How we work has changed in recent years. Remote work is now a common practice in many industries. This has given companies access to a global talent pool and hire skilled professionals from almost anywhere in the world.

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This new flexibility has made it easier than ever to bring in international contractors with the right expertise. But with that convenience comes a new challenge; especially when handling payments and staying compliant with tax laws.

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From tackling different tax systems to dealing with currency conversions and legal requirements, managing international contractor payments can get complicated.

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In this guide, we’ll walk you through the best ways to pay international contractors while complying with tax laws.

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Who is an International Contractor?

An international contractor (also known as a global or foreign independent contractor) is a self-employed individual or business entity based in one country that provides services to a company located in another country.

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These professionals usually work remotely, are hired on a project or temporary basis, and manage their taxes and compliance with local labor laws.

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Independent Contractor vs. Employee

Businesses must understand the differences between an independent contractor and an employee to ensure legal compliance and avoid potential penalties. The main differences include the following:

• Independent contractors can determine how, when, and where they complete their work, whereas employees follow employer guidelines and schedules.
• Contractors handle their expenses, taxes, and benefits, while employers are responsible for withholding taxes and providing benefits for employees.
• Contractors often work with multiple clients and on short-term projects, whereas employees usually have long-term, exclusive relationships with their employers.

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Things to Consider When Paying Foreign Contractors

Consider the following factors when paying foreign contractors to ensure efficient, cost-effective, and compliant transactions.

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Currency Exchange and Conversion Fees

Currency fluctuations and conversion fees can impact the total cost of payments. Traditional bank transfers, especially those using the SWIFT network, often incur high transaction and exchange fees.

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To reduce these costs, use digital payment platforms like Wise or Payoneer, which offer competitive exchange rates and transparent fee structures.

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In addition, paying contractors in their local currency can help avoid double conversion fees and provide clarity on the amount received.

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Payment Frequency and Schedule

A clear payment schedule maintains trust and ensures smooth operations. Common payment intervals include weekly, bi-weekly, monthly, or milestone-based payments. The chosen frequency should align with the project's nature and the contractor's preferences.

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For instance, milestone-based payments are suitable for project-specific tasks, while monthly payments may be appropriate for ongoing engagements. Outline the payment schedule in the contract to prevent misunderstandings.

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Contractual Agreements

A well-written contract is important when engaging foreign contractors. The agreement should detail the scope of work, deliverables, payment terms, confidentiality clauses, and dispute resolution mechanisms.

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Including details like payment frequency, methods, currency, and penalties for late payments can further protect both parties. Such comprehensive contracts not only set clear expectations but also provide legal protection during disputes.

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Local Labor Laws and Regulations

Compliance with the contractor's local labor laws helps avoid legal issues. Each country has its regulations concerning worker classification, taxation, and employment rights.

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Wrongfully classifying a contractor or failing to adhere to local laws can result in penalties and damage to your business's reputation. Hence, consult with legal experts or use services like Employer of Record (EOR) platforms to comply with local regulations.

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Popular Payment Methods for Paying International Contractors

The payment method you choose for your international contractors can affect transaction costs, processing times, and compliance with international regulations. Here are some of the most popular options:

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PayPal

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PayPal is a popular digital payment platform that facilitates seamless transactions between businesses and international contractors. With its global reach and user-friendly interface, PayPal enables quick payments using just an email address. This makes it a popular choice for cross-border collaborations.

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When to use PayPal

Here are the best situations to use PayPal:

• Small to Medium Transactions: Ideal for businesses handling moderate payment amounts where convenience outweighs transaction fees.
• Freelancers and Remote Workers: Suitable for paying individual contractors who prefer digital payment methods and require quick access to funds.
• Lack of Alternative Payment Infrastructure: Beneficial when other payment methods are unavailable or less reliable in the contractor's region.

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Pros

• Setting up and managing transactions is straightforward, requiring minimal information from both parties.
• Payments are processed in real-time, allowing contractors to access funds almost instantly.
• Operating in over 200 countries and supporting 25 currencies, PayPal offers extensive international coverage.
• PayPal provides buyer and seller protection, adding a layer of security to transactions.

