Contractor Management 15 min

Hiring independent contractors: pros, cons and the ideal process

Written by Pedro Barros
May 25, 2024
Pedro Barros

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Finding top talent is the best way to grow your business and satisfy customers. The good news for businesses today: in the era of remote work, digital nomads, and the gig economy, you can hire talent living anywhere and build a powerhouse team. The barriers to building a global workforce are lower than ever, giving leaders access to a talent pool that wasn’t possible even 10 years ago.

But here’s the rub. Hiring an independent contractor who’s living in another country is not as easy as working with a local freelancer. If the best person for the role lives outside your home country, you face an unfamiliar set of labor laws and foreign tax requirements.

To hire independent contractors, you must address issues of compliance, classification, finance, and process. Paying independent contractors internationally is easy enough with the right solution, but ensuring compliance can be more complicated.

Understanding the pros and cons of hiring independent contractors, especially those in other countries, is essential for businesses looking for help from global talent. This complete guide will tell you everything you need to know about hiring independent contractors so you can hire away with peace of mind.

How do I hire an independent contractor?

Hiring an independent contractor starts with classification and compliance. Once you know where you stand there, you can move on to more practical matters of payment and workflows.

What is an independent contractor?

A person is considered an independent contractor if they are running a business separate from yours and are able to pursue income from other businesses. Do they have autonomy from you? If yes, they are an independent contractor.

There is a growing risk of penalties if you misclassify your employees as contractors. In the U.S., the IRS does not offer a magic formula to tell the difference. Instead, they provide a set of common law rules to help businesses differentiate between employees and independent contractors. These rules fall into three areas:

1. Behavioral Control: Do you have the right to control the outcome of the work and how the work is performed?

2. Financial Control: Do you have the right to direct financial and business aspects of the job? This can include things like:

  • Who is responsible for business expenses

  • Who invests in facilities and tools needed to perform services for your business

  • Whether the worker is working for more than one business

  • How the worker is paid

  • Whether the worker can realize a profit or incur a loss

3. Type of relationship: What terms are in place to govern the relationship?

  • Is there a written contract describing the relationship?

  • Do you provide employee-type benefits like insurance, paid vacations, or sick pay?

  • Is it a permanent job?

  • Are the services provided to you a key aspect of the business of the company?

The U.S. Department of Labor uses similar guidelines, called an Economic Reality Test, based on six factors used by the Supreme Court to determine employment status.

5 benefits of hiring independent contractors

Wondering what the advantages of hiring an independent contractor instead of an employee are? Here’s how hiring independent contractors can help your company grow and improve its performance:

1. Hire talent from anywhere in the world

It’s important to integrate diversity into your company culture, as this can help retain employees. According to a survey by CNBC, 80% of employees want to work for a company that values diversity and promotes inclusion in the workforce. 

Hiring independent contractors allows you to build a remote team across different time zones, broadening your talent pool and increasing diversity.

2. Reduce training and onboarding time

You’ll spend less time on training and onboarding contractors than employees. Contractors are typically ready to start working ASAP, even on short notice, and come with the skills to handle your project.

3. Shrink business costs

Hiring a contractor is less expensive than hiring an employee. When you hire employees, you don’t just have to pay for their salaries; you also need to cover their benefits and pay taxes.

You don’t have to worry about these things with an independent contractor. 

Another benefit of hiring a contractor is the flexibility they provide. You only need to hire them when you’re in need of their skills, which helps keep your company budget low. 

4. Free up managerial resources

Contractors are more independent than employees and typically have their own streamlined ways of working on projects. As a result, they typically don’t require as much work management as an employee does. 

5. Add vital skills to your team

There might be certain tasks that your current staff simply isn’t equipped to handle. You can hire a contractor with specialized knowledge for one-off or short-term projects to manage those tasks quickly and efficiently.

4 drawbacks of hiring independent contractors

While hiring independent contractors can be a cost-effective strategy for driving growth, it does come with challenges. These include the following:

1. Less control over work and schedule

Contractors have their own autonomy. They manage their hours, work on their own time, and have a say over how they’d like to work on their projects. 

As a result, you have less control over their work than you would with a full-time employee at your company. 

It’s also harder to measure a contractor’s progress since you aren’t there to watch them work. 

2. More hiring risk

It’s more difficult to run a proper background check with an independent contractor. There’s no foolproof way to confirm that their samples are truly theirs and that their skills align with your expectations. There's also a chance that they could leave in the middle of the project. 

