Whether you’re operating a business domestically or internationally, in order to succeed, you need quality team members to get the job done. Paying those workers as independent contractors, however, can be risky if your company is operating in foreign markets.
There are many factors to consider when paying foreign contractors if you want to stay in compliance, minimize operational costs and keep valued contractors happy on the job.
- What is an international contractor?
- Local considerations when paying foreign contractors
- Worker classifications
- Penalties for misclassifying workers
- Employment paperwork
- Permanent establishment risk
- How to pay foreign contractors
- International wire transfer
- International money order or traditional paper check
- PayPal or other digital payment network
- Contractor management platform
- Working with a global employer of record
What is an international contractor?
An international contractor is someone who operates from a different country and holds noncitizen status. This criteria is consistent no matter where you are headquartered or where local country of the worker you plan to hire. With that said, the classification of a contractor hinges on the type and duration of services rendered.
Unlike regular employees, international contractors are typically engaged for specific projects or finite durations. The employer and contractor formalize their arrangement through a contract outlining the project scope, timelines, deliverables and compensation terms. This approach lets businesses to access talent globally without requiring a permanent establishment in foreign markets. This offers greater flexibility and cost-efficiency.
Foreign independent contractors contribute across diverse industries in various capacities. According to a recent report, roles in AI programming, marketing, project management and web design saw significant demand and growth. Other fields highlighted for international contractors included graphic design, content creation, automation, and translation services.
Local considerations when paying foreign contractors
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.
Worker classifications
It’s up to the foreign government to define what constitutes an independent contractor vs. employee.
In general, if a worker is working for one employer for a long period of time, that worker is usually classified as an employee, and the company is expected to pay wages, benefits and withhold taxes on that employee.
If the worker can work for multiple companies at once, controls their own working status, or works for a single company for a short period of time and moves onto a different company, they’re usually deemed an independent contractor. When a worker is determined to be an independent contractor, the contractor is responsible for their own income tax obligations.
Penalties for misclassifying workers
Tax penalties can stack up if a U.S. company designates an international worker as an independent contractor but the local government classifies them as an employee.
Common tax penalties issued by a foreign government in a worker misclassification scenario include, back tax withholding on wages, benefits or any overtime paid to the worker. In some cases, paying full-time employee benefits such as vacation, sick and severance pay, to a contractor may trigger fees and penalties.
Be aware that employee misclassification lawsuits are not always initiated by the local government. Oftentimes, contractor workers will report a company to local authorities for misclassifying their employment status in order to receive back payments.
Employment paperwork
In the U.S., companies that engage with independent contractors require them to complete an IRS 1099 tax form to comply with American tax reporting laws.
U.S.-based companies paying international contractors should have contractors fill out an IRS Form W-8BEN, which certifies their foreign status in the eyes of the U.S. government.
When engaging a foreign contractor, companies may need to ensure that the contractor is properly reporting their income and tax obligations to local authorities in their host country. It’s also a good idea to have a contract with an independent contractor that clarifies the worker’s role and tax and payment designations.
Permanent establishment risk
If a global company fails to clarify its own standing in a foreign country and its related worker tax and income designation, a foreign government, usually through its tax agencies, will step in an make a worker designation based on permanent establishment rules.
If a local tax agency claims that a business is operating within its country borders on a continuous basis, it may classify that business as a permanent establishment, and the company would be subject to local corporate tax and income reporting statutes—plus fees and penalties if the business isn’t in compliance.
Permanent establishment risk is essentially a tax and compliance risk. Any global company needs to understand its business designation in a foreign market, and all inherent tax laws and income reporting obligations that come with being classified as a permanent establishment.
How to approach paying foreign contractors
There is no requirement for U.S. companies to file an IRS 1099 Form to pay a foreign contractor. But as noted above, the company should require the contractor file IRS Form W-8BEN, which formally certifies the worker’s foreign status.
When paying foreign contractors, global companies face substantial risk if they’re not familiar with the nuances of local tax and employment laws, so getting proper guidance on local compliance is recommended before processing payments.
Here are five commonly used methods for paying foreign contractors:
1. International wire transfer
Companies can use their own bank to transfer payments to a foreign contractor via a global transfer network (usually SWIFT) that connects financial institutions across the world.
However, government regulations and employment laws vary by country and some contractor engagements may not be covered in an international money transfer.
Additionally, there are both upfront and intermediary bank fees attached to international bank transfers and currency fluctuations that can change the amount of the payment on a country-to-country basis.
