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.
Paying international contractors accurately and compliantly is crucial to establishing and maintaining your global workforce.
What is an independent contractor?
A contractor, also known as a consultant or freelancer, is a self-employed individual who provides services or products. An international contractor resides in a different country than the company or customer to which they provide their services.
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, 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 various methods of paying 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 best suits you 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 U.S., you will issue a Form W-8BEN for the contractor to complete.
This tax form classifies their status as a foreign worker or a 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. 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 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 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 international contractors. The ideal fit for your situation depends on many factors, 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 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 payment 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
Review answers to common questions 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. 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.
Compliantly engage and pay international contractors
Engaging and paying international contractors offers flexibility and scale for expanding businesses, but risks like misclassification and noncompliance with country-specific onboarding, tax, and payroll regulations can undermine your business' growth goals.
Is your workforce compliantly classified? Use our risk assessment checklist as a comprehensive guide to determine if you are compliant—and what to do if you 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. © 2024 Velocity Global, LLC. All rights reserved.
Topic:
Contractors
