Global Payroll
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How to Pay a Foreign Contractor

Undoubtedly, global hiring is going to gain momentum post-pandemic. Hiring remote talent will definitely earn a spot in the growth plans of many businesses. If you are one among them, then learning how to pay a foreign contractor is definitely a must.

Hiring a foreign contractor can offer several benefits for your company.  

For example, a foreign contractor can help your company by bringing in new perspectives pertaining to work culture, best practices, and hiring. 

Thus, thoroughly understanding the best ways to pay foreign contractors can help you brew a fruitful relationship with them.

Things to Consider While Making Payments to Foreign Contractors for Services

The primary inhibition in hiring contractors is navigating through the muddy waters of payment and taxes. Thus, knowing these considerations would help you brace yourself against legal uncertainties.

Local labor laws | Why do they matter?

If you abuse local labor laws while making payments to foreign contractors for services, you’ll never hear the end of it from revenue and federal agencies.

Labour laws vary with respect to your employee’s location. Hence, you have to comply with the laws of the foreign country when paying your foreign contractor. The local laws of your country don’t matter when paying your foreign contractor.

Navigate through these local labor carefully before you join forces with your contractor. 

May the global talent workforce be with you!

Employee Misclassification | Meet the IRS

IRS defines certain criteria for an employer to classify contractors and full-time employees. As an employer, you have to carefully recognize full-time employees and contractors and manage their employment and payroll appropriately. 

The IRS states that an independent contractor is someone who:

  • Offers services to other companies or the public
  • Pays and manages taxes on their own
  • Is hired for specialized skills
  • Works on multiple projects simultaneously

Additionally, an employer is required to offer enough flexibility to contractors in terms of work hours and the process followed to complete the task. Employers must only decide the result of the work. 

If the employer fails to meet the conditions above and fails to work according to the aforementioned circumstances, then the employer has to classify the employee as a full-time employee.

Similarly, employees have to check similar conditions based on your foreign contractor’s jurisdiction. In some countries, local laws may stipulate you to classify your foreign contractor as an international employee. 

You may have to endure a few tax penalties if you misclassify and pay foreign contractors. 

These penalties include:

  1. Back tax withholding for workers
  2. Paying overtime for workers

How does your tax reporting and tax-related obligations look like?

Although you do not need to withhold any taxes for your employees, there are certain obligations that you have to fulfill when you hire foreign contractors.

If you are an employer in the USA, you have to report the amount you are paying for your contractor using the forms Form1042 and Form 1042-S. 

The US federal agency also advises employers to ensure that the counteract has an office or place of business in their foreign country. They also warn the employers that their contractor cannot have an annual remuneration of more than $3000 in a year.

If your foreign contractor does not meet these conditions, you will be required to report and withhold your foreign contractor’s income. Additionally, your foreign contractor also has to provide you their Taxpayer Identification number.

How to Pay Foreign Contractors?

International contractors can be paid through various means involving both, online and traditional ways. 

Each method has its own set of hassles and advantages. For example, wiring your money is as fast as Flash, however, it is as risky as relying on Hawk-eye for the End Game. 

This dissuades companies from looking for options to pay foreign contractors. Consequently, the company also drops global hiring from its growth strategy too.

Here is a complete breakdown of the various ways you can pay foreign contractors.

  1. Good old Wire transfers

Wire transfers are really traditional ways to pay foreign contractors. They are easy to implement as well. You just need to contact the bank or a financial agency like Western Union to transfer your money.

They are also the least risky of the lot. Particularly, when handling large payments, it is peaceful to know that there is a bank or a reputed financial institution trustworthily wiring your money to and fro. The money is also insured by the bank.

However, wire transfers also have their own issues.

Sometimes they do take an annoyingly awful lot of time to reach your foreign contractor. Moreover, wire transfers are only possible when your contractor has a bank account that can receive international payments. 

Hence, wired transactions are best suited for contractors who have bank accounts.

  1. Pay using checks and money orders

Making payments to foreign contractors for services using checks may outdate wire transfers. Although the nostalgia is inviting, these modes of payment are far from perfect. 

The only reason the likes of you would pay foreign independent contractors using checks is to offer flexibility with respect to when and where they can collect their payments. 

Otherwise, the cons outweigh the pros. 

Making use of checks and money orders to make payments to foreign contractors for their services is risky. Firstly, they can get a long time to reach your foreign contractor via post. There is also the risk of mail getting lost. Another significant issue is that US money orders are accepted in only 28 countries in the world.

  1. International Bank (Swift) Transfers 

One of the most common ways to make your foreign contractor rich enough at the end of the month is using the global transfer network, SWIFT. 

The process is simple. Banks collect money from you and transfer it to the contractor’s bank account. They fix conversion rates based on real-time. They also charge a few to hefty bucks as transfer fees.

The process is safe and risk-free with a network of banks ushering the process.

However, hefty transfer fees and loss of money while converting from your currency to foreign currency may pose a hurdle. Particularly, the loss of money while converting may end up hurting the morale of your contractor who may end up with lesser bucks than expected.

  1. Digital Wallets

With financial regulations toning down a bit and increased advancements in fintech, digital wallets are making it possible for global transactions to take place without much friction. 

If your contractor has a Paypal account, then PayPal can be your best pal too. 

Paypal is one of the firsts in the world of digital payments. Currently, Paypal facilitates payments in more than 200 countries and 25 local currencies. The transaction fees in the platform 2.9% + $0.30 in the US, and 3.9% + exchange rate for international transfers.

Paypal also offers an upgraded version of itself called Paypal MassPay. This upgrade enables you to pay multiple contractors for their services, simultaneously, saving time.

Other digital payment options include apps like Revolut and Wise. These apps offer the lowest transfer fees and are often the fastest ways to transfer money straight into your contractor’s bank account. 

Have you checked out EOR solutions like Multiplier?  

Multiplier’s payment solution for contractors and their services works like a charm at 40$/month for each employee. 

Using Multiplier you can employ foreign contractors without setting up local entities in other countries and  also pay manage payments for their services using our payroll processing system

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