Paying independent contractors: Mauve’s guide to compliancy and best practice

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.

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.

Who are independent contractors in and international business perspective?

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 in the US, subcontractors, and/or 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.

For businesses and entrepreneurs seeking to expand their reach internationally, independent contractors can offer an advantageous stepping stone toward profitable local presence in a new region. Typically able to work from anywhere, freelancers can be located - and relocate to - almost anywhere in the world, opening the door to new markets and emerging industries.

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 can include:

• Access to a wider, higher quality talent pool. For example, 73% of independent contractors reported having a higher education degree or qualification compared to employed staff, according to one LinkedIn survey, demonstrating the quality of the international contractor talent pool.
• Asynchronous work: Meaning  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, therefore, 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. After all, content employees and contractors are likely to be more productive and more loyal to your company.

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.

In the UK, for example, metrics such as degree of control and dependency between contractor and company would be used to determine whether a freelancer you’ve hired falls inside or outside IR35 – the legislation determining the employment status of individuals.

Tax and legal obligations

Unlike with your employees, you are not usually obligated to withhold taxes (or make any other 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, 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 and you likely wish to retain their expertise for as long as you need it.

Proper paperwork

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.

Benchmarking pay for international contractors

Most freelancers rendering quality services will set their own rates according to the going rate of those services in their home country. Negotiating these rates with freelancers is always an option, but should be approached from a place of understanding with regards to the cost of living each contractor faces, and the minimum wage rates and culture in their country.

For example, some countries mandate that all employees receive a 13^th month salary. Whilst you would not be obligated to pay your contractors a similar bonus, it might still be worth considering in order to cement a solid brand reputation in the minds of other contractors operating in the same area, thus potentially attracting more talent to your company in future.

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, though will still hit you with processing fees. 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.

Pros:

• Secure method of payment.
• Relatively hassle free.

Cons:

• 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.

Pros:

• Very few – this is the least favoured payment method among the international freelance community.

Cons:

• 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.

Pros:

• Payment is very fast; near instant.
• Digital payment platforms have friendly UIs which make paying contractors easy.
• These platforms handle currency conversion for you.

Cons:

• 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 – as well as handling payroll for international employees – no matter the country in which they’re based. Mauve in particular is capable of providing this service through a diverse network of wholly-owned entities permanently established in over 70 countries worldwide (with trusted partners based in 150+ countries  ).

Pros:

• 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.

Cons:

• 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.

Paying independent contractors efficiently, compliantly, and cost-effectively with Mauve

Mauve Group has over 28 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. Alternatively, you can explore the Mauve blog in greater depth, to continue your journey toward international business success.