Paying international contractors can be costly because of exchange rates, heavy transfer fees, and other unexpected costs.
Although your company offers to cover the additional fees, the total quickly adds up. In addition, you must comply with a lot of compliance issues to avoid penalties.
However, hiring top freelancers overseas shouldn’t be a challenge despite these challenges.
Getting the most out of your relationship with international contractors begins with understanding how to pay international contractors and stay compliant.
This article is part of our guide on how to pay contractors.
1. Decide on the payment terms and establish the legal jurisdiction
Most freelancers have their own preferred payment structure, whether that’s an hourly rate, a fixed price per project, a retainer, etc. Before you even decide to work with a contractor, you need to clarify how you want the compensation to be calculated at the end of the project.
You should also define the payment milestones, as some freelancers may ask to be paid upfront or before the final deliverable is submitted. This is a basic step when working with any freelancer, whether they live in the same country where you are based, or abroad.
Next up is defining the currency. Some contractors outside of the U.S. have USD accounts, but for the others, you’ll need to see if they’re able to accept the currency rate fees or if they expect you to carry the charge. You should also define the payment method as the cost can vary from 30 cents up to $50 per transfer.
Although putting all of the above conditions into writing will significantly reduce your risk of disputes with overseas freelancers, it is still advisable to agree on a legal jurisdiction. A jurisdiction clause can be defined as “exclusive,” which means only the specified country’s courts can hear the case or “non-exclusive,” which means that the parties can also litigate in other courts. Initiating a legal process in a foreign country is far more complicated and requires a lot of resources than initiating the same process in your own country.
A different option is including an arbitration clause. Arbitration is a form of Alternative Dispute Resolution (ADR) which can help to resolve a commercial dispute without the need for litigation, thereby avoiding going to court and tackling the ensuing jurisdictional or governing law issues altogether.
Once you’ve established the terms for paying independent contractors and determined legal jurisdiction, be sure to mark it through a Master Service Agreement or a contract agreement so no misunderstandings may occur. At this point, you’ll want to gradually start going through a contractor onboarding checklist to ensure all legal and administrative matters are prepared.
2. Tax compliance is essential
A U.S. company doesn’t need to pay, withhold, or report taxes for international freelancers living outside of the U.S. This is true for all other countries as well.
However, it’s up to the company to ensure that the work is not performed by a foreign citizen from within the country. In this case, there are extra policies and taxes that apply.
U.S. companies need to collect a W-8BEN form from all foreign contractors living and performing work from outside of the U.S. The W-8 BEN-E applies instead if the contractor is working and receiving the payment through their own entity (i.e. company, agency, etc.).
This form will include ITIN (International Taxpayer Identification Number) and other general information that will help your company to confirm the freelancer is not working from within the U.S. Be sure to collect these forms before you start working with a contractor since you will not be able to pay them before they submit it.
If the freelancer fails to provide the completed form, you’ll have to deduct approximately 30% withholding rate on their payment. The exact terms and withholding rates will be determined based on your contractor’s country signed tax treaty with the U.S.
You do not need to submit 1099-NEC for your foreign freelancers, but you are obligated to provide them with the relevant information so they can submit the data to their tax authorities. Therefore, you need to ensure you keep accurate documentation of all funds paid during the year.
In addition, it’s your duty to ensure that you’re compliant with the labor laws in your freelancer’s country even when your company lies in a different jurisdiction. It’s the contractor’s location that counts when it comes to law forcing a contract, labor hours, payment frequency, and more.
3. Select the right method of payment
Wire transfer is the most popular method of paying international contractors since it’s the most secure, it covers all countries, and fits all use cases.
The catch is that it can get very expensive at anywhere from $25-$50 per transfer. There’s also the risk of high currency conversion fees and sometimes the bank of your foreign contractor will have an additional fee. Freelancers could either request reimbursement for this or need to take a loss, which most won’t be happy about.
When doing bank transfers, make sure to get all bank details correctly. Besides the bank address, you’ll need:
- A transit number for freelancers in Canada
- The IBAN and BIC/Swift code for your European contractors
- A BIC/Swift code, BSB, and account number for Australia
- The bank’s state branch and code when working with freelancers in India
However, there are plenty of wire transfer alternatives to use when you pay freelancers overseas. PayPal, Payoneer, Wise [formerly known as Transferwise], or any other online payment platforms are great solutions, but they don’t fit everyone.
PayPal, for instance, doesn’t cover all countries and has crazy exchange rates. Payoneer demands opening an account and has a fixed annual fee, plus extra fees/transfer and during currency exchange.
4. Freelance marketplaces or freelance management systems (FMS)
Another option for paying international contractors is freelance marketplaces like Fiverr, 99designs, or Upwork etc.
These platforms will take care of payments, tax compliance and even serve as the arbitrator in case of a dispute. The main problem is that they charge a 15%-20% commission, which will make top freelancers hesitant to work with you. This means you won’t be able to work with every contractor you want through these platforms.
An ideal solution is using a freelance management system (FMS), like Fiverr Enterprise, which takes care of the payments and the tax documentation requirements, but without imposing extra fees. This allows you to work with any freelancer, including those you source yourself.
5. Run a KYC check before the first payment
Another point companies often skip when paying international contractors is performing a Know Your Client (KYC) check before sending the money. A KYC ensures you won’t unknowingly pay someone whose account is associated with criminal activity.
If you opt to pay freelancers internationally through a wire transfer, the bank will handle the KYC check. Online payment solutions, like Payoneer, and freelance marketplaces, like Upwork, also take care of this for you.
But, if you opt for a check, credit card, or other similar payment, you’ll need to get your legal team onboard to perform the KYC.
Pay international contractors fearlessly
Working with freelancers overseas can offer many benefits, from greater access to talent to lower costs. There’s no reason to avoid working with foreign freelancers and contractors as long as you are prepared to do it by the book.
By keeping the above-listed tips top of mind, paying international contractors can be simple, fast, and affordable.