Hiring freelancers and contractors lets companies target professionals with specialized skills, delegate projects efficiently without employing or training new employees, and even grow into untapped international markets. Also, after the Covid pandemic, business owners now prefer to hire remotely and even internationally. This, and the fact that people enjoy the flexibility and ability to work remotely, will see the gig economy grow to 78 million people in 2023.
But how are foreign freelancers paid? If you're a U.S. company keen on hiring outside the country, you need to know how to pay international contractors. This is important if looking to establish and maintain an international workforce. A global payroll is much more complicated than wiring money to family or friends. Your business has to comply with employee classifications and reporting requirements in your home country and every country where your team lives.
And you'll need to factor in stuff like unique local labor laws, foreign exchange rates, payment methods, and transaction fees. So, making payments to international contractors can be frustrating and expensive, even more so when you involve professional tax and payroll services in every location.
Read on to learn more on the basics of paying international contractors, including:
- How contractors are classified
- Creating an agreement with foreign independent contractors
- Factors to consider when determining pay
- How to report international payments and file the proper tax forms, and more
What is an international contractor?
An international contractor is someone who doesn't work or live in the country where your company is based. For example, a U.S.-based company can hire developers in Mexico as contractors. The worker qualifies as an international contractor long as he or she doesn't work or reside in the United States and isn't an American citizen. The distinction is the same for other countries.
But, this definition is more of where the services are done rather than the independent contractor's nationality. If an American citizen performs the work outside of the U.S., the local government will likely demand an income reporting requirement and withholding obligation. So, a company simply can't pay American contractors working abroad without recognizing where they carry out their jobs.
A company must comply with the contractor's local definitions; otherwise, you'll find yourself in tricky situations. For example, some countries determine whether a worker is an independent contractor or employee depending on the length of the relationship between the company and the worker. So, a longtime contractor can eventually become an employee, entitling him to benefits.
How to pay international contractors
Paying international contractors is more complicated than paying local contractors. There are currency conversions and fees involved. Also, some countries have banking protections different from the U.S. and E.U. Read on if you're wondering, "How do I pay an independent contractor out of the country?"
International bank transfer (SWIFT)
An international bank transfer is among the most common and trusted ways to make payments globally. Also known as SWIFT, this wire payment connects banks across the globe seamlessly, making it fast and easy to pay international contractors. However, SWIFT transfers usually take up to 5 business days to reach the contractor, and they are expensive, costing from $30 to $50 or more per transfer. Also, there may be a flat rate incurred for currency conversion. That explains why they're becoming less popular. Also, employment and tax laws vary between countries, making SWIFT transfers more complicated.
Paying foreign contractors via cryptocurrency is slowly gaining popularity. There's no exchange rate involved, so you lose no money in the conversion. You can initiate a payment with popular currency platforms such as Coinbase, which is pretty simple. First, log into your wallet, choose the recipient, enter the amount, and send.
The biggest caveat is that cryptocurrencies are unpredictable, fluctuating faster than traditional currencies. Also, not all foreign contractors own crypto accounts. So, if you intend to go the crypto way, you'd have to discuss this with a contractor beforehand.
PayPal is among the most common and easiest ways to make digital payments internationally. Most people have an account, so you can send, receive and pay invoices almost anywhere globally with just a few clicks. Also, companies can pay foreign contractors in 26 currencies and even mass payments for up to 5,000 contractors at a go.
PayPal offers several payment options, meaning you can pay contractors from your PayPal balance, credit card, or bank accounts. And you can access PayPal via its app on your phone or desktop, making it easy to manage payments even when you're on the go. However, PayPal charges Business account holders a 3% transaction fee and a base exchange rate, usually higher than other services. So, wiring international contractors thousands of dollars will be expensive.
Payoneer works like PayPal, letting you pay international contractors in over 200 countries. Unlike traditional bank transfers, contractors can access their money as soon as you deposit it into their accounts. Payoneer supports 150 currencies, which is almost six times more than PayPal. Also, the platform is recognized by financial regulators globally, so you can safely pay your international contractors while remaining compliant.
Payoneer has a mobile app letting you manage your transactions from the convenience of your laptop or phone. The downside with Payoneer is that they charge up to a 3.5% currency exchange rate, and they charge the contractor up to 2% of the amount transferred when withdrawing from their account.
Bill.com is designed to streamline your company's payment process, letting you pay international contractors electronically, whether in U.S dollars or foreign currency. It's also cost-effective because it helps save on wire transfer fees compared to the average bank costs. Their standard bill payment process lets you centralize your approval workflow process and manage controls and oversight of the company's finances. All this while automatically syncing all your payments with your accounting software, whether Intacct, Xero, NetSuite, QuickBooks Desktop, and Online. The upside is that you'll have documentation for your records and accounting department and can accurately book contractor payments in the correct periods. Also, you can show your contractors the cash trail if they claim not to have received the cash or try to bill you twice.
