Umbrella Companies: What They Are and Why You Need Them
An umbrella company acts as the legal intermediary between a client and an independent contractor, to facilitate the contractual relationship.
Contractors select umbrella companies when working internationally if they are unfamiliar with local regulations and wish to remain in compliance.
The umbrella company stands in the middle of the client-contractor relationship so that both parties are satisfied with performance and payment. We have a network of umbrella companies all across the globe if you need one for your international client contracts.
Companies hiring workers remotely or internationally have a few choices to make about worker status, management, and payment.
Hiring as an employee brings a lot more complexity and cost for your company. That is why hiring a contractor may look like a better option.
However, hiring a contractor directly (or transitioning an employee) has some risks for your company, and one solution is to use an umbrella company.
In this article, we cover:
- What is an Umbrella Company?
- How do they work?
- When and why might you use an Umbrella Company?
- What is covered by Umbrella Company services?
- What happens when you engage with an Umbrella Company as a contractor?
- How to choose an Umbrella Company
- An Umbrella Company won’t always be the right fit
- If you want us to help you choose an umbrella company (it’s FREE!)
- Here are some commonly asked questions
What is an Umbrella Company?
An umbrella company is a third-party entity in the working relationship. They are responsible for handling payment, tax withholding, and social contributions for the worker so that your company does not have to worry about administering the relationship. If the contractor came from a recruitment agency, they are also involved in some stages of managing payment and performance.
How do they work?
If you want to use an umbrella company to hire your contractor, here is how it works:
- You let your worker know how you want to set up the relationship
- If they agree, either you or the contractor can contact a reputable umbrella company
- The umbrella company then contracts with the contractor/agency for the project or position, facilitating terms and payment periods
- Upon completion of the project or payment period, the contractor will submit their timesheet to the umbrella company
- Your company is then invoiced by the umbrella company for the agreed payment
- The payment is transferred to the contractor after taxes and contributions are withheld
The umbrella company acts as an intermediary and removes uncertainty about project terms, payment and compliance with tax regulations. This is especially helpful if you are hiring a new contractor, or if they are in a foreign country where you are unfamiliar with local laws.
When and why might you use an Umbrella Company?
Here are a few situations that might lead you to consider using an umbrella company:
You’re a company that wants to transition an employee to work as a contractor or self-employed. But the person doesn’t want to handle their payment, taxes and contributions.
- For example, if you have an employee at your home base in the UK, and they want to move to Japan and work abroad remotely as a contractor, then hiring them is easier if you use an umbrella company. This still gives them the administrative convenience of being an employee, with the autonomy they want of being self-employed.
You’re a company that doesn’t want to engage a contractor directly and would like a degree of separation.
- Some companies don’t want the risk of directly engaging a new contractor, especially if they are international. If you have a US tech startup that needs to hire a remote IT worker in India, using an umbrella company will remove the uncertainty around payments and contract terms. You will know that you will get the work that you pay for, and the contractor will have assurances as well.
Your company is worried about compliance when hiring a contractor abroad.
- Every country has different rules when it comes to worker classification and qualifying as self-employed. For example, if you are using a contractor for sales in your own country, and now you want to send them to Germany, then they might not meet the self-employed criteria there, which are very strict. The umbrella company, in that case, might end up being their German ‘employer’, and take care of all tax and worker compliance.
What is covered by Umbrella Company services?
The scope of services by umbrella companies will vary, but the best umbrella companies will provide a full suite of services for international contractors. When you are looking for an umbrella company in a foreign country to be your contracting partner, they should offer all of the following services:
- Manages all client payments, tax withholding and any social contributions
- Invoices the client on your behalf
- 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 choose to use a DIY approach when contracting, you will be performing all of these tasks on your own, which underscores the value of an umbrella company.
We have a short video explanation of what an umbrella company is and how an umbrella company works
What happens when you engage with an Umbrella Company as a contractor?
The umbrella company provides the contractor with several benefits once you have your contract in place:
- They will typically process client payments quickly (within 24 hours of receipt) ensuring good cash flow.
- They make full use of all legal advantages and self-employment benefits to which the contractor is entitled.
- They can provide benefits in terms of group purchasing, using their large number of “employees” to negotiate advantageous rates on services that contractors commonly use like car leases, mortgages, mobile phone contracts, computers, professional subscriptions, insurance, and gym membership.
- A good umbrella company will use a high level of automation in their process administration for the contractor. You just have to fill in your timesheets, wait for client payment and deposit to your bank account, and then receive your payslips and tax reports electronically.
- Umbrella companies can also provide work permits and business visas for foreign nationals who need immigration assistance to perform their contract. We specialize in dealing with these umbrella companies – if you need help with sponsorship or a work visa for your next contract please contact us.
