Australian resident employees if they are promoting or operating casino gaming junket arrangements in Australia; promoting or operating entertainment or sports activities in Australia; promoting or operating construction, installation or upgrading of buildings, plants and fixtures and for other works and related activities in Australia.
2. Superannuation for Overseas Contractors and Employees
As an Australian business, you may also have superannuation obligations. Again, here are 3 scenarios for you to choose from:
a.) Superannuation for Australian Residents Working Overseas
As an Australian business, you have superannuation obligations for Australian employees overseas. But this is only if they are residents of Australia for tax purposes. The foreign country your employee works at may also require you to make superannuation contributions. This means you need to be aware of any domestic schemes, otherwise you may end up paying superannuation twice (known as double superannuation).
Australia has agreements with other countries to prevent double superannuation from happening, but as an employer, you will need to get a ‘certificate of coverage’ from the ATO BEFORE your employee leaves Australia. They can then give it to your overseas counterpart to be exempt from compulsory contribution in the other country.
b.) Social Security for Australian Non-Residents
You do not have to pay superannuation in Australia for non-residents, but you may have to make social security contributions on behalf of your foreign employee in the country they are working in. This means you need to have a good understanding of the domestic social security scheme in the foreign country your employee is working in.
c.) Social Security or Superannuation for Contractors or Freelancers
If you are enlisting the help of a foreign contractor or freelancer you have no obligation to make social security or superannuation contributions – it is up to them.
Visit these Australian Tax Office websites:
3. What to do next
a.) Once you’ve determined you do need to withhold tax payments made to your foreign resident employee you need to provide them with a PAYG payment summary – foreign employment (NAT 73297) which includes:
- Income relating to period of foreign employment
- Tax withheld and paid to a foreign government
To obtain a printed copy of the form download the following form and print in A4 size: Foreign Employment (NAT 73297, PDF, 274KB)
You can also use ATO’s automated self-help publications ordering service or you can phone ATO’s Publications Distribution Service on 1300 720 092 between 8:00am and 6:00pm Monday to Friday and quote “Foreign Employment” (NAT 73297)
b.) Give the payee their copy of the payment summary by 14 July, following the end of the financial year you made payments to them in. Note, if your employee requests a payment summary in writing prior to 9 June, you must provide the payment summary to them within 14 days of receiving their request.
c.) Send the ATO original copies of your employees PAYG payment summaries and your PAYG payment summary statement by 14th August, following end of the financial year. Do not send payment summaries printed from your payroll software, it must be ATO originals.
d.) Keep your copy of your PAYG payment summaries for at least 5 years.
4. How You Transfer Money Overseas
Now that you’re ready to pay your overseas employee or independent contractor you need to think of how to best transfer the money. Here are some helpful hints to ensure you choose the best currency transfer service option for your business needs.
a.) Use a specialist currency transfer company instead of a bank
While using your bank might be a more convenient option, it may also be more expensive. It is worthwhile to get in touch with businesses specifically set up to provide low cost money exchange at good exchange rates.
Companies like Transferwise, OFX, World First, TorFX, XE and HiFX allow you to transfer money directly into the recipient’s bank account using their online services and call centres. Some currency exchange providers like Western Union and Moneygram let the recipient collect their funds in cash.
b.) Be aware of any costs
There are many costs that could impact how much your overseas contractor or employee will receive when you send money to them. Any hidden costs charged by your money transfer provider could be a big hit to your bottom line and operating expenses. Especially if you are making recurring overseas money transfers.
Here is a simplified list of the key costs involved when you send money overseas:
- The currencies and countries you are moving currency between — different currency pairs have different exchange rates.
- Fees levied by the currency exchange provider — different banks and providers will levy different fees.
- The difference between the base exchange rate and what the currency provider offers you — you are unlikely to get the “mid-market / interbank” exchange rate. Instead, the rate you will get is often one or two percentage points worse than that rate.
- Fees levied depending on how the exchange is funded — some providers will charge you a fee if you fund the transfer in certain ways.
- Recipient bank fees — some banks charge additional fees when funds from a money transfer are paid into an account.
- The fees charged by the money transfer provider — different providers charge different fees, both as a flat rate and as commissions.
c.) Reliable customer support for your business
A reliable service is an important consideration when you transfer money overseas. Especially if you do multiple transactions to pay your international employee or contractor. Your provider should be flexible, responsive, and receptive to your specific needs. They should be able to actively demonstrate how important your business is to them. There are many advantages of using a specialist service to transfer your money internationally including:
- Fast transfers, money can sometimes be transferred within one working day.
- Dedicated customer support and advice.
- Online options for sending money through their website or apps.
- Forward or limit orders to manage currency risk and reduce market fluctuations.
- Mobile apps and other tools to manage the money transfer processes.
How to Find the Cheapest Way to Transfer Money Overseas
Compare The Total Cost
The total cost of the transfer comes down to 2 things:
1. Transfer Fees
Every Australian bank and money transfer company will charge you a different fee to send money overseas. Usually it’s between $10 and $32.
2. Exchange Rate Margin
There is no “standard” exchange rate. Each bank will offer you a different exchange rate based on the currency you want to send overseas and the amount you need to send.
General advice: The information on this site is of a general nature only. It does not take your specific needs or circumstances into consideration. You should look at your own personal situation and requirements before making any legal, accounting or financial decisions.