How to pay remote software developers abroad
As remote work has become the norm for the tech industry, more businesses are hiring software developers from abroad instead of building teams that work from the same country. We at Toughbyte can help companies in Europe and the US find remote developers, but many of our clients are reluctant to hire them because they don’t know how to pay developers located outside of their country in a tax-compliant manner. This blog post will address the concerns and explain how to make these payments.
Working with remote developers as contractors
Hiring remote developers to work as contractors is common when having them work on a short or fixed term project. However, you can also sign a B2B contract with a developer from abroad even if you intend for them to be part of your team longer term. Note that this is usually harder to do for local developers. In order to sign a contract with a developer abroad, in most countries the developer should establish an individual entrepreneurship or a limited liability company. Depending on the jurisdiction, it may also be possible to declare the payments as income without setting up a legal entity. In either case, the developer would be the one responsible for paying all their taxes and ensuring compliance with the relevant local tax laws.
With a B2B contract, you don’t need to pay any pension or other compulsory contributions, which can be an additional 10-30% of the amount you pay an employee in salary. Also, the developer typically pays less in taxes since they can pay themselves out via dividends and write off some expenses. As a result, given the same budget, you can offer higher pay to someone abroad. However, this way they lose some social security guarantees, such as potential unemployment benefits. It’s worth mentioning that candidates in the Nordics are reluctant to do this and prefer to be employed, but this isn’t the case in Eastern Europe, for example, where working as a contractor is more common.
Contractors typically work on a monthly, daily or hourly rate. Working with a contractor on a monthly rate is the closest thing to having that person employed. You will pay a fixed amount each month, most likely with vacation days included. A daily rate refers to a fixed amount paid to the contractor for each day they work without any vacation days provided. An hourly rate is dependent on the number of hours worked. It is important to note that a contractor working by the hour can often end up logging less than eight hours a day. This is often reflected in a higher hourly rate to compensate for the fewer hours the developer bills for.
Working with remote developers as employees
Another way to engage remote developers is by hiring them as full-time employees. If you prefer that option, there are two ways to set up the collaboration - using an Employer of Record platform (EOR) or by establishing a legal entity in the country where the developer is based.
EORs provide services such as payroll, benefits administration and compliance assistance. You will have to sign a B2B contract with them rather than directly with the developer. They will in turn sign a contract with the developer. These platforms also handle pensions and other compulsory contributions which you need to pay for. On top of that, EORs charge an additional monthly fee, which you can find below. It’s worth noting that some countries, such as Austria, have a 13th monthly salary, which should be taken into account when calculating payroll. EORs also offer the option of hiring a contractor through them, allowing you to manage all your personnel costs in a centralized manner.
You can find the starting monthly fee of the most popular EOR platforms in the table below:
Establishing a legal entity in another country can be a costly and time-consuming process that takes a lot of effort. It involves registering a company in a foreign jurisdiction and complying with local business operations, taxation and employment laws. This only makes sense if you have at least a few people in that location. There are also some risks related to the taxation of company revenue. For example, some countries may require you to pay taxes on revenue generated by mobile app sales or in-app purchases made by users in that country, even if your company does not have an office there. Before forming a legal entity in another country, you should carefully consider the costs associated with incorporation, as well as the accounting and legal procedures, which can vary from country to country.
Paying remote developers
You should be able to pay most remote developers via a standard bank or wire transfer. If they have an account in the EU and you have a bank account within the EU as well, it will be possible to use SEPA payments which cost on the order of a euro per transaction and shouldn’t take more than two-three days to arrive. The amount the developer receives will be exactly the amount you sent. A developer outside the EU may be able to open an account within the EU using a banking app such as Wise, who are a client of ours, or Revolut.
If that’s not the case, you will need to make foreign payments via SWIFT. The cost of these payments should be on the order of 15-20 euros or dollars, but can be as high as 40-50, depending on your bank and the intermediary bank being used. The developer’s bank could also charge them for receiving the transfer, so if you want to compensate them for that, you will need to add that amount to your payment. The transfer should take no more than five business days to arrive.
It is possible that foreign payments via SWIFT become either too expensive, end up being unreliable or are simply not possible due to the restrictions imposed by your bank given the location of the developer. In this case, there are payment providers such as Payoneer available, which allow you to transfer money to an account near to you held with them first and then do the transfer to the developer. They usually charge 1-2% of the transaction amount, but may be able to offer lower fees if your monthly volume exceeds tens of thousands of euros or dollars.
It is more cost effective and less risky to pay the developers in the currency your business primarily operates with. If, for example, you operate in euros and the candidate is in Turkey, paying them in dollars would incur unnecessary currency risks and currency exchange costs for all the parties involved, twice over. It is often less expensive for developers to open an account in your currency in their bank and then exchange that to the local currency as needed, rather than accepting payments to a local currency account in another currency.
You will need to create invoices for all the transactions and, as long as the developers are abroad, from an accounting & tax point of view, they will all be considered payments to subcontractors. It’s also worth adding that if you use an EOR platform, they will provide you with an account number you can easily make payments to, whether within the EU or the US.
How you pay remote developers depends on whether you work with them as contractors or hire them as employees. If you work with them as contractors, you will need to sign a B2B contract. In that case, the developer will be responsible for paying all their taxes and ensuring compliance with the tax laws in their country. If hiring remote developers as employees, you can do that via an Employer of Record platform or by establishing a legal entity in the country where they are based. EORs manage payroll and employment compliance but charge an additional monthly fee. Establishing a legal entity in another country is only worth doing if you have at least a few developers there.
When it comes to making payments, standard bank transfers can be used. If the developer is in the EU and you have a bank account within the EU as well, SEPA payments can be used. If not, more expensive foreign SWIFT payments are an alternative. Third party payment providers are also available in case your bank cannot do a foreign transfer to the developer’s account for some reason.
If your company has remote working practices in place, hiring software developers to work remotely from abroad is an attractive option for growing your tech team. You can access a larger talent pool with lower salary expectations due to a lower cost of living. This allows you to find suitable candidates faster without having to deal with relocation. As long as the agreements are structured correctly and the right payment channels are used, making payments is no more difficult than paying salaries to local employees. In fact, due to the fixed overheads, the cost of a remote hire from abroad is often more predictable than that of a local employee.