There are a couple of ways to hire an employee outside of the US. In this article we'll show you three possible options — by opening local subsidiary, opening branch office or using PEO/EOR.
Open a local subsidiary 📑
This is probably the first thing that comes to your mind when you are thinking about hiring remote employees. It can be called a default path for the companies that are expanding. There are a couple of things to be mindful of when setting up a subsidiary.
The biggest advantage of local subsidiary is that it’s a fairly familiar path so your investors and colleagues should be acquainted with it and you could probably count on some advice.
As for the disadvantages First of all, a local subsidiary will have a significant set up costs as you’ll need to find a local lawyer, incorporate, accountant, etc. You’ll need to recreate all of the infrastructure you already have in the US, like payroll and HR. In result, most companies don’t actually do it until they have at least four or five employees or contractors in a particular country. Only then it starts to make sense to even consider that investment. If your team is very distributed, it's not really a viable option to set up so many subsidiaries.
You might come across a country where it's super easy to open a subsidiary, but unfortunately it’s not the case for every location. Also, your US taxes will become more expensive and complex — for example, your company would have to submit 5471 form for foreign subsidiaries.
Before you embark on this project we would highly recommend that you ask your CPI if they’ll support you (from our experience, 80% of CPIs we contacted said they don't deal with companies that have international subsidiaries). If they don’t, you can find boutique accounting firms that work with international firms but be aware, their services aren’t the cheapest.
Make sure you fully understand the changes in taxes to avoid being surprised how much this can increase your costs.
Branch office 🏢
It’s a lightweight version of the subsidiary.
What’s important is that, you can’t do it in every country, so you have to check with your country bases if that's an option for you. If it is an option you can use, all you need to do is register your foreign entity (US company) with the local authorities and ask for a tax number because you’ll need to run a payroll in that country.
It's definitely a good middle ground option. You don't have the costs of having a subsidiary (though you still need an HR person or some tool, like a local equivalent of Gusto to run the payroll). The downside is that it isn’t something you can do in every single country.
Also, if you are US company opening a branch abroad, you might encounter some troubles with signing up to some tools or offices because of the lack of residence address or an entity name (and it works the same in reverse).
Professional Employment Organization and Employer of Records 💼
The third option, which is less known is the third-party route — PEO/EOR. PEO helps you with the compliance across the state lines and EOR is its global equivalent.
We distinguish two types of Employer of Records. Direct EOR have legal entities in every single country and they can put employees on payroll for you in each of those jurisdictions. Indirect have partners in every country, so technically they don’t own any entity, but they have relationship with companies that can do that for them.
They are perfect for those who want to start fast as you don't have to open a legal entity or set up a bank account which takes time. They are also a good option when you have employees in multiple countries.
Big disclaimer though — this industry is not startup friendly. The most companies in this space hit you with significant set up fees, even up to $3500 per country (if you're lucky) or per employee. You can expect to pay 20%- 30% of payroll in fees or 15-18% and $2000 a month per single individual!
Also, the fees are not very transparent so if you ever will be considering working with the PEO make sure to read all the fine print. There’s a reason for those costs — the majority of PEO’s or EOR’s customers are huge companies, not startups. And huge companies can afford it. For them the cost of hiring a foreign employee is probably less significant than not having that employee in their team.
One of the reasons why we started Pilot was to help that industry. Because we experienced it at the receiving end, we know the struggles and costs too well. The needs of our customers are our needs from some time ago. Thanks to that experience, we started a service made especially for startups.
Whichever option you choose, remember you have to comply with a local employment law. Even if your PEO runs a payroll for you, you are still bound by a local law. For example if you want to fire an employee and local law says you have to pay 3 month severance — you have to pay it. If you are California company hiring a new employee in Brazil — you have to pay 52% employer-side payroll tax anyway. You are always obliged to follow local employment laws.
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⚖️ Legal Disclaimer: The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.