Engaging with contractors has many benefits: It allows companies to target talent with specialized skills, efficiently delegate projects without hiring or training additional employees, and even expand into new international markets.
Great talent can be located anywhere. But that also means the contractor who aligns best with the business’s needs might be in a different country. That’s where international contractors come in.
Paying international contractors accurately and compliantly is crucial to establishing and maintaining a global workforce.
What is an independent contractor?
An independent contractor, also known as a consultant or freelancer, is a self-employed individual who provides services or products to clients on a contractual basis. An international contractor, also known as a global contractor, resides in a different country from the client to whom they provide their services.
Is it possible to pay a contractor in another country?
Yes. However, other countries have different payroll and contractor regulations. Contractor classification, tax requirements, and payment systems vary from country to country, and complications can arise quickly if these guidelines are not followed.
Knowing the proper steps ensures timely and compliant payment to your international contractors.
5 Things to do before paying international contractors
1. Establish a contractor agreement
First, the company and international contractor need to outline and agree to the terms of the arrangement in a contractor agreement. A contractor agreement includes a description of the services provided, the terms and length of the project, payment details, confidentiality, non-solicitation, and dispute resolution clauses.
2. Define the payment terms
There are various methods for paying an international contractor:
- pay upfront
- when the project is completed
- pay by the hour
- make a down payment and pay the rest upon project completion
An organization should determine which payment option is preferable and define those payment terms in the contractor agreement.
3. Determine the payment schedule
Establish a payment schedule, such as weekly, monthly, or per project, to ensure consistent and timely payments to contractors. The cadence of the payment schedule depends on whether the contractor will be engaged for one project or continuously.
4. Collect the required tax form
Collecting the correct paperwork is a crucial step when engaging international contractors. If the company is located in the U.S., it will issue a Form W-8BEN for the contractor to complete.
This tax form classifies their status as a foreign worker or non-U.S. citizen and confirms that all of the work will take place in their country of residence. It also determines proper tax reporting and withholdings. Employers are not required to submit Form W-8BEN to the U.S. Internal Revenue Service (IRS), but should keep it on file.
While a W-8BEN is issued to individuals, Form W-8BEN-E is issued to international contractors acting as an entity.
5. Ensure the contractor is correctly classified
Contractor classification is a set of regulations designed to protect the contractor’s interests. Note that there may be significant differences in contractor classification between countries.
A Form W-8BEN or W-8BEN-E not only documents the contractor’s status as a foreign worker or entity but also outlines the proper tax reporting and withholdings for the organization. Many companies also use an Employer of Record (EOR) to help navigate workforce classification across international borders, avoid improper tax reporting, and mitigate the risk of costly legal fines due to misclassification.
How to pay international contractors
How an employer pays an international contractor depends on factors ranging from timeliness and availability to local regulations in the international contractor’s country. Consider the following contractor payment methods:
International bank transfer (SWIFT)
An international bank transfer, also known as SWIFT, is one of the most common methods of paying international contractors. This is a wire payment that transfers funds from the organization’s bank to the contractor’s bank through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. A wire transfer is a secure and convenient way to ensure that payment is directly deposited into the contractor’s account in their country of residence.
However, international bank transfers are not the best option for making timely payments, as they can take up to five business days to complete. Employers may also incur substantial banking fees and exchange rates in the process.
International money order
International money orders are prepaid checks available at various locations, including the post office and grocery stores. They are purchased upfront and can be mailed and cashed anywhere in the world. The payer doesn’t need a bank to purchase the money order, and the recipient doesn’t need a bank to cash it.
While a money order is a convenient payment method, the contractor must have a local place to cash the order. Keep in mind that a money order is in the hands of the postal delivery system, which may cause a delay in the contractor’s payment. Money orders may also incur substantial fees on both sides of the transaction.
Online money transfers
Online money transfer providers, such as PayPal, Zelle, or Wise, are a convenient method for paying an international contractor. Once the sender and recipient have created their accounts, payments can be sent instantly via a mobile device or computer.
While payment apps are free, transactions may incur fees for business, bank transfers, and exchange rates. Additionally, many payment apps are not permitted in certain countries and do not protect against contractor compliance violations. Employers should confirm with their international contractor that online money transfers are a feasible option.
Contractor payment solutions
Typically, contractor payment solutions are automated platforms that allow for contractor payments across international markets. Standard contractor payment solutions in the market integrate all foreign exchange fees into the payment and seamlessly transfer funds to a contractor.
In some cases, contractor payment services may also offer additional features to help employers remain compliant by including a risk assessment of the contractor and contract templates.
Partnering with an EOR to pay international contractors
For some businesses, it makes the most sense to partner with an employer of record to pay international contractors. An EOR is a third-party provider that hires talent on behalf of a company. For contractors, this includes onboarding, contracts, compliance, payroll, and local tax regulations.
An EOR helps pay international contractors compliantly by:
- Ensuring worker classification aligns with local labor laws
- Handling payment in local currency with tax compliance built in
- Protecting a company from misclassification and audit risks
- Eliminating the need to establish a legal entity abroad
EORs like Velocity Global help businesses grow globally without the administrative burden of setting up infrastructure in every country. It’s a scalable way to access international talent compliantly and efficiently.
FAQs about paying international contractors
Do I need to issue a MISC-1099 form to international contractors?
No. Form 1099-NEC is for U.S.-based contractors. Use Form W-8BEN or W-8BEN-E to document foreign status.
Do I need to withhold taxes for international contractors?
Typically no, if the contractor is not a U.S. citizen, not residing in the U.S., and working from abroad. However, proper documentation is required.
Can I pay international contractors in USD?
Yes, but be sure to clarify the payment currency and any applicable conversion fees with the contractor in advance.
What happens if I misclassify a contractor as an employee?
You may face back taxes, penalties, legal action, and reputational damage. Classification should be carefully reviewed, especially across borders.
How do I know if an EOR is right for my business?
If you’re hiring contractors in multiple countries or plan to expand globally without setting up foreign entities, an EOR can simplify and de-risk your operations.
Compliantly engage and pay international contractors
Engaging and paying international contractors offers flexibility and scale for expanding businesses. Still, risks, like misclassification and noncompliance with country-specific onboarding, tax, and payroll regulations can undermine a business’s growth goals.
Concerned about misclassification? Velocity Global’s risk assessment checklist is a comprehensive way to determine if your contractors are classified correctly—and what to do if they are not.
Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional.
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