- Additionally, they give the recruitment agency and end client the reassurance they need that the contractor is being paid legally and reliably.
How to choose an Umbrella Company
In developed markets where umbrella companies are well established their services are fairly similar. But services can vary among countries which is where Contractor Taxation can really help you. We only work with quality umbrella companies that offer a full range of services for contractors. Here are some of the criteria that we use to select umbrella companies to be a part of our global network:
- The company is reliable with an established track record serving expat contractors
- They fully licensed and insured in their country of business
- They use a fair and verifiable fee structure
- Their payment process for contractors is well tested without any issues with delays
- The company is willing to handle pension or superannuation contributions for contractors
- They work with contractors who are on short contracts
- The umbrella company uses staff with legal and accounting expertise
- They experienced with work permit sponsorship and immigration rules
An Umbrella Company won’t always be the right fit
In some instances, an umbrella company might not be the best for your company or the contractor.
You’re a company that wants to pay contractors directly through services like Wise, Paypal or Payoneer.
- If you have a good history with the contractor and they are happy to handle their self-employment tasks, then you do have the option of just paying them directly on a third-party payment platform under agreed contract terms.
You’re hiring workers that have their own company or are already self-employed
- Experienced contractors may have their own limited company or operate as self-employed. They may be able to do their own invoicing, contracting and taxes on their own. In that case, the umbrella company may not seem necessary, but you still need to find ways for verifying project parameters and payment.
If you want us to help you choose an umbrella company (it’s FREE!)
- Fill in our form. It takes 30 seconds to give your basic details.
- We will respond by email giving you advice straight away and possibly asking further questions to make sure it’s a good match.
- You can ask us any questions you like (still FREE!) and we’ll talk through your options with you.
- If you like any of the options we suggest, we can introduce you to the providers.
We don’t charge you anything for our services.
Here are some commonly asked questions
What are umbrella companies?
The umbrella company is a legal entity registered in a country that acts as an intermediary between contractors and their clients. They facilitate client payments, withhold taxes and contributions, and can also sponsor work permits. The ‘umbrella company’ meaning comes from the idea that they are in a position to cover the entire client-contractor relationship, ensuring a smooth experience for each party.
There are several reasons to use an umbrella company, but the best umbrella company will commit to be an essential ally for a contractor working in a foreign country. They will handle all the administrative tasks associated with client payment and government compliance on your behalf. Otherwise, you will be forced to learn and comply with all host country regulations on your own, or hire local attorneys and accountants.
An international contractor will want to use an umbrella company when they are new to a country and unfamiliar with immigration, tax and self-employment regulations. An umbrella company is also useful if a contractor is in a new client relationship, and concerned about payment and potential misunderstandings with the client as a foreign worker.
Working in a foreign country carries a certain amount of stress and uncertainty, and using an umbrella company can ease the burden. The umbrella company handles all the details of administering your work life, while you can focus on your duties and position with your client. You also don’t have to worry about non-compliance as the umbrella company is staffed with local experts.
Best umbrella company for international contractors
The umbrella company that you choose should have a long history in the host country and a solid reputation in the industry. They will be able to demonstrate that they have an established system for assisting contractors, and an experienced staff familiar with all regulations.
You should choose the best umbrella company that can fully meet your needs as a contractor in a foreign country. They will be registered in the host country, have excellent customer service, available references and a single point of contact. You should avoid umbrella companies that only offer an online platform, are new to the industry or have a limited scope of services (such as ‘payment only’).
An umbrella company will charge the contractor a monthly fee, either based on a percentage of the contract rate or a fixed fee. If you intend to use an umbrella company, it is possible to have your client share the fee as there is benefit to you both. This can be a point of negotiation for your client contract.
Both your client and recruitment agency will be familiar with umbrella companies in the respective country and might refer you. Or to avoid any potential conflict of interest, you can contact Contractor Taxation for access to our fully vetted network of umbrella companies.
What are the specific roles filled by the best umbrella company?
Umbrella companies will calculate and withhold your taxes monthly, just as with the PAYE system. This way you will know your taxes are accurate and in compliance, although you will still be responsible for filing your annual tax return.
Umbrella companies also pay your regular social contributions, depending on whether they are required for self-employed expats in the host country. Most countries will deduct these contributions before calculating tax, so its most efficient to have the umbrella company do it for you.
As a self-employed contractor you are not entitled to holiday pay, but if you choose to be an employee of your client those amounts would be accounted for in payroll.
Your client will send your payment directly to the umbrella company, who will then issue you a final amount after all deductions. If there is an issue with payment, the umbrella company will facilitate with the client for resolution. This allows you to avoid any internal conflict with your client that could affect your position.
In most countries, an umbrella company is a legal corporate entity that can sponsor your work permit. One advantage is that because the work permit is with the umbrella company, you can usually change clients easily and without a new permit application.