Even innocent mistakes can become costly endeavors for a company. If a company and local government don’t align on the proper classification of a worker, it can result in serious tax penalties.
Here are a few common tax penalties to be aware of:
- Back tax withholding on wages
- Benefits or any overtime paid to the worker
- Paying full-time employee benefits such as vacation, sick leave, or severance pay
In some countries, it is It’s quite common for contractors to claim they were actually working as an employee and report a company to the local government so they can receive these back payments.
Businesses should always use legally-binding employment contracts that are drafted with will also need to establish in-country agreements, making sure to follow any regulations of the local labor laws in context and not templates that may leave loopholes. If this is done incorrectly, labor courts can rule in favor of contractors to receive withholdings and benefits. Even if you have a local agreement in place, contractors can fight for employment status. This can be a costly process, especially if you are subject to pay legal fines.
Accurately paying foreign contractors requires thorough knowledge of the tax and employment laws in the countries where your business operates. These factors will weigh the heaviest when assessing a foreign country’s regulations and requirements.