All You Need To Know About Banking As A Contractor
International contractors that are working abroad for the first time will face unique banking and finance issues. Many of the banking methods you take for granted may be a bit more complicated once you enter a foreign country.
These go beyond the simple steps taken by tourists and business travellers, such as using foreign ATMs or exchanging currency. You will be entering a foreign banking system, with its requirements for payments, bank accounts and paying taxes. Hence, you need to know all of these when it comes to banking as a contractor.
Contract Payment Options
Once you have secured a new client and set up the contract an initial decision is how and where you get paid. Your client may not have a preference as long as all the terms are spelt out in the contract, and you have your accounts organized.
Paid to your home bank
If you are maintaining ties to your home country, you may want to have payments made to your home bank. This can be simplest as long as your account is already set up and can receive wire transfers. If this is the option you choose, it is best to set your contract rates in your home currency.
Keep in mind that receiving client payments to your home country does not affect your tax residency or payment obligations in the foreign country. That will be governed by your physical presence in the country and the fact that your earnings are locally sourced.
Paid to a local bank
Contractors planning to work long-term in a foreign country may find it beneficial to set up a local bank account. This is something you should know about banking as a contractor. In general, clients may feel more comfortable paying to a local account, and can easily issue a monthly check or electronic payment.
Each country has its requirements for expats who want to set up a domestic bank account. But if you have a work permit, local address and valid passport, that should be sufficient in most cases.
Note: If you are a US citizen the foreign bank will be required to report the account to US tax authorities under FATCA, which has led some banks to deny new US customers.
Paid through an umbrella company
A final option is to use an umbrella company as a third party to facilitate client payments. In this scenario, your client would remit regular payments to the umbrella company following invoicing. The umbrella company in turn would issue net earnings to you. This has advantages for both you and your client, as you have an experienced intermediary who is adept at making either international or domestic transfers.
The umbrella company can also estimate and withhold local taxes and resolve any disagreements or issues that arise. There is a fee for the service, which could be shared equally with your client due to the mutual benefits.
Do you need a local bank account?
The question might arise if you need a local bank account, especially if your contract is short term. Having a local account and ATM card can be convenient, and you can avoid the often high foreign ATM fees. It’s also helpful for online banking services such as bill pay, digital payment apps and tax payments.
Even if you get paid into your home account, there are international transfer services such as Wise that give you a competitive exchange rate and low fees. This allows you to transfer funds that you need for paying expenses to a local bank. Many expats enjoy having bank accounts in multiple countries for flexibility, and there is no reason to close the account if you leave.
Currency exchange issues
Depending on where you choose to get paid, the currency exchange rate can have an impact on retained, actual earnings. If you get paid locally in Euros for example, then you will be paying expenses in the same currency so there is no issue. But if you have to convert Euros to another currency to pay expenses at home that can affect the final amount received.
It is a good practice to build a currency exchange clause into your contract that limits the percentage of rate variance allowed. If the percentage is exceeded, the contract rate is increased or reduced accordingly.
Not every country has state of the art banking security. So, it’s a good idea to look into the destination (and bank) ahead of time for any red flags. These can include card cloning at ATMs, insecure banking apps and lack of identity verification steps.
One way to overcome these problems is to use a well-known international bank with established security protocols. This does minimize some ‘institutional risk’, especially if deposit insurance limits are low in the country and you plan on carrying a large balance. An umbrella company can also help advise reputable local banks.
Depending on your length of stay you may find that you become a tax resident in your new location, but even if not, you will still pay taxes on local earnings. Many countries use an online tax filing and payment system, and may even require your client to withhold monthly. If you don’t feel confident navigating the online system, it may be worthwhile to hire a local accountant for assistance.
Investment and savings
If you want to invest your excess earnings, you may find it more difficult as an expat. Local brokerage firms may not be open to new foreign clients unless you are high net worth. In addition, your home country broker may have limitations on investment type if you disclose a foreign physical address. All of this will depend on your home country and host country inclinations, requiring research ahead of time. Savings accounts are easily set up as long as you don’t expect a very high-interest rate.
How does Contractor Taxation help international contractors?
We have a global network of umbrella companies that can assist you with client payments, banking requirements and tax payments. If you are contracting in a foreign country for the first time, the umbrella company becomes an invaluable partner to help you with local banking and transactions. This takes the guesswork out of the most important part of your contracting journey: receiving accurate and timely client payments into the account of your choice.
Other benefits of umbrella companies include:
- Manages all client payments, tax withholding and any social contributions
- Issues you a payslip each month, to a local or foreign account
- Sponsors work permits
- Helps set up the contract with the client
- Moderates any disputes with your client
- Advises on access to totalization and double taxation treaties
If you have questions about how an umbrella company can help you as an international contractor, please contact us at Contractor Taxation.