Key Takeways
- Payment methods for overseas contractors can include: bank wire, credit card, freelance platforms, money transfer companies
- Pros of employing overseas contractors include: cost effectiveness, agility, testing a market
- Cons include: IP protection and non-compliance
- Crucial to be aware of and avoid contractor misclassification
International contractor vs overseas employee differences
International or foreign contractors can offer your business a range of skills and benefits you might not find in-house or nationwide. But there are some factors to consider beforehand, including how you’re going to pay international contractors and which laws you’ll need to follow.
An international contractor is a worker who follows the employment laws of another country. Unlike the existing employees in your company, international contractors only work when they’re required.
See this table for the major differences between international contractors vs overseas employees
| International Contractors | Employees |
|---|---|
| Paid per project | Paid for time worked |
| No withheld income taxes. Responsible for self-employment tax | Employer must pay and withhold relevant taxes, including income, social and unemployment tax |
| Pay for their own benefits like health care and retirement. Some countries may require benefits like paid leave | Most employers pay for and provide benefits like health care, disability, paid leave and retirement |
| Responsible for work expenses and may not receive reimbursement from the company | Employer is responsible for reimbursing any work expenses incurred |
How to pay overseas contractors
With your overseas contractors to hand, you need to weigh up the best way to pay them. Below are some of the most common methods to send payments to international contractors:
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Use your bank
Banks and building societies are popular choices for paying overseas contractors. After all, if your company has a business bank account, why not use it to make a contractor payment? The reality is that bank transfers tend to be an expensive option still reliant on the outdated SWIFT network. In addition, overseas bank transfers usually come with high fees and unfavorable exchange rates.
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Make a credit card payment
International contractors sometimes accept credit card payments for their services via mobile apps like PayPal. One of the downsides of credit card payments can be the withdrawal fees. In China, for example, the contractor is sometimes charged a withdrawal fee just for transferring money from an app to their bank account.
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Pay with a freelance platform
When you’re hiring globally, platforms like Fiverr and Upwork are a boon to your business. Not only can you find great talent, these providers can help you pay for them too. But when you are paying international contractors companies like these can often charge the contractor up to 20% fee. In the long run, these charges can sometimes compel international contractors to overquote for their services.
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Innovate with cryptocurrency
Receiving payments in cryptocurrencies is gaining popularity with many workers, including overseas contractors. That’s because cryptocurrency payments cut out the middleman, i.e., the bank, thus eliminating poor exchange rates and bank fees. Cryptocurrency payments are usually instantaneous, and the currency has the potential to rise in value. Additionally, offering crypto payments is a great way of attracting the best talent to your company.
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Go with a dedicated money transfer provider
Digital transfer services continue to disrupt the payment services industry for the better. A mixture of solid expertise and innovative technology make these providers a faster, cheaper and safer way to make cross-border payments. While some providers like Remitly offer a one-size-fits-all solution for corporate and personal payments, others like PayPal provide dedicated business accounts. That includes multilingual customer support and dedicated account managers. This can be especially helpful if you’re sending large amounts of money and need some guidance during your transfer.
The pros and cons of employing international contractors
To begin with, let’s look at the pros of employing an international contractor:
- Cost-effectiveness – outsourcing projects overseas can save your business money. That’s because employing a contractor locally tends to be more expensive. And employing globally can give your company more options in terms of employee cost, as opposed to just employing locally.
- Filling a gap – when certain skills are hard to come locally, hiring an independent contractor in a different country, could be the answer. For example, US companies might want to hire computer programmers based in China according to HackerRank’s “programmer” ranking.
- International markets – working with an international contractor can be the first step in overseas expansion. As previously mentioned, if the world’s top developers are based elsewhere, then maybe it’s time to open up offices overseas.
On the other hand, the cons of global outsourcing include:
- Limited IP protection – your intellectual property may not be protected by your domestic agreements in foreign countries.
- Establishing a legal presence – before hiring an overseas contractor, you’ll need to understand things like payroll regulations, mandatory employee benefits and labor laws in that country. In short, it’s a time-consuming and complex process. Fortunately, you can keep on top of this through a foreign subsidiary, a global professional employment organization (PEO) or employer of record (EOR). That way, you can put all compliance requirements in the hands of local experts.
