Paying International Contractors: Mauve Guide to Compliancy and Best Practice
Who are independent contractors?
In the rapidly evolving world of global business, hiring the unique expertise of independent contractors can be advantageous to the company or executive looking to expand operations abroad, or streamline them at home. An integral part of that process, however, is learning how to pay an independent contractor living internationally.
The term ‘independent contractors’ refers to individuals who are responsible for their own place, method, and time of work, work for multiple different clients at once, and are responsible for paying their own taxes. You may have heard them referred to by other names before, such as: freelancers, 1099-employees, subcontractors, and nonemployees.
Crucially, there is a very important distinction to be made between independent contractors and employees. Failing to correctly assess the status of a contractor, or blurring the lines of your relationship with one, can result in hefty fines and penalties.
In this article, we’ll explore all of the considerations you should make before hiring a freelancer abroad, as well as the various methods you can use for paying international contractors once you have.
Why hire international independent contractors?
When looking to expand your business globally, you may well seek to establish a permanent presence (via a subsidiary, for example) in a foreign country. Doing so gives you access to a new market, a new culture, and a new language base.
However, you don’t have to be a multinational entity for there to be good reason to look for talent elsewhere. There are a number of key benefits to temporarily employing the services of a foreign independent contractor. These include:
- Access to a wider, and thus higher-average-quality talent pool
- Asynchronous work: in which your company’s work is being completed around the clock by independent contractors in other time zones
- International contractors can typically be sourced, hired, and put to work faster and more flexibly than employees
- Freelancers tend to offer highly-skilled, specialised work, and naturally charge considerably higher rates than in-house employees. Hiring a foreign independent contractor gives you access to this expertise on a short-term (and thus more affordable) basis
Enjoying the many benefits of hiring independent contractors abroad is one thing, but a crucial part of that is learning best practices for paying international contractors, so that you can keep them happy and hard-working, and maintain your company’s reputation.
Considerations to make before paying foreign independent contractors
Because you’ll be dealing with contractors living and working in a range of different countries, there are a range of different labour, employment and tax laws you have to be aware of. Suffice to say, compliantly hiring and paying foreign freelancers is not always easy, and seeking the assistance of a third-party independent contractor solutions provider is often a smart idea.
Risks of permanent establishment
Wherever you’re doing business in the world, local tax authorities are watching you to make sure you’re not trying to avoid paying them money they’re due. If a local tax body, like the UK’s HMRC or the USA’s IRS, decides you have established a permanent presence in their country, then they will demand you back-pay local taxes, and may slap you with a fine. You may even be held accountable in court.
Typically, hiring and paying international contractors is not grounds for a tax authority declaring ‘permanent establishment’ (PE), as you are only temporarily enlisting the services of that country’s citizens. Where you start to risk PE is when your relationship with an independent foreign contractor starts to become long term, or you offer them benefits, training, or a place of work.
Penalties for misclassification
Another consideration to make when looking to hire and pay contractors internationally is how to properly classify these workers. As an employer, it is your duty to correctly classify the employees on your payroll, as well as the international contractors you pay on a project-by-project basis. Failure to correctly classify workers – known as ‘misclassification’ – can, like PE, result in your company being ordered to pay back taxes, penalties, legal fees, and in some cases back-pay holiday and sick leave, as well as any other benefits your employees are afforded, which the employee in question was not paid whilst misclassified as a freelancer.
Tax and legal obligations
Unlike with your employees, you are not usually obligated to withhold taxes (or any other national contributions) for independent contractors you hire at home or abroad. Similarly, when paying foreign independent contractors, you need not always adhere to the employment and labour laws of their country (as these laws usually only apply to employees). Of course, however, it is good practice to treat international contractors as fairly as possible, in accordance with their country’s laws, given that they are providing you a quality service.
When hiring independent contractors in certain countries, it may be necessary to fill out paperwork proving to your local tax authority that the individual is indeed who and where you state they are. For example, when US companies hire contractors abroad, they must ask that the contractors fill out IRS Form W-8BEN, for them to file with the IRS.
Establishing a written contract for services rendered
It is always good practice to draft and have signed a written contract when hiring international independent contractors. These contracts should be proof-read by a lawyer versed in international employment law, and should cover all details of the work, including length of contract, services rendered, payment (and payment method), as well as correct classification of the contractor.
How to pay an independent contractor abroad: top tips and 4 different methods
Paying international contractors can be done in a few different ways, and there are various best practices to accompany each. Here, we at Mauve Group – experts in global business and independent contractor solutions – offer our professional insight.
The best currency to pay international contractors in
Your local currency
Paying foreign independent contractors in your local currency – be it yen, dollars, pounds or euro – saves you some hassle, but is only really beneficial to freelancers if they have a bank account in that currency. Otherwise, they’ll have to pay exchange fees.
