International contractors supplement your domestic workforce, adding quality workers to help you achieve your company goals. Foreign independent contractors aren’t paid the same way as domestic, US-based employees—options include paying through international bank transfers, digital wallets, and cryptocurrency, as well as payroll software. Foreign workers also handle their own payroll taxes. You must consider what currency you’re paying foreign independent contractors with and budget for the cost of each payment.
In the US, an independent contractor is an individual your company hires to help with certain projects outside the general purpose of your business. You don’t set your contractors’ work hours or control how they perform their work.
Classifying an international independent contractor is dependent on the country, although there are some similarities with how the US does it. We’ll discuss classification further below, but the point to take away here is that each country sets its own standards, such as mandatory benefits, which is uncommon in the US. Make sure that you’re following the standards set forth in the country where your international independent contractor lives.
We highly recommend that a written international independent contractor arrangement be solidified between your company and the contractor. It will explicitly state the relationship between the parties and how that relationship works in practice through the Statement of Work (SOW). In some countries, this document is a requirement, while in others, it’s just strongly encouraged. For more information, check out our in-depth guide to hiring international independent contractors.
Ways to Make International Payments
Paying a foreign contractor isn’t as simple as paying domestic workers. There are currency conversions involved, and all countries don’t have the same banking protections as the US and EU. Some countries also require you to have a domestic bank account to make payments to people and companies within the country.
If the country you’re paying an employee in doesn’t require you to have a local bank account, then consider opening one at one of our top recommended banks for small businesses and check out their international wire fees.
How Much to Pay an International Contractor
Determining a fair compensation structure for all of your workers is key to attracting and retaining top talent. International contractors are no different, but there’s more to consider:
- Local pay expectations
- Currency exchange rates
- Local cost of living
- US and foreign taxes
- Whether the foreign contractor will physically work in the US at any point
The exact amount you’ll pay an international contractor will also vary depending on the work they’re doing and the equipment needed to do the work. International independent contractors frequently provide their own equipment to do the work you need, making this a consideration for their requested pay. More specialized skills may require a higher pay rate.
If you have only one international contractor, you may choose to pay them in their local currency or in US dollars. The more foreign contractors you have, however, the better it is to standardize your payments.
If you pay in US dollars, you can better budget and set standard rates for different types of work. While this may not be an attractive option to international contractors in places with a higher cost of living, it will keep your foreign contractor pay rates fair and make the administration easier on your internal team.
Paying contractors in their local currency allows you to offer competitive rates without overpaying. It also gives your international contractors fair pay in their local currency. But it could mean that there are more discrepancies between foreign contractors in different countries.
If your international independent contractor ever comes to your US office location—or comes to the US and does any work for your company—not only might they need to get a visa, but they may also be subject to taxes for the amount of money they make while physically in the US. This is an important consideration if you ever think your international independent contractor will need to do work while physically in the US.
Ultimately, what you pay a foreign contractor depends on many factors. Make sure you consider each factor and how it impacts your business, budget, and ability to scale your global workforce.
Thinking about hiring a global employee? Check out our guide to hiring international employees.
International Contractor Payment Terms
How you pay your international workers may be limited by local laws. Some countries require payment at least twice per month, even for independent contractors.
If there is no law requiring you to pay on a certain timeline, you are free to pay as you wish. We do recommend that you include payment terms in the independent contractor agreement, so there is no question about how the worker will get paid. If you’re partnering with multiple international independent contractors, we also recommend aligning your payment terms as much as possible to make it easier on your internal team.
These are the most common payment terms for a foreign independent contractor:
- Upfront: Whether full or partial payment, many independent contractors prefer at least some payment upfront. While this ensures the independent contractor gets paid for their time, it can put your company at risk if the work is never done, incomplete, or unsatisfactory. This type of payment is usually only done with small and quick projects.
- Upon project completion: This payment term is the best for your company as it ensures you’re pleased with the end result before you make payment. But many independent contractors will not agree to full payment at the end because their risk is too great. If this is the payment plan you prefer, you can offer a small upfront payment—say, 10% of the full contract amount—to alleviate the contractor’s concerns.
- By milestone: A good compromise is to pay by milestone throughout the project. You can make a small upfront payment and then make small payments as the foreign worker completes more of the project.
- Monthly: This is the simplest way to pay the foreign independent contractor, especially for longer projects, and can be the most beneficial for both the contractor and your company. You also get the benefit of knowing that regular payments are going to be made so you can better budget.
Pro Tip: We don’t recommend paying by the hour if you can avoid it. While you can have the independent contractor track their time, paying by the hour gets you one step closer to misclassification, which we discuss in more detail later. Paying by the hour alone won’t make an independent contractor an employee, but it does put your company at greater risk when combined with other factors. Sometimes paying by the hour is unavoidable, but make sure you’re taking proactive steps to avoid crossing any misclassification lines.