2. International money order or traditional paper check
Companies can also begin paying foreign contractors via an international money order or by paper checks, but there are multiple downsides and risks in doing so.
With money orders, processing the transaction can be slow and inefficient. For example, the payer must physically send a staffer to purchase the money order at the post office, bank, Western Union outlet or other money order outlet.
Money orders may come with prohibitive fees, are slow to process given the physical nature of purchase, and the foreign contractor will, upon receipt of the money order, have to physically deposit the payment on their own. Additionally, exchange rates may boost the cost of a money order to the payer.
Checks don’t come with fees, outside of any postal fee for sending the payment via mail, but they travel slow and risk alienating valued contractors who want to be paid quickly and efficiently.
3. PayPal or other digital payment network
In recent years, many companies have turned to digital payment networks like PayPal or Xoom when paying international contractors.
Payment is fairly easy and fast on a digital basis, unlike money orders or international payments, which can take days to process. Fees are in play for both the payer and the payee, and it's common for exchange rates to be marked up with a foreign contractor digital payment.
But the use of PayPal is restricted in some countries, making it a less reliable option, depending on where a company plans to engage workers. Companies will also encounter more security risks with this payment option in comparison to a typical bank transfer.
4. Global contractor management platform
Hiring and paying foreign contractors can be complex and cumbersome, especially for companies that employ contractors in multiple countries with multiple currencies. Managing the payment schedules and currency exchanges can quickly become overwhelming.
Contractor management platforms, like Contractor Unity from Safeguard Global, simplify the process for paying contractors in a single streamlined platform. It eliminates manual and time-consuming payment processing and ensures you maintain a positive working relationship with your contractors.
Other payment methods like PayPal or wire transfers will always have risk associated with those transactions. For example, PayPal often has restrictions and limitations on account usage, affecting the amount you can send and receive. If you are unable to pay your contractors due to these restrictions, you may be violating their rights. This negatively affects your working relationship and could lead to penalties and fines if they pursue legal action.
Some banks accounts will even require you to verify the identity of the contractor with each payment. Contractor Unity only needs to verify the information once, no matter how many payments you make.
Money order/checks | Wire transfer | PayPal | Safeguard Global Contractor Unity | |
Secure payment platform | X | ✔️ | ✔️ | ✔️ |
Paid in local currencies | X | ✔️ | ✔️ | ✔️ |
Accurate and timely processing | X | ✔️ | ✔️ | ✔️ |
Online payment process | X | ✔️ | ✔️ | ✔️ |
Payments managed on your behalf | X | X | X | ✔️ |
No manual inputs required | X | X | X | ✔️ |
Fast contractor hiring and onboarding | X | X | X | ✔️ |
1 invoice for all contractors | X | X | X | ✔️ |
Pay contractors in 170+ countries | X | X | X | ✔️ |
Partnering with a global contractor management provider can reduce the administrative burden so you can focus on maximizing productivity and efficiency from your independent workforce. An effective contractor management solution allows you to pay contractors in their preferred currency, without any hidden fees, from a single platform.
5. Working with a global employer of record
Even if a company has every intention of being compliant when paying international contractors, if it’s not versed in the nuances of a country’s labor laws, there is risk.
For security, compliance and financial protection, partnering with a global employer of record to convert contractors to employees can significantly reduce your risk of noncompliance. An employer of record acts as your official and legal employer, so you can hire, pay and manage foreign workers without worrying about local employee tax and payment issues.
The employer of record, sometimes referred to as an international PEO, is responsible for making compliant payments to your in-country workers and remitting all employer and employee taxes.
One partner for paying global workers
Your business is constantly evolving. During periods of rapid growth, you may need independent contractors to quickly fill the gaps to keep operations running smoothly. As you see consistent success in a new market, it might make more sense to hire workers through an employer of record. And, as you prepare for a long-term presence in a country, you might want to establish your own legal entity and hire workers directly.
Safeguard Global is your full-scale partner for hiring and paying international workers. While other companies may offer contractor management or EOR by itself, we have the flexibility and expertise to support you throughout the entire expansion journey. We grow with you.
- Learn more about paying foreign contractors with Contractor Unity.
- Ready to convert your contractors to employees? Learn more about GEO, our first-to-market employer of record solution.
No matter where you are with your hiring needs, our global business advisors are happy to guide you on the best plan for your global workforce.
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