Their local currency
Paying international contractors each in their own currency is good for the contractors, but will leave you picking up the fees, and may require you to open foreign bank accounts.
Use a digital payment platform or global business solutions firm
You can opt to pay independent contractors living abroad via a digital payment platform like PayPal, which handles the currency conversions for you. Alternatively, you can opt to employ the services of a trusted independent contractor solutions provider like Mauve Group, who handles payment of freelancers on your behalf, in addition to a host of other complimentary services.
The best methods for paying international independent contractors
International bank transfer
One of the most common ways to pay foreign independent contractors is to wire them the money via international bank transfer. Companies use their own local bank accounts to arrange payment through a global transfer network like SWIFT.
- Secure method of payment
- Relatively hassle free
- Incurs upfront fees
- Currency fluctuations will affect the amount of money paid on a time-sensitive and country-to-country basis
- Wire transfers take time, and are not the fastest way to ensure your contractors are paid
- You’ll need additional information from freelancers in order to pay them via international wire transfer, such as their BIC and IBAN numbers
Money order or cheque
A more traditional method of paying international contractors is to pay them via money order or paper cheque. For money orders, you generate one at a local post office, bank or money order outlet (like Western Union), and then send this to the freelancer, who has to physically deposit the payment in a similar fashion. For cheques, you write one and send it via international mail to the contractor, who then cashes it with their bank.
- Very few – this is the least favoured payment method among the international freelance community
- Very slow method of payment
- Risk of cheques being lost (or stolen) in the mail
- More resource-dependent than other methods, as it requires a member of your finance team to physically visit a bank, post office or money order outlet
- Money orders may come with high fees attached
- Exchange rates may affect your bottom line
- Risk of alienating and frustrating foreign independent contractors by using this payment method
Digital payment partner (e.g. PayPal)
One of the more popular options for paying international contractors in 2023 is to do so via a digital payment network like PayPal, Xoom, or Wise. Payment is made digitally to the platform, which then converts your local currency into the freelancer’s currency when they withdraw the money on their end.
- Payment is very fast; near instant
- Digital payment platforms have friendly UIs which make paying contractors easy
- These platforms handle currency conversion for you
- This is a less secure method of paying foreign independent contractors than via international bank transfer
- Some digital payment platforms, like PayPal, are restricted in certain countries, and so are not a ‘one size fits all’ global business solution
- Both parties (employer and contractor) must pay fees to use the platform
Independent contractor solutions
Perhaps the easiest and most assuredly compliant way to pay contractors anywhere in the world is to leave payment to the professionals. Independent contractor solutions providers like Mauve Group are experts in ensuring fair, fast and compliant payment to freelancers no matter the country in which they’re based.
- You don’t have to worry about tax or classification compliance, Mauve Group takes care of it for you
- Your freelancers are paid on time, in their local currency, every time; ensuring happy and loyal independent contractors
- Mauve Group also offers a number of other global business solutions, including Agent of Record evaluation, and international contractor verification and onboarding
- You are using an external provider for the employment and payroll process, and thus must pay for the service. However, with so many compliance risks (and associated financial penalties) involved in a DIY approach to international business, the fee soon pays for itself.
Mauve’s top 3 tips for fair and fast international contractor payment
Consider all payment partner options carefully
How you choose to pay an independent contractor working abroad will have lasting implications for your bottom line, the quality of your relationship with that contractor, and payment speeds and rates. Make the decision carefully, having assessed all the pros and cons associated with each of the four methods outlined above.
Keep an eye on exchange rates
Exchange rates fluctuate daily, and will impact the amount you pay in order to meet an international independent contractor’s hourly or daily rates. Keep an eye on them, and pay your contractors when the time is right (although always within the agreed timeframe) in order to maximise your savings.
Pay your independent international contractors fairly and in a timely fashion
Independent contractors play a vital role in the global development of your business – from the graphic designer in India overhauling your website, to the Scottish copywriter improving your Google rankings. Make sure to pay them fairly, promptly, and using a method which is beneficial to you both. When it comes to paying international contractors, speed, rates and compliance are key.
Mauve Group has over 25 years of professional experience in providing forward-thinking businesses the expert guidance they need to reach their full international potential. When it comes to paying foreign independent contractors, we can handle every single aspect of the process, ensuring 100% compliance and satisfaction on both ends. If you’d like to get in contact with us to discuss our independent contractor solutions, we’re here to talk.
The information provided has been checked for accuracy as of the date of publication, and is intended as a general guide and for information purposes. It is subject to unanticipated and unexpected changes and does not constitute legal advice.