Accurately paying your foreign independent contractors requires intimate knowledge of tax and employment laws in the US and the foreign country where your independent contractor resides. In some cases, you’ll need to pay and report taxes to the IRS (or the tax agency for the contractor’s home country), collect forms, and ensure the international contractor is paying their local tax obligations.
For IRS tax reporting purposes, you’ll need to determine whether the income paid to the international contractor is US-sourced. The ultimate question in making this determination is: Where does the international contractor perform services for your company?
Consider these three scenarios:
Most countries will not require your company to pay local tax unless you set up a legal entity, although the independent contractor may still be required to pay tax, and your company may be required to pay taxes or benefits, depending on the country. Establishing a presence in another country could trigger tax liability. Sometimes referred to as permanent establishment, a foreign country will levy taxes on your business if that country determines you are operating within its borders.
While every country has different enforcement mechanisms, the following scenarios may trigger foreign tax liability for your company:
- Employing workers or independent contractors who provide services to your company that directly contribute to company revenue
- Entering into long-term contracts with independent contractors in the foreign country
- Receiving payments from clients in the foreign country
- Entering into contracts with any business in the foreign country and generating income from those contracts
Your company could establish a presence in another country simply by contracting with an independent contractor who lives in that country—though, in most cases, that may not be enough. Otherwise, most of the international tax burden will fall on the foreign independent contractor.
Be aware that some countries have enacted protections for independent contractors in response to the rise of gig work, requiring companies to provide benefits.
France, for example, requires companies in certain situations to withhold payroll taxes and provide benefits as though the independent contractor were an employee of the company. Many other countries have passed similar laws. To ensure your company is compliant, it’s best to speak with an international employment lawyer.
Hiring domestic independent contractors comes with the perils of misclassification. The same is true of international contractors.
You can classify your individual workers as either employees or independent contractors. You cannot, however, classify employees as independent contractors to avoid paying taxes, benefits, and other overhead costs. That is misclassification and could get you into trouble with government agencies, leading to costly fines and penalties, such as:
- Back taxes on withholdings for both your company and the misclassified employee
- Back overtime pay
- Employee lawsuits
That’s just what you might face in the US. Most countries have stricter employment laws, and depending on where your foreign worker lives, you could face even harsher penalties:
- The European Union (EU) will require your company to pay the misclassified employee four weeks of vacation time plus all unpaid wages, overtime, and taxes.
- Argentina levies fines and may even hold people personally liable, sentencing them to time in prison.
How do you know if your international contractor is really an employee? Consider these general questions:
- Do you tell the worker when to work?
- Do you tell the worker what to do each day?
- Do you tell the worker how to do their job?
- Do you give the worker regular performance reviews?
- Do you give the worker time off and other benefits?
If you answered yes to any of these questions, your international worker may actually be an employee of your company. It’s wise to seek legal advice from an employment attorney specializing in international employment law, since the laws in each country vary.
Need to pay a global employee instead of a contractor? Check out our guide on how to pay an international employee.
Depending on what country your international contractor lives in, you may need to complete tax and employment forms for that country to pay them. You should also ensure that your international worker is properly reporting their income to local authorities in their home country, as best you can.
For US taxes, you’ll need to have your international contractor complete one of two forms: W-8BEN or W-8BEN-E. Both forms come from the Internal Revenue Service (IRS) and are completed by the international worker. Form W-8BEN is for individual international workers, and Form W-8BEN-E is for international workers who have formed their own company. Both forms are similar to Form W-9 used to record payments to domestic independent contractors, but are much longer and require extensive information.
When the foreign independent contractor completes the form, you do not need to send it to the IRS. Instead, you use it to ensure you’re withholding domestic taxes at the appropriate rate before paying your international worker.
Having an independent contractor agreement in place is not required, but highly encouraged. This document clearly defines the roles and responsibilities of each party, discusses the relationship as company and independent contractor, and provides a scope of work for the international worker. It will also clarify the terms and conditions of your arrangement and ensure there’s no confusion about who’s paying taxes and what benefits the contractor may be eligible to receive. This will also clarify payment terms and what deliverables or milestones need to be done—thus helping show the nature of the worker’s independent contractor status. This can serve to limit your company’s risk of misclassification, though you still need to ensure that you’re not acting as the worker’s employer in practice.
Working with foreign independent contractors gives your company many advantages, but it doesn’t come without challenges and hurdles. Navigating this relationship can seem daunting; however, with the right tools and guidance, you can expand your workforce to include international independent contractors and continue on your path of growth and success.