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Cons

• International payments may incur fees averaging around 3.9% plus a fixed fee, depending on the transaction amount and currency.
• PayPal applies a currency conversion fee, ranging from 3% to 4%, which can add to the overall cost of transactions.
• While PayPal has a broad international presence, it's not available in all countries.

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Revolut

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Revolut is a fintech company that provides digital banking services, including multi-currency accounts, international money transfers, and expense management tools. Its business accounts support over 30 currencies, thereby facilitating seamless global transactions.

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When to Use Revolut

Revolut is most suitable when:

• Managing Multiple Currencies: Ideal for businesses dealing with contractors in various countries.
• Seeking Cost-Effective Transfers: Beneficial for small to medium-sized enterprises looking to minimize transfer fees.
• Requiring Quick Setup: Useful for businesses needing to establish payment systems promptly.
• Integrating Financial Tools: Ideal for those who want seamless integration with existing accounting software.

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However, businesses that require extensive financial services (or operating in regions with limited Revolut support) can consider alternative platforms.

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Pros

• Hold and transact in over 30 currencies, thus reducing the need for frequent conversions.
• Access to real-time interbank rates with transparent fees.
• Intuitive mobile and web apps for easy account management.
• Compatible with accounting software like QuickBooks and Xero.
• Issue up to 200 virtual cards and multiple physical cards for team members.

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Cons

• Some advanced financial services, like business loans, are not available.
• Reports of slow response times and limited support channels.
• Inability to deposit cash or checks into the account.
• Not all features are available in every country due to licensing restrictions.

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Wise (formerly TransferWise)

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Wise specializes in low-cost international transfers, providing real mid-market exchange rates without hidden markups. With over 16 million users globally, Wise processes more than £60 billion annually, offering a transparent and cost-effective alternative to traditional banks.

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Its platform supports over 50 currencies and allows users to send money to more than 160 countries, thus making it a versatile tool for businesses and individuals alike.

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When to Use Wise

Wise is beneficial in the following situations:

• Paying International Contractors: Ideal for businesses that need to pay freelancers or contractors abroad, ensuring they receive payments promptly and without excessive fees.
• Small to Medium-Sized Businesses: Companies engaged in cross-border transactions can manage payments efficiently using Wise's multi-currency accounts.
• Freelancers and Remote Workers: Individuals working with international clients can receive payments in multiple currencies with minimal fees.
• Personal Transfers: Sending money to family or friends overseas is straightforward and cost-effective with Wise.

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Pros

• Wise charges low, upfront fees, eliminating unexpected costs.
• Users benefit from mid-market exchange rates, avoiding the inflated rates often imposed by banks.
• Approximately 50% of transfers are instant, and 90% are completed within 24 hours.
• Wise offers accounts that can hold and convert between multiple currencies, facilitating seamless international transactions.
• The Wise app and website are intuitive, making it easy to manage international payments.

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Cons

• While Wise covers over 50 currencies, it may not support some less common currencies.
• Transfers can only be received into bank accounts; there are no options for cash pickups.
• Some bank transfers may take longer, depending on the destination country and banking systems.
• Customer service is mainly online, which may not be sufficient for urgent issues.

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Payoneer

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Payoneer is a leading global payment platform designed to facilitate seamless cross-border transactions for freelancers, small businesses, and enterprises. It allows users to receive payments from clients and marketplaces worldwide, manage funds in multiple currencies, and withdraw earnings locally with ease.

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When to Use Payoneer

Payoneer is ideal for freelancers and business owners who need a reliable and cost-effective solution for international payments. It is beneficial for those working with clients across different countries and currencies, as it offers competitive exchange rates and low transaction fees.

