Your Complete Guide to Paying Overseas Contractors and Employees
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 (or superannuation payments) can be challenging. Below are 4 steps you can take to successfully employ people overseas:
- Review the tax and tax withholding position of your employee, including any tax exemptions
- Review the social security (superannuation) position of your employee
- Next steps - paperwork for tax and social security (superannuation) obligations
- Determine how, when and where payments should be delivered
1. Taxes for Overseas Contractors and Employees
First, you need to understand if the person you're hiring is an employee or an independent contractor. Once you've determined the employment status of the person you've hired, you can navigate the tax requirements.
If you are a New Zealand company and you are recruiting an overseas person (non-resident) for at least 92 days, then New Zealand tax obligations could apply to you. An employee is also taxed as a non-resident if they come to New Zealand, stay more than 183 days in any 12-month period (any rolling 12-month period, not the tax year or calendar year), and have an "enduring relationship" with New Zealand.
Tax rates for your foreign resident employee can be anywhere between 10.5-33% depending on the level of income.
A non-resident is taxed in New Zealand on income from employment services performed locally or any payments made from New Zealand sources. If you are a New Zealand employer you need to follow New Zealand 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 or exemptions exist.
For example, if your overseas employee in New Zealand faces double withholding tax. You may be able to find out whether there is a tax agreement between New Zealand and the country where your employee lives. New Zealand has ‘double tax agreements’ (DTA) with 40 countries. The terms and conditions of these agreements can change in any given year, so it's important to be aware of any changes.
Once you've determined the status of your overseas employee and whether a DTA applies, you can get a Certificate of Exemption (COE) through myIR.
Here are 3 different employee tax scenarios. Choose which one applies to your situation.
a.) Tax Payments for New Zealand Non-Residents
If you have New Zealand resident employees that are working in a foreign country you will have pay as you earn (PAYE) withholding obligations, which needs to be paid to the Inland Revenue Department (IRD) on their behalf.
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 or those who are in a country with double tax agreements with New Zealand.
They may also be entitled to a foreign income tax offset for amounts of foreign tax paid.
b.) Tax Payments made to Overseas Contractors or Freelancers
In New Zealand, you need to withhold taxes from payments made to foreign contractors who are non-resident individuals that aren't employees or if you make a payment to a non-resident company for specified contract activities or services.
c.) Tax Payments made to Non-Resident Entertainers
You must deduct withholding tax from payments to non-resident entertainers, unless payments are for a performance that is:
- Part of a New Zealand or foreign government-sponsored cultural programme
- Forms part of a programme of an overseas non-profit organisation
- Relates to game or sport, where the participants are the official representatives of the organisation that administers the game or sport in an overseas country
2. Superannuation for Overseas Contractors and Employees
As a New Zealand business, you may have an obligation to pay an Employer Superannuation Contribution Tax (ESCT), but only for employees of your business and not for overseas contractors. Again, here are 3 scenarios for you to choose from:
a.) Superannuation for New Zealand Residents Working Overseas
As a New Zealand business, you have superannuation obligations for New Zealand employees overseas. But this is only if they are residents of New Zealand 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).
If you have employees in a superannuation scheme, eg KiwiSaver, you'll usually pay employer contributions to the scheme. Employer superannuation contribution tax (ESCT) is a tax deducted from the employer superannuation cash contributions you pay.
If your employees are KiwiSaver or complying fund members, your compulsory employer contribution (CEC) is set at 3%. It's up to you if you want to make voluntary contributions above the 3% minimum CEC.
b.) Social Security for New Zealand Non-Residents
You do not have to pay superannuation in New Zealand 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
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.
We find this calculator from the Australian Taxation Office (ATO) will make it easier for you to decide whether your relationship with the person doing business with you is your employee or a contractor for tax purposes, even if you're a NZ business.
Also, you can visit these websites for more information:
3. What to do next
a.) Payday filing for non-resident contractors and employees:
If you choose to use payday filing you don't need to provide the non-resident employed by you with any personal details including date of birth, start and end dates, and contact details if you don't have them, but they will be taxed at a higher rate.
You must include payment information either:
- on a payday basis (i.e. when you pay your contractors)
- or on a twice-monthly basis
However, payments need to be reported to the IRD within 2 working days after the 15th of the month and after the end of the month if you opt for the second option.
You also have a 20-day deferral period, which means your reporting happens 20 days after your actual payment date to give you time to collect payment info from overseas.
b.) Forms required for non-resident contractors and employees:
Payers must ensure that they hold a completed tax rate form for employees and contractors. Here are the forms you need to submit or keep for your business records:
- Tax rate notification for contractors IR330C - this will help tell you which rate to use when deducting PAYE from their wages
- Employer schedule IR348 - this has the details of your employees' gross wages and deductions
- Employer deductions IR345 - this form needs to be completed once or twice a month, depending on the amount of your gross annual PAYE and ESCT. If the gross annual PAYE and ESCT is under $500,000, you need to file this form monthly. Over $500,000 its twice a month.
c.) Keep your copy of your PAYE and ESCT 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 Wise (formerly known as TransferWise), OFX, World First, TorFX and XE 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.