U.S. companies continue to look overseas for talent, with worldwide employment of foreign workers standing at over 42.5 million employed workers, according to the U.S. Bureau of Economic Analysis.
Although hiring globally can help fill your employment needs, it can also bring on complexity when dealing with a key foreign worker demographic: international independent contractors. Having contractors in different countries means having to be able to pay them in different currencies, and at various pay cycles. It also requires understanding employment regulations in different countries to make sure you remain compliant with worker classification laws.
1099 and international contractors
To be clear, international independent contractors aren’t 1099 workers. But because “1099” is the IRS code for U.S.-based contract workers, U.S. companies may associate “1099” with all contractors, regardless of where the contractors are based.
However, the IRS doesn’t require a company to withhold taxes or report any income from an international contractor if the contractor is not a U.S. citizen and the services provided are outside the U.S. filing forms 1099 is required if:
- The contractor is located internationally but is a U.S. citizen
- The contractor is a U.S. citizen living abroad but still performed some work in the U.S.
1099 for international contractors: Upsides and downsides
Regardless of the terminology, international independent contractors offer ample upsides for U.S companies:
- International contractors can bring talent and value into countries where a company has no foreign subsidiary or entity
- Organizations can often obtain talent at a lower cost relative to full-time salaried workers. Companies don't provide foreign contractors with employee benefits like healthcare, retirement plans, and paid time off.
- Companies can leverage contractors to work on country-specific projects where you may have no “insider” project expertise. For example, a Parisian systems programmer working on a big government technology contract between a U.S. multinational and the French government.
- Handled correctly, a company can be free of the responsibility for withholding income and taxes for international contractors
However, along with the benefits of international contractors are some potential downsides.
First are the uncertainties surrounding hiring a contractor in a country that may be unfamiliar to company managers. What is the payment frequency? Do you have to pay contractors in their local currency? Can you manage different requirements for multiple countries and contractors simultaneously? Managing contractors, especially if you have several in different countries, can quickly become cumbersome.
Additionally, there is the risk of running afoul of in-country employment, tax and benefits laws. Misclassifying an independent contractor could lead to hefty compliance fines, penalties and additional payments to contractors.
To mitigate the risks associated with hiring international contractors, it helps to have access to good local knowledge, which could mean contracting with an outside specialist who is well-versed in foreign employment laws and mandates. Leveraging a third party to manage contractor payments can streamline the process and eliminate the administrative burden on your team.
Protecting your company from liability
An international contractor is an independent foreign worker who offers professional services to a company. The key term is “independent.”
The IRS, for instance, defines an independent contractor as follows: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
Other countries have their own rules on what constitutes a full-time employee and what constitutes an independent contractor. In most cases, “independent” is often a central component. Organizations working with international contractors may run into compliance barriers on several major fronts:
They directly manage the contractor’s work. If the hiring company dictates the timeline, structure, style and other parameters of a project or workload. The local government may deem that contractor a full-time employee, causing them to lose independent status.
They treat the contractor like an employee. Any company movement to reimburse expenses; offer computers, phones or other workplace tools to the contractor; pay or provide professional training; or pay for time off and offer employee benefits, may also lead to an “employee” classification by a foreign government.
Companies engaging contractors in foreign countries should focus on the specific criteria that may flip an independent contractor into a full-fledged employee status by a local government:
- Contractor is paid for time worked rather than per project
- Company tools or resources are used to complete a job
- Contractor only provides services to one company and does so for an extended period
- Company manages the day-to-day work of contractor
Making the right call on international contractors is imperative to U.S. organizations that want to be fully compliant with tax, employment and withholding laws in a foreign country.
If an overseas government deems an independent contractor as a full-time employee, the hiring company may not only have to shift its payroll and tax structure for its workers, it also may also be liable for fees and penalties for misclassifying the worker’s employment status in the first place.
A “to do” list when considering international contractors
Before you get started on your next project, it’s important to ensure you establish a foundation for successful working relationships with your international contractors.
Ensure the contract is clear. The contractor must report all income and handle their own taxes—as the hiring company, you have no legal obligation to handle those issues for contractors.
That said, it’s always a good idea to stipulate income and tax obligations clearly in the contractor agreement between the hiring organization and the international contractor. In general, using a U.S.-based contract is fine in this instance, but it’s important that specific local employment rules and laws are included, where necessary, in the contract.
Additionally, it’s important to include language in a contract that protects your company’s intellectual property. Depending on the local laws, if not specifically stipulated in a contract, contractors may be able to claim rights to intellectual property for work they created. The best way to protect your organization is to clearly declare in a contract that you retain ownership of intellectual property for any work a contractor performs for your company.
Make payments and assign reporting responsibilities. This can either be done manually for each contractor, or you can work with a contractor payments solution to manage the process on your behalf. Once you’ve hired and accurately classified a worker as an international contractor, you’ll need to set up payments to the contractor. You will not be responsible for issuing form 1099 to track the source income of foreign workers.
As mentioned, that payment process is can be done manually through accounts payable or a contractor management platform, with the international contractor submitting a timely invoice for work completed. It’s important to note, an independent contractor is responsible for filing his or her own tax forms and withholding documents.
Know the tax rules. By and large, there is no requirement for the hiring company to issue an IRS Form 1099 to an international contractor, which would be the case if the contractor were based in the U.S. This form allows small businesses to report payments and ensures taxes are withheld for the social security administration and other government programs.
However, a United States company engaging an international contractor should provide an IRS Form W-8BEN to the foreign contractor, and ensure it is prepared fully and accurately and is signed and dated by the contractor. The W8BEN is not submitted to the IRS, but it should be kept by the hiring company to certify the contractor’s country of residence in the event the IRS questions why taxes were not withheld.
Know the potential penalties in misclassifying overseas workers. Employee misclassification can result in fines, potential of back payments of taxes, insurance, pension or retirement plan contributions, or even jail time. For example:
- In France, a manager has been sentenced to three years in prison for misclassifying independent contractors
- A U.K. court granted a salesman 13 years of back pay after being misclassified as an independent contractor
A global partner to assist with the 1099 for international contractors
Managing one or two international contractors might not be complicated now, but what happens when you start to scale? Are you prepared to manage several payment schedules and currencies simultaneously? This can put your company at greater risk when hiring independent contractors.
Safeguard Global grows and scales with your unique expansion goals. We provide a comprehensive solution to hiring and paying a global workforce, no matter the worker classification. Here are a few options to consider when hiring abroad:
Contractor management
A contractor management provider can help you eliminate the complexity of paying your international contractors by consolidating the payment process—no matter the country, currency or pay frequency—to a single, streamlined platform.
Contractor Unity, the platform from Safeguard Global, removes manual and time-consuming payment processing procedures and ensure payment is timely and accurate, every time.
Employer of record
Another option for hiring talent in countries where you don’t already have a legal entity is a global employer of record (EOR), sometimes referred to as the international PEO or global PEO model. This option can also be leveraged to easily transition any existing or noncompliant contractors to employees at any time.
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