Engaging with contractors has many benefits: it allows companies to target talent with specialized skills, efficiently delegate projects without hiring or training additional employees, or even expand into new international markets.
Great talent can be located anywhere, and the contractor that fits the business’s needs might be in a different country than the company HQ. That’s where international contractors come in.
Knowing how to pay international contractors is a crucial piece to establishing and maintaining your global workforce.
What is an independent contractor?
A contractor, also known as a consultant or freelancer, provides their services or products as a self-employed individual. An international contractor resides in a different country than the company or customer to which they are providing their services.
Read also: Should You Hire a Contractor or Employee?
Can you pay a contractor in another country?
Yes. However, other countries have different payroll and contractor regulations. Contractor classification, tax requirements, and payment systems are factors that vary from country to country, and complications may quickly arise if they aren’t followed.
Knowing the proper steps ensures payment to your international contractors in a timely and compliant manner.
5 things to do before paying international contractors
1. Establish an independent contractor agreement
First and foremost, 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 contractor payment terms
There are a variety of methods to pay an international contractor: pay the contractor upfront, by the hour, when the project is completed, or start with a downpayment and pay the remainder when the project is complete. Determine what option fits the best and define those payment terms in the contractor agreement.
3. Determine the contractor payment schedule
Do you plan to engage with a contractor for just one project or continuous service for your company? Establish a payment schedule, such as weekly, monthly, or per project, to ensure consistent and timely contractor payments.
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 United States, you will issue a Form W-8BEN for the contractor to complete.
This tax form classifies their status as a foreign worker, a non-U.S. citizen, and confirms that all of the work will take place in their country of residence. It will also determine proper tax reporting and withholdings. The Form W-8BEN is not required to be sent to the IRS, but you should keep it on file for company records.
A W-8BEN is used for individuals, so if your international contractor acts as an entity, you will issue a Form W-8BEN-E instead.
5. Ensure the contractor is correctly classified
Contractor classification is a set of regulations designed to protect the contractor’s interests, and each country operates differently when determining contractor classification.
A Form 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 you. Many companies also use contractor classification solutions 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
There are several approaches to paying an overseas contractor. The ideal fit for your situation depends on many factors, from timeliness and availability to local regulations in the international contractor’s country.
International bank transfer (SWIFT)
An international bank transfer, also known as SWIFT, is one of the most common methods to pay international contractors. This is a wire payment that goes from your bank to the contractor’s bank through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. A wire transfer is an easy and secure method to ensure your payment goes directly into the contractor’s account in their country.
However, international bank transfers are not the best option if you need to pay the contractor in a timely fashion, as it can take up to five business days to receive the transfer. You may also face substantial banking fees and exchange rates in the process.
International money order
International money orders are pre-paid checks available at various locations, including the post office and grocery stores. They are paid for upfront and can be mailed and cashed anywhere in the world. You don’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 an accessible and straightforward payment method, ensure that the contractor has a local place to cash the order. It is important to note that a money order is in the hands of the postal delivery system, which can delay the contractor’s payment. Money orders may also come with hefty fees on both sides of the exchange.
Online money transfer providers
Online money transfer providers, such as Paypal, Xoom, or Wise, are a convenient method to pay your international contractor. These payment apps require the sender and recipient to create an account, which allows for instant payments through the phone or computer.
While payment apps are free to create an account, they do come with business fees, bank transfer fees, and exchange rate fees. Additionally, many payment apps are not allowed in some countries and do not protect your business from contractor compliance violations in foreign countries. Double-check with your international contractor that an online money transfer is a feasible option for them.
Contractor payment solutions
Typically, contractor payment solutions are automated payment platforms that allow you to pay contractors across international markets. Standard contractor payment solutions in the market integrate all foreign exchange fees into your payment and seamlessly transfer funds to a contractor.
In some cases, contractor payments services may also offer additional features to stay on top of compliance by providing an assessment of your international contractor risk and offering contract templates, etc.
FAQs about paying international contractors
Do you issue a 1099 form to international contractors?
You do not need to issue or collect Form 1099-NEC from your international contractor. Form 1099 is only used if the company and contractor are based in the U.S. The Form W-8BEN declares the contractor’s foreign status and will suffice.
Read also: Form 1099-NEC vs. Form 1099-MISC
Do you need to withhold taxes for international contractors?
If the international contractor is not a U.S. citizen, does not reside in the U.S., and performs their services outside of the U.S., then you do not need to withhold taxes. Make sure to collect a completed and signed Form W-8BEN from the contractor before sending them any payment.
Pay international contractors compliantly with Velocity Global
Engaging with international contractors opens up a world of possibilities, but navigating various country-specific regulations is a time-consuming and complicated process.
Many companies opt to partner with a global employment solutions provider that's well-versed with local employment laws to help classify and compliantly pay international talent.
Velocity Global and our global partner network simplify the employer and talent experience with employment solutions that allow you to engage, manage, and pay your flexible workforce within one easy-to-use platform.
Connect with Velocity Global today and learn how our solutions support and streamline your global employment needs.