How to Pay International Contractors: A Guide for International Employers
Once you have hired a contractor and reached an agreement on the project and rate, the next step is to find the best way to pay them. If they are in your own country, this is fairly simple, but it can be more complex to pay international contractors who work or reside in another country.
If you or the contractor prefers to use an umbrella company this can make it easier, since you just remit payment to the umbrella company and they will handle payment and withholding. But if you are paying your contractor directly, there are a few things to consider.
Payment Methods for Overseas Contractors
The first step is to decide what method of payment to use, and here are the primary choices;
Bank wire transfer
Wire transfers are practical when you have an existing relationship with a contractor, and are not concerned about project performance or delivery. It is fast and the fees are reasonable between most countries, but there may be transfer fees on both ends.
One downside could be currency exchange rates if you are sending one currency and it is being converted to a different local currency, so it is best to keep your contracts and payments in one stable currency such as euros or US dollars.
Third party payment platform (Paypal, Payoneer, etc.)
These platforms are popular for B2B payments and purchases, and both parties need to have an account. Transfers are almost instant, but as with bank wires there is no way to ensure contract completion or quality. One advantage is there may be invoicing features on the platform the contractor can use.
As mentioned, an umbrella company can be an intermediary between you and the contractor, for both payment and performance. There is a fee to use an umbrella company, but you may find the level of protection worth the cost.
Freelancer web platform (Upwork, PeoplePerHour, etc.)
If you hired your contractor on a freelance platform, you can also pay them there as well. This is a good option with new contractors, as the platform will have a means for verifying project completion before the contractor receives payment.
You can also bring an existing contractor on to the platform by having them set up an account. Fees can be as high as 20% of the project cost so that is one downside, because either you or the contractor will have to absorb the cost.
Tax and Withholding for Overseas Contractors
One of the benefits of using a contractor instead of an employee is you don’t have payroll and employment administration to worry about. The contractor takes care of their own tax and withholding in their country of residence. For companies in the UK and Australia, you only need to withhold taxes on payments for interest, dividends or royalties made to a contractor.
However, in France you may need to make withholdings for your contractor similar to an employee, and in Spain if the contractor devotes more than 75% of their time to you, they are entitled to paid time off and severance. These are unusual laws, but they highlight the importance of checking the local rules where your contractor is working.
You will want to confirm with the contractor that they are paying taxes as a self-employed, to prevent any appearance that they are your employee and not withholding correctly. For example, if your company is in the US it is good idea to have foreign contractors fill out form W-8BEN which confirms that they are not employees or citizens, and not subject to US taxation. This form can be retained in case of an audit or questions about the payments being made abroad.
Superannuation and Social Security for Contractors
As your contractor is self-employed, they are liable to make their own super or social security withholding. In the US, contractors actually have to pay both the employer and employee share as they’re self-employed. You will not typically need to contribute to social security in their country or make withholding on their behalf, but this is one area where an umbrella company can be helpful to ensure compliance.
The pitfall in both the tax and social security requirements, is if for some reason your contractor fails to meet the self-employed criteria and is then deemed to be your employee. For example, Germany has strict self-employed requirements, which a foreign contractor may not meet, and you might find yourself with a de facto employee.
Common Non-Compliance Risks when Paying International Contractors
The chief non-compliance risk when hiring contractors is misclassification, where they are seen to be your employee. This is more than a theoretical risk since governments are aware that companies hire contractors to avoid the employment relationship and benefits, which have a distinct cost over contractors.
Classification revolves around control of the worker, and how truly self-employed they appear. For example, if you pay them a fixed monthly amount, that looks a lot like salary, and if you require them to work certain hours that may be seen as control over an employee.
If your contractor is found to be an employee under local labor laws, you might be liable for penalties or unpaid benefits like the 4 weeks of paid vacation typical in the EU. In the US, penalties can reach up to 41.5% of the contractor’s wages going back three years. If it was intentional, the employer may face a fine as high as $500,000 and a year a jail.
Australia imposes a $33,000 fine per violation, and in France, it can mean closure of any local business as well as a fine of up to EUR225,000.
Failure to Make Contributions Where Required
In addition to misclassification fines, you could be facing other penalty payments for back social security, employer contributions and payroll tax.
Sometimes claims can be made by contractors wanting employee status after they begin to work for you, so it is best to hire international contractors that are well-established, with a history of work with many clients and who operate as true self-employed.