Deel is a contractor-centric company that lets you pay international contractors in one place. The global hiring aggregator uses local legal entities to hire foreign contractors on your behalf in 150 countries. They handle the whole employment process, from compliance, international payroll, taxes, benefits, and HR admin, while the contractor works for your company just like the rest of your team.
The company offers multiple currency options and several withdrawal options. So, your contractors receive timely payment in their local currency and their local bank accounts. Also, contractors receive pay slips after a paycheck and can check their pay stubs and payroll records without nagging you or the payroll team. Deel charges from $49 per contractor, which is pretty fair considering they're doing everything on your behalf.
Pilot.co is an HR and payroll solution with a globally-distributed remote team responsible for international payroll, compliance, tax, and benefits for US-based companies. You don't have to juggle various payment processors and banks. Their platform lets companies pay international contractors from over 100 countries in their local currency and local bank transfers, meaning they don't need to use a debit card, an e-wallet, or other payment tools. Also, the company doesn't have conversion fees, doesn't charge you international wire fees, or charge your contractors for receiving payments. So, Pilot.co saves your company time while saving you and your contractor money. And their platform lets you access and pull all your contractors' data in one central place.
How international contractors are classified
The foreign government is responsible for defining what includes an employee vs. an independent contractor. Generally, if someone works for one employer for a long time, they are classified as an employee, and the company must pay wages, benefits, and taxes on the employee's behalf.
But, if someone is working for several companies at once, is in charge of their working schedule, and controls the way services are executed, they're viewed as an independent contractor. If a worker is an independent contractor, they're accountable for their own income tax obligations.
International contractor forms and tax requirements
"Do I need to issue a 1099 to non-US citizens?" No, in the United States, companies that work with international independent contractors expect them to fill an IRS Form W-8BEN form to certify their foreign status to the government and adhere to U.S. tax laws. You're not required to send Form W-8BEN to the IRS, but you should save it for company records.
An individual international contractor will fill a W-8BEN, while a contractor acting as an entity will fill a Form W-8BEN-E instead. Also, when working with an international contractor, a company may need to ensure that the worker accurately reports their income and tax obligations to the relevant authorities in their country.
Creating an agreement with international independent contractors
You should formulate a contract with a foreign contractor to protect you in case of a dispute. The agreement specifies the contractor's job description, payment and tax designations, and how disputes may be resolved. Like with contractors from your country, you can determine work ownership and protection clauses, which depend on the foreign contractor's local laws and regulations.
Determining the amount to pay an international contractor
A fair compensation structure is key to attracting and retaining top talent, whether locally or internationally. But, there's more to consider with an international contractor, including exchange rates, local and foreign taxes, local pay expectations and cost of living, and whether the worker will be based in the U.S. at any point of the contract. The specific amount varies depending on the contractor's work and increases if the job requires specialized skills.
If your company has only one foreign contractor, you can pay them in U.S. dollars or their local currency. But the more they are, the easier it is to standardize their payments.
- Paying in dollars helps to budget better and determine standard rates for different work types. It also helps keep your international contractor rates fair, even though it may not be attractive for contractors in regions with a higher cost of living.
- Paying foreign independent contractors in their local currency lets you offer fair rates without overpaying while maintaining a good standard of living for the contractor. But it further increases discrepancies between international contractors based in different countries. Your contractors may resent not making as much as contractors from other countries. Also, there's the chance that your company is seen as capitalizing on weak economies, cheap labor, or supporting oppressive governments.
- Other companies settle for a hybrid method of payment. They use a digital payment tool or contractor management platform to help capitalize on currency fluctuations.
Ultimately, the amount you pay a foreign contractor is based on many factors. Make sure to consider each of them and how it affects your company, budget, and ability to grow your international workforce.
Determining international contractor payment structures
Local laws can limit how you pay your foreign contractors, with some countries requiring that you pay workers at least twice monthly. The H.R. department can set the company's payment terms if there's no law dictating that you pay on a given timeline. Also, it's important to include payment terms in the foreign independent contractor agreement to clarify how the worker will get paid. The most popular payment structures include:
1. Project fee- This is a predetermined amount for a particular piece of work and is also known as the fixed-price project fee. Both parties are aware of the project's budget from the get-go. Make sure you have a solid contract in place to determine project milestones, progress reporting, penalties for missing deadlines, and intellectual property ownership. Projects that attract such an arrangement include tech development or engineering design. A company can either pay for the project upfront, pay upon completion, or by milestone.
