The ecosystem of paying foreign contractors across the globe can be quite daunting. It involves considering local tax laws and regulations, currency conversions, foreign exchange fees, and choosing the ideal international payment methods for your international contractors.
Here’s everything you need to know.
Factors to Consider Before Paying Foreign Independent Contractors
Local Labor Laws
Before you hire a freelancer, consider their local labor laws. Each country has its own set of rules, so it’s essential to find out if the contractor you want to hire is required to comply with these laws first.
If so, is your company's compliance (in their country) required as well? Again, knowing beforehand will save you time and unnecessary headaches, and help you avoid getting into legal trouble, locally and internationally.
To reduce the potential risks of getting into legal trouble locally when hiring independent international contractors (especially if you run a U.S. company), you need to meet specific IRS-defined criteria.
According to the IRS, independent contractors provide services to the public and pay local tax. So as a company, you can only control the results of their work, but the means and work hours are up to the contractor.
But if your company controls the entire process (results, means, and work hours), then the IRS deems the independent contractor an employee, who is then eligible for employment benefits and federal tax withholding. Under the local laws, these regulations are even stricter.
With the “gig economy” on the rise and contractors working as full-time employees, countries are forced to change their local labor and tax laws — and for a good reason.
Do you want to hire remote international contractors as full-time employees for your company? Then consider one of the best global payroll systems.
These systems help enterprises and small businesses pay and manage the benefits of all their remote international workers while staying compliant with tax laws. And it doesn't matter where the contractors are based in the world.
Even more interesting, they conveniently manage and process pay slips, tax information, and health insurance — as if you are in the same city with your remote foreign contractors.
Some of the top payroll software systems include Oyster, WorkDay, Papaya Global, Globalization Partners, and Remote.
Best Ways to Pay Independent Contractors
Hiring and working with international remote workers is just half the journey. You need to pay for their services as well. Here are some of the best payment options for your business:
Wise (formerly TransferWise) is the most preferred payment option for most enterprises and small businesses. This is because they have the fairest exchange rates in the market, and they allow batch business payments for local bank payouts in multiple local currencies.
While other payment methods charge a premium for wholesale exchange rates, Wise is less expensive in terms of transaction charges. The only downside? Wise is only present in 59 countries. However, if you work with large sums of money and your foreign remote workers are in these countries, then Wise is the best payment option for you.
Payoneer is a dependable payment option worth considering as well. Laden with multiple money withdrawal options and a huge international presence, Payoneer also offers a Mastercard to its customers around the world.
This payment option is more convenient for someone working with remote workers, as money can be used immediately after you deposit it into a contractor’s account. No need to deposit money into their local bank again.
The downsides? Payoneer attracts high transaction fees ($2 to $4) to load their debit card. There’s also a steep charge (up to 3.5%) on currency exchange for every transaction you make. If you want to make bank transfers, expect another fee.
If you're looking to make international payments exclusively from the U.S., Xoom is the ideal money transfer option for you. It’s fast, easy to use, and comes with convenient money delivery services.
Xoom allows businesses to transfer large sums of money (you can send up to $10,000 at a time) straight into their overseas contractors’ accounts. If the contractor doesn’t have an account, Xoom cash pickup services will often conveniently fill that void.
The downside? Xoom takes a huge cut when converting U.S. dollars into local currency. They also charge a high fixed-rate fee on credit card payments.
PayPal is perhaps the oldest international money transfer service worldwide. It supports over 20 local currencies and is present in more than 200 countries. However, despite being the most frequently used payment method, not all talented contractors can access it.
If you’re making international transfers, you’ll incur a 3.9% charge plus the current exchange rate. Within the U.S., PayPal transaction fees are significantly lower (2.9% + $0.30).
PayPal is among the best payment solutions for businesses looking to make bulk international payments to remote contractors. The only downside with PayPal is that it restricts sending money to friends and family using a business account.
Benefits of Hiring International Contractors
The rise of the Internet turned the world into a huge global village. So outsourcing contractors living in far-off continents with different cultures, educational backgrounds, and perspectives is just a button-click away.
Here are the benefits of hiring independent overseas contractors:
They perform highly skilled tasks that go outside the realm of an in-house team. And because you hire them based on their specific skills, it's easy to find the best fit for your business. Best part? They require minimal training.
They are cost effective. You don't need to cover employment benefits when you hire international contractors. So no pension plan, no healthcare, and no Social Security. There's also no federal tax withholding and reporting tax obligations.
They bring something new to the table. Because of different cultures and perspectives, foreign contractors help you see things differently — allowing you to tap into their rich and unmatched experiences.
How to Determine Tax Withholding for Independent Contractors
You’re not obligated to withhold income tax for remote international workers unless they are full-time employees. But if you run a U.S. company and pay international workers, tax reporting to the IRS is inevitable.
In addition, if the remote contractors are foreign and working in the U.S., you need to meet certain IRS conditions to avoid tax obligations:
The contractor can only spend three months in the U.S. during a tax year.
They can’t earn more than $3,000.
They must have a business place or office in a foreign country.
If these conditions aren’t met, your company is required by law to both report the income and withhold taxes.
How to Report Payments for International Contractors
You need Form-W8BEN, which is a Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting. This document reports payments to your remote independent contractor and proves they are not from the U.S. or based in the U.S.
International contractors working remotely can use this document to provide important information such as their International Taxpayer Identification Number (ITIN).
But while the document is essential, you don't need to send it to the IRS. Use it instead to keep a record of every remote international contractor your company has ever hired. (Please note that Form-W8BEN is used for individuals only, and not contractors representing entities).
The Bottom Line
Hiring and working with international remote workers can make or break your business. Without proper classification and documentation in place, cross-border contractor relationships with businesses can result in a painful hassle, unwanted costs, and even legal repercussions in the future.
Don’t let your enterprise or small business suffer this terrible fate — know the rules for your business to stay compliant before paying remote workers, regardless of where each contractor is based globally.
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