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Pros

• Payoneer allows you to hold and manage funds in over 150 currencies, including USD, EUR, GBP, JPY, AUD, CAD, and CNH.
• With operations in more than 200 countries, Payoneer provides a vast network for receiving and making payments.
• Payoneer seamlessly integrates with popular platforms like Upwork, Fiverr, Amazon, and Airbnb, thereby streamlining payment processes for freelancers and businesses.
• Sending payments to other Payoneer users is free, and receiving payments from clients via bank debit incurs a 1% fee.
• Users can withdraw funds to local bank accounts or use the Payoneer Prepaid Mastercard for online and in-store purchases, as well as ATM withdrawals.

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Cons

• While receiving payments from other Payoneer users is free, receiving funds from clients via credit card incurs a 3% fee.
• Converting funds between currencies may involve a 0.5% fee, and international transactions can attract a cross-border fee of up to 3.5%.
• Payoneer may not offer the extensive features required by large enterprises, such as advanced payment gateways or point-of-sale systems.

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Western Union

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Western Union is a longstanding leader in the money transfer industry, boasting over 550,000 agent locations across more than 200 countries and territories. Established in 1851, it has built a reputation for facilitating fast and secure international money transfers.

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It offers several services to meet diverse payment methods.

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When to Use Western Union

Use Western Union when:

• Urgency is important: Do you need to send funds that are available for pickup within minutes? Western Union's expedited services can accommodate such requirements.
• Recipient Does Not Have a Bank Account: If your contractor prefers or only has access to cash, Western Union's extensive network of agent locations allows for convenient cash pickups.
• Operating in Remote or Underserved Regions: In areas where digital payment infrastructure is lacking, Western Union's physical presence ensures recipients can access their funds.
• Multiple Payment Options are Required: Western Union supports various payment methods, including bank transfers, credit/debit cards, and cash, providing flexibility for senders and recipients.

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Pros

• With over 550,000 agent locations worldwide, Western Union ensures recipients can access their funds conveniently, regardless of their location.
• Many transfers, especially those funded by debit cards or cash, can be completed within minutes, making it ideal for urgent payments.
• Offers flexibility by accepting various payment options, including bank accounts, credit/debit cards, and cash at agent locations.
• Supports approximately 130 global currencies, thereby facilitating international transactions across several regions.
• Ideal for recipients who prefer or only have access to cash, allowing them to collect funds at agent locations.

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Cons

• Transfer fees can be relatively high, especially for quick transfers or cash pickups, potentially making it a more expensive option compared to digital-only platforms.
• Western Union applies a markup on exchange rates, which can increase the cost of the transfer.
• Understanding the fee structure can be complex, as fees depend on payment method, destination, and transfer speed.
• While Western Union offers online transfers, its digital services are not as comprehensive or user-friendly as some digital-only platforms.
• For substantial amounts, the fees and exchange rate markups can make Western Union a less cost-effective choice.

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MoneyGram

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MoneyGram is a well-established global money transfer service, operating in over 200 countries and territories with more than 430,000 agent locations. It offers different transfer options, including cash pickups, bank deposits, and mobile wallet transfers.

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When to Use MoneyGram

MoneyGram is beneficial when you need to send funds quickly and securely to international contractors, especially in regions where access to traditional banking services may be limited. Its extensive network ensures recipients can conveniently access their payments.

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Pros

• With over 430,000 agent locations globally, MoneyGram provides extensive coverage, making it accessible for senders and recipients. 
• Cash pickups are usually available within minutes, while bank transfers can be completed within a few hours to a day, depending on the destination.
• Offers various funding options, including bank accounts, debit/credit cards, and cash at agent locations, thereby providing flexibility for senders.
• Recipients can receive funds through cash pickup, bank deposit, or mobile wallet, depending on their location and preference.

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Cons

• Transfer fees can be higher compared to some digital-only platforms, especially for credit card payments or instant cash pickups.
• MoneyGram applies a markup on exchange rates, which can increase the overall cost of the transfer.
• While the limit is $15,000 per online transfer to more than 40 countries, the per-transfer and per-month maximum for online transfers is $10,000 for most countries.