- Payment upfront- Most independent contractors always ask for some upfront payment, whether partially or fully. It ensures that they're paid for their time, but it puts you at risk if the contractor delivers unsatisfactory or incomplete work or doesn't deliver any work.
- Payment upon project completion-This term is the most effective for the company as you only pay once you're pleased with the final result. But it's a risk too big for the contractors, and they most likely won't agree to it.
- By milestone: You can pay the contractor for every milestone they complete throughout the project. A small payment can be made upfront, and then small payments made as the contractor finishes more of the project.
2. Retainer- It is a set amount paid regularly. A typical arrangement is a monthly payment renegotiated at the start of each financial year. The contract should specify what the retainer covers regarding deliverables and/or time spent working for you. This works especially for longer projects, where the company needs multiple tasks done regularly, and it can be suitable for both the worker and your company. And you're also able to better budget because you know you'll be making regular payments.
But, you should address common scenarios such as what happens when you don't give your contract enough work to keep them busy for the retained hours. Are the hours forfeited, or do they roll over into the following month? And more importantly, is rolling hours over into the next period legal in your contractor's country?
3. Time and materials- A time and materials project is ideal for work easily manageable at the task level. The contractor hands in an invoice with a timesheet and expense report, proving the time and materials used for the payment period. If your company can closely time the effort it takes to produce your desired outcome, this could be the perfect payment arrangement.
But, time and materials can be expensive for creative industries because determining how long it will take to achieve the desired result is complicated. Also, these projects lack the incentive to work efficiently because if contractors take longer to deliver results, they're paid more.
How international contractors should invoice
An international contractor can submit their invoice, depending on the payment terms described above. The agreement should make clear the payment tools it uses, payment terms, whether it caters to all transaction costs, etc.
For example, a software developer can bill per hour and share an invoice indicating how many hours he has worked per week or month if they're on a retainer. Also, he can share an invoice for every project milestone he completes if he's paid per milestone. If they're on a time and materials project, they'll likely include a timesheet and expense report as described above.
A typical invoice would include the contractor's payment details, the total amount expected, either inclusive or exclusive of transaction charges, and the date when the invoice should be paid.
FAQs on paying international contractors
Can you pay an international contractor?
Yes. Nothing is stopping you from hiring and paying an international contractor. But, the payroll and contractor regulations vary from country to country, and you can find yourself in trouble if you don't follow these regulations. So, make sure that you're aware of the proper steps to ensure that your foreign contractors receive payment in a timely and compliant way. Alternatively, you can hire a professional service like TECLA to do everything on your behalf.
How do I pay a foreign contractor?
You can pay them through international bank transfers, cryptocurrency, digital wallets, payroll software, etc. It all depends on what your agreement with the contractor dictates.
Can a company be penalized for misclassifying workers?
Yes. Tax penalties can accrue if a U.S. company labels a foreign worker as an independent contractor while the local government designates them as an employee. In such a case, the local government can issue common tax penalties, including withholding back tax on benefits, wages, or overtime paid to the worker.
Sometimes, giving full-time employee benefits such as sick pay, severance pay, and vacation to an independent contractor may prompt fees and penalties. So, it's important to research local labor laws in the contractor's country. Please note that the local government doesn't always initiate employee misclassification lawsuits. Most times, foreign contractors will report you to local authorities for employee misclassification so they can receive back payments.
How do I report a payment to a foreign contractor?
You aren't required to report payments made to foreign contractors to the IRS. But if the international contractor enters the U.S. and performs any work in the country, you are required to withhold taxes and report to the IRS.
Do international contractors have to pay taxes?
It depends. There's no obligation for a company to withhold taxes for foreign contractors that aren't U.S. citizens, don't live in the U.S., and carry out their services abroad. Still, before you make any payment, ensure that the contractor sends you a filled and signed Form W-8BEN. But, depending on their tax laws and regulations, a contractor may be required to pay taxes in his country.
Do foreign contractors receive a 1099?
No. Companies only issue an IRS 1099 form to independent contractors that are American and/or work or reside within the U.S. for compliance with American tax laws. The Form W-8BEN, which states the contractor's foreign status, should suffice.
Pay your international contractors through TECLA
Hiring international contractors can be beneficial for your company. But with the many legalities involved, tech companies can hold off on working with foreign contractors. We at TECLA are here to help with just that. We'll handle the contracts, legalities, and payments, ensuring that you comply with local labor laws while lowering the management burden of completing tax forms through our nearshore staff augmentation services. We offer you peace of mind, letting you scale an international workforce and recruit top talent without having to worry about payments, legal compliance, benefits, and more.