- Non-compliance – this can occur when you employ overseas workers but don’t follow employment laws in your country or theirs. For example, if you’re a British company employing contractors in Portugal, you’ll need to comply with laws in both countries.
- Time differences – working with contractors in different time zones can lead to complications. That’s because it can be hard to communicate effectively. However, some companies can use multiple time zones to their advantage. In the stocks and shares industry for example, having a presence in another time zone can help your business respond quickly to sudden changes in the market.
- Language and cultural differences – even in countries that share a common language like Spain and Ecuador, communication can come to a standstill. That’s because of variations in things such as language, customs and traditions, and work culture.
How to avoid contractor misclassification
Hiring international contractors comes with elements of risk. Regardless of what’s stated in your employment contract, overseas contractors can sometimes, unknowingly be working as employees under local law. This is called contractor misclassification or non-compliance.
In the US, for example, even if an independent contractor (or 1099 contractor) is unknowingly misclassified as an employee or (W-2 worker), a business will still be penalized for the mistake. Let alone when you hire overseas, where the local laws and compliance may result in misclassifying contractors as foreign employees.
Form 1099 NEC refers to a form that businesses need to file with the Internal Revenue Service (IRS) when they’re paying a contractor. Similarly, a W-2 is the form that companies file for employees.
In the event of uncertainty, employers can file a Form SS-8. With this form, the IRS will help you assign the right classification to the individual(s) in question. Contractors can also file an SS-8 if they think they’ve been incorrectly classified.
Here are some tips for staying compliant and avoiding misclassification:
- Learn the specific laws governing employee classification in your home country.
- Research the employment laws in the countries where your contractors work by consulting with local HR experts.
- Make sure your hiring team receives training on the different classifications.
- Put your working relationship in writing in a contract.
- Maintain comprehensive records of contractor agreements and payment transactions in the event of an audit.
Things to do before your international contractor starts
So you’ve found the perfect freelancer – that’s great news. Before any work begins, you should agree to the terms and conditions of the contract. Establishing these initial details makes paying a remote worker in another country easier in the long run. The agreement should include:
- The nature and length of the work, e.g. landing page translations.
- The amount you’ll pay the freelancer.
- Which currency you’ll pay them in.
- How and when they’ll need to invoice you.
- The payment method and date.
The Papaya Global Advantage
Managing a global workforce comes with many challenges, including sending payments to international contractors. Papaya Global’s contractor management solution will help you easily hire, onboard and pay your workers. Even better, our network of in-country partners will handle any complex issues such as legal compliance.
Contact us today to see how we can scale your overseas contractor management
FAQs
Do payments to foreign contractors require a 1099 form?
No, form 1099 is required for payments to foreign contractors or services performed outside the US. No withholding is necessary if the foreign contractor is not a US citizen.
Do I need to sign an independent contractor agreement with a foreign contractor?
It is important to have contracts in order to establish a strong working relationship and understanding between the parties. Contracts are legally binding agreements and by signing them, each party commits to fulfilling certain rights and obligations. Thus over the course of a project, both you and the contractor can refer to a written contract. This may help avoid costly and time-consuming conflicts by providing security and peace of mind for both parties.
Can independent contractors be paid a commission?
Yes, whether in addition to or instead of a salary or contractual payment, commissions can be paid to employees and independent contractors.
Is there a limited employment duration for contractors in different countries?
That depends. Different countries determine employment status based on the contract length and payment structure.
For example, in countries such as Germany and South Africa, you can renew only up to 3 times. Whereas in some other countries, a contractor may be considered an employee after a defined period of continual work with your company. That’s why it’s essential to understand the laws for classifying employees in countries where your contractors reside.
Which currency do I need to pay contractors in?
A business in the United States starts with U.S. dollars (USD). The currency you use to pay contractors in other countries must be converted to USD before payment can be issued.
Do foreign contractors have to pay taxes
Contractors from abroad pay their own income tax, so U.S. companies are not required to withhold taxes from their payments. It is still necessary for companies to collect IRS Form W-8BEN or W-8BEN-E from contractors performing work outside of the United States.
