Is your company a start-up looking for top talent without increasing payroll costs? Or are you looking for cost-effective ways to staff your business during the global pandemic? If so, you may be considering using remote workers located abroad, either as employees or independent contractors.
With the use of remote workers increasing, companies have to evaluate the best way to pay their remote employees or contractors, often across international borders. The best choice will depend on the nature and duration of the position. It will also depend on ensuring both worker performance and ease of payment. The goal is to make contracting and payment both cost-efficient and easy for both parties. At the same time, it is important to meet your company’s need for skilled workers.
Independent Contractors vs. Other Employment Solutions
Your company may initially look at a formal employment relationship for a new hire. This is certainly possible even with foreign workers. While this option does secure a degree of commitment from the worker, hiring an employee abroad will mean
- Setting up your local entity or branch or
- Using a third-party employer of record to handle employment for you.
Any compliant employment option brings an extra expense for the company. Due to the cost and complexity of meeting foreign employment regulations, some companies will opt to hire a worker as an independent contractor, at least initially to see how the relationship works out. This is more of an arms-length arrangement when compared to hiring an employee, and there can be benefits to hiring contractors. Almost any type of company can use a contractor for certain work roles or projects. Also, many remote workers may prefer the flexibility and autonomy of contracting.
Benefits of Working with Independent Contractors
Reduced Costs
The first benefit is that it can be up to 40% less expensive than hiring an employee. This is because the company does not have to offer benefits or leave entitlements. They also do not make insurance payments and employer social contributions in most countries.
Fewer Employer Liabilities
In addition to the cost savings of hiring a contractor, the company will also have fewer liabilities. A contractor is self-employed and is solely liable for their tax withholding and payments. They are also responsible for their worker safety, insurance regulations, and the quality of their work product. There is no need for the company to register and comply with ‘employer-related social and tax obligations.
Less Commitment
Because the contractor operates as a business, the only commitments for a company are the terms of the contract and making timely payment. A contract may be time or project-based and once completed, no formal termination is required after the final payment. This is a distinct advantage compared to the typical 30-day notice with cause and severance for employee terminations, especially for companies forced to downsize during the global pandemic.
Temporary Solution
Hiring contractors is attractive for both temporary, and project-based engagements. It could also work as a short-term solution before the contractor commits an employee. The company can try out a worker for some time as a contractor and then make the change to an employee. Or, the contractor can be hired periodically over time as business needs warrant the use of their skills.
How to Pay an Independent Contractor Remotely
Once you have decided to hire a contractor, the next step is to structure the contract and payment methods. You will have a few options to consider:
Direct Contractor
The simplest approach is to contract with the worker directly and set up the rate, work parameters and payments within the contract itself. This method brings risk for both parties, especially if it is a new work relationship. This is because there is no way to guarantee performance or payment across borders.
Cost: If an arrangement can be made that suits both parties then this is the cheapest method, and the only additional costs above the agreed payment are remittance fees and possible currency fluctuation.
Payment and Invoice (P&I) Services
This payment method uses a third-party P&I service that will facilitate the processing of the contractor’s invoices and payments to ensure smooth transactions. They will even set up the contract, invoices, and agreed payment time frames and methods, using a money transfer platform or bank wire transfer.
The 3rd party will invoice the company each month based on the contractor’s timesheets, and after the receipt of funds, the P&I service will transfer the funds to the worker’s bank account of choice. However, they will not deduct tax or social security as this is entirely the worker’s responsibility.
Cost: If a company uses multiple contractors this can be a cost-effective method of alleviating risk and uncertainty in the contractor relationship, for a low fixed rate per contract.
Umbrella Company
A final third-party option is the use of an umbrella company, which takes the P&I service a step further, operating as an active intermediary between your company and the contractor. In some cases, an umbrella company may fill a role resembling a local employer in a foreign country. This gives a greater degree of assurance for meeting any legal obligations.
The umbrella company receives payment and withholds the contractor’s taxes and contributions. They also generate a ‘payslip’ for the contractor, along with payment. The key with an umbrella company is to select one that is familiar with the country in question. Here are some other important questions to ask your umbrella company
Cost: The umbrella company will charge a percentage of the monthly contract amount for its services, which will often be more than a simple P&I service, but much less than entering a formal employment scenario.
Remaining Compliant While Paying Independent Contractors
Hiring any type of worker abroad will mean remaining in compliance with local laws surrounding taxes, contributions, and contract enforcement. It is essential to partner with in-country resources who can guide your company in avoiding pitfalls such as misclassification of contractors, permanent establishment, and special requirements for paying contractors.
How Contractor Taxation Can Help with Paying and Hiring Contractors
Contractor Taxation is uniquely positioned to help your company with paying and hiring contractors. Our network of fully vetted umbrella companies is already set up and ready to engage new contractors in most countries. We have also partnered with a P&I service that can offer a range of invoicing, payment and tax services so that you do not have to administer any of those details.
If you want to eliminate the risk and uncertainty of hiring contractors, please contact Contractor Taxation for referrals and a full explanation of which hiring option may be right for your company.
