More and more businesses are choosing to engage with overseas contractors and for great reason. Companies can target international contractors with specialized skills, save onboarding time and money that would otherwise go toward hiring employees and test out new foreign markets for global expansion.
While engaging with international contractors allows for more flexibility, it also requires knowledge of foreign labor laws and processes. This guide will help you learn how to hire overseas contractors and pay them compliantly.
There are several steps to hiring an overseas contractor. The following steps will help you legally engage and pay an international contractor from anywhere in the world.
Correctly Classify the Contractor
When engaging a foreign contractor, you must consider the classification laws of the country where your business is located as well as the contractor’s country. Contractor classification is a set of regulations designed to protect the contractor’s interests and is a critical step to proper tax reporting. If an employee is misclassified as a contractor, your company is liable for unpaid taxes, penalty fines, a percentage of the employee’s wages, and more.
Many companies opt to work with a contractor classification partner to help navigate classification for international talent, avoid improper tax reporting, and mitigate the risk of legal fines.
Create Locally Compliant Contracts
When engaging with an international contractor, it’s important to outline and agree to the terms of the arrangement in a written contractor agreement. The contract should follow the local regulations of where your overseas contractor is located as well as include the following items:
- A description of the services provided
- The terms and length of the project
- Payment details
- Confidentiality, non-solicitation, and dispute resolution clauses
Collect Required Tax Forms
Collecting the correct tax paperwork is a critical step to classifying your international contractor.
If your company is based in the United States, you will issue a Form W-8BEN for the contractor to complete. This tax form classifies their status as a foreign worker and a non-U.S. citizen, confirms that all work will take place in their country of residence, and determines proper tax reporting and withholdings.
Use a Contractor Payment Solution
A contractor payment solution is an automated payment platform that enables you to onboard and pay contractors across international markets. A contractor payment solution integrates foreign exchange fees into your payments, transfers funds to the overseas contractor, and with some platforms, offers locally compliant contract templates. However, a contractor payment solution only handles pay, not classification compliance.
Stay Compliant With a Contractor Management Solution
A contractor management solution helps companies navigate foreign labor requirements for quick and compliant contractor engagement. Similar to a global employer of record (EoR), but for overseas contractors, a contractor management partner manages all contractor engagement and compliance on your behalf. A contractor management solution onboards, classifies, pays, and ensures compliance for international contractors.
The following is additional information to consider when engaging and paying overseas contractors.
Do Overseas Contractors Pay Taxes?
International contractors do not have to pay taxes to a different country from their citizenship and residence, even if they are paid by a company based in another country. Because an overseas contractor is a tax resident in their own county, they are subject only to their local tax laws.
For example, US companies are not responsible for withholding US taxes or reporting the wages of their international contractors. According to the IRS, wages earned by a nonresident alien for services performed outside of the US are foreign source income and are therefore not subject to US tax reporting or withholding.
However, if the contractor is traveling or residing in another country for an extended period of time, then they may be liable to that country’s taxes. For instance, a contractor would be considered a US resident for tax purposes if they meet the substantial presence test for the calendar year. The contractor would meet the substantial presence test if they are physically present in the US for at least 31 days during the current year and 183 days during a three-year period (including the current year and the 2 years immediately before that).
Can a US Company Hire Foreign Contractors?
Yes, a US company can hire foreign contractors. The process is different from hiring foreign employees, where a company would either establish an entity in the local country or partner with an EoR to compliantly hire, pay, and manage foreign employees. Consider the pros and cons of hiring foreign employees vs. engaging contractors to determine what serves your needs best.
When engaging an overseas contractor, follow correct classification, create locally compliant contracts, collect a Form W-8BEN, and use either a contractor payment or contractor management solution.
Engaging international contractors allows you to access the skills you need and expand your global workforce. Don’t let the challenge of classifying and paying overseas contractors prevent you from bringing in the right talent to your distributed workforce. Velocity Global provides everything you need to easily engage talent, pay contractors, and build an agile workforce with ease.
Velocity Global’s Contractor Management (Agent of Record) solution allows companies to onboard, pay, and manage contractors across the globe and maintain compliance. Our Contractor Payments solution enables accurate and compliant payment through our easy-to-use technology and localized expert-vetted contracts.
Contact us today to learn how to hire overseas contractors compliantly and quickly.