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Tax Considerations When Paying International Contractors

To establish a foreign contractor's non-U.S. status, U.S. businesses must collect these forms:

• Form W-8BEN: For individual contractors, this form certifies their foreign status and may claim tax treaty benefits to reduce or eliminate U.S. withholding taxes.
• Form W-8BEN-E: For foreign entities, this form serves a similar purpose, establishing foreign status and claiming any applicable tax treaty benefits.

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You must obtain these forms before paying international contractors. Failure to do so may result in a default 30% withholding tax on U.S.-source income.

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Withholding Taxes: When and How to Withhold

The U.S. imposes withholding taxes on certain payments to foreign contractors. The standard rate is 30% of U.S.-source income. However, tax treaties between the U.S. and over 60 countries can reduce or eliminate this rate for specific types of income, such as independent personal services.

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To benefit from these reduced rates, contractors must provide the appropriate forms (W-8BEN or W-8BEN-E) and certify their eligibility. Review the specific tax treaty provisions applicable to the contractor's country of residence.

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Permanent Establishment Risks

Hiring international contractors can create a "Permanent Establishment" (PE) in the contractor's country.

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A PE is a fixed place of business that subjects a company to local taxation. Certain activities, such as having a dependent agent or a significant presence in a foreign country, can trigger PE status.

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To reduce PE risks, businesses should: 

• Define the contractor's role and avoid granting authority to conclude contracts on behalf of the company.
• Limit the contractor's activities to those that do not establish a fixed place of business.
• Regularly review the contractor's activities to ensure compliance with local tax laws.

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Record-Keeping

Proper documentation is important for compliance and audit purposes. U.S. businesses must retain records of all payments to foreign contractors, including:

• Completed Form W-8BEN or W-8BEN-E.
• Contracts and agreements outlining the terms of the engagement.
• Invoices and proof of payments made.
• Correspondence related to the contractor's services.

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Keep these records for at least three years from the date of the last payment to the contractor. Maintaining organized and accurate records helps ensure compliance and provides necessary documentation in case of audits.

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Wrapping Up

Managing international contractors isn’t always straightforward. From figuring out the best way to pay them to tackle tax regulations and staying compliant, there’s a lot you must track. The right tools can help you stay organized, efficient, and on the right side of the law.

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HireChore offers comprehensive solutions to manage contractor hiring, onboarding, compliance, and payments. The platform takes the stress out of contractor management. You get accurate, on-time payments and smooth onboarding.

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With HireChore, you can focus on growing your business while knowing your international contractor operations are running smoothly. Learn more.

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FAQs

What is the best way to make international payments?

The best payment method depends on cost, speed, security, and the contractor's location. Here are some of the most effective ways to handle international payments:

• Wise (formerly TransferWise)
• PayPal
• Payoneer
• Deel
• Employer of Record (EOR) Services
• Bank Wire Transfers

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Do I need to withhold taxes when paying a foreign contractor?

Yes, U.S. companies are generally required to withhold taxes when paying foreign contractors for services performed within the United States. The standard withholding rate is 30% on U.S.-sourced income unless a tax treaty between the U.S. and the contractor's country of residence provides for a reduced rate or exemption. 

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To determine the appropriate withholding rate, the foreign contractor must provide the correct IRS form:

• Form W-8BEN: Used by foreign individuals to certify their non-U.S. status and claim any applicable tax treaty benefits. 
• Form W-8BEN-E: Used by foreign entities for the same purposes.

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Do I need an Employer-of-Record (EOR) for every country?

You don't need an Employer of Record for every country where you hire international contractors. However, using an EOR can help in certain situations, especially when hiring employees (as opposed to independent contractors) in countries where your company lacks a legal entity.

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What are the best practices when paying international contractors?

The best practices include:

• Research and comply with the labor laws and regulations of the contractor's country to avoid legal issues.
• Be aware of tax obligations in your country and the contractor's country, and ensure proper documentation and reporting.
• Use reputable and secure payment platforms that offer transparency in fees and exchange rates.
• Define payment terms, deliverables, timelines, and dispute resolution mechanisms in written agreements.
• Encourage open communication channels to promptly address concerns and build a collaborative environment.

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