3. Lack of intellectual property protection

Under standard terms, anything the independent contractor produces can go under their own copyright. So if you work with a contractor, you’ll need some form of copyright agreement to keep your company protected. 

That said, even with an agreement in place, there’s no guarantee that the freelancer won’t use your intellectual property behind your back. Also, without a physical presence in the country in which the contractor lives, taking legal action is going to be difficult.

4. Lack of company loyalty

Contractors move on from freelance job to freelance job, so they may be less loyal than employees to the companies they serve. 

This might not be a problem if you’re just looking for someone to fulfill a short-term role, but it can become a challenge if you’re trying to retain long-term talent. 

Aside from company loyalty, it’s also harder to integrate a contractor into your company culture since they may not be as invested in your organization’s long-term goals as an employee. 

When should you hire a contractor? 

It’s best to hire a contractor over an employee when:

You’re working on a short-term or seasonal project

If you’re working on a short-term project and just need a quick hand, then it might be best to hire a contractor over an employee. You don’t want to worry about tax and benefit costs for a one-off project. 

And once the project ends, you don’t have to worry about withholding, severance pay, or termination. 

You need someone with specialized expertise

Let’s say you need a task performed quickly, but you don’t want to hire a new employee and have to train them on how to complete the job. In this case, you’ll need an independent contractor with specialized knowledge to quickly take over the task. 

When is it best to hire an employee?

There are times when it’s best to hire an employee instead of a contractor. Here’s how to determine whether an employee would better suit your project:

You’re working on a long-term project

If you decide you want to work with a contractor long-term, then it’s best to put them under an employee contract instead. That way, you can make them feel like part of your company and (hopefully) keep them around longer. 

You’re hiring for work that requires supervision

As long as they have the right skills, contractors can do well working on their own. However, if you want to onboard someone you plan to train and supervise, it makes more sense to hire an employee instead of a contractor. 

How do I hire international contractors and stay compliant?

Your company must abide by local labor laws when hiring international contractors. That means complying not only with the laws of your own country regarding contractors but also the laws of the countries where your contractors work.

Change is constant in international business, with labor laws updated regularly. It’s not unusual to have worker protections in place that automatically change the employment status from contractor to employee after a certain amount of time has passed. What was initially legal can change over the duration of an engagement, and you may not receive any notification. That’s why it’s important to have a knowledgeable local partner everywhere you hire.

  • If your company turns out to be the only place a worker is engaged, there could be a serious risk of misclassification.

  • You can unintentionally expose your business to any number of potential penalties and fines, even if you make an innocent mistake.

  • You may experience IP risks if the country where your contractor resides awards ownership to the person who developed it rather than the company that commissioned the work.

  • You may be responsible for deducting income tax, national insurance, or healthcare contributions, depending on the country.

For example, the United Kingdom requires companies that hire contractors to follow off-payroll working rules (IR35). You may also be required to pay a consumption tax on your contractor invoices, which you may or may not be able to recoup. Common consumption taxes include sales tax, goods and services tax (GST), and value-added tax (VAT).

Innocent mistakes are not viewed favorably by local authorities, especially mistakes by foreign companies. It’s crucial to keep up with changing labor regulations and taxation requirements for every country where you hire an independent contractor. Remote can help your business hire international contractors legally, easily, and quickly.

Can I hire international contractors?

Yes, you can hire international contractors and build a remote workforce. It’s common practice for businesses around the world to work with contractors in other countries. That said, doing so is not free of risks.

Each country has unique employment laws full of nuance. If you’re hiring international contractors who reside in another country, you must comply with both US laws and the laws of the other country. This extends to requirements for individual and company tax collection.

Your HR department may be able to manage contractor compliance. Determine whether your internal team has the skills to accurately:

  • Identify the difference between employees and contractors according to the local definition

  • Know when it’s legally required to

     convert your international contractor to an employee

  • Protect your intellectual property and invention rights for the work done by the contractor

  • Understand the tax code in the foreign country as it relates to withholding and reporting

  • Develop relationships with tax consultants and industrial relations attorneys

  • Advise contractors

     how to complete IRS documents like the W-8BEN form

  • Prepare agreements to meet updated legislation requirements

  • Onboard foreign contractors in a timely and efficient manner

  • Put systems in place to pay foreign contractors in their local currency

While it may sound complicated, do not let these guidelines discourage you from onboarding international talent. Contractors in multiple countries can be a powerful tool for your growth. The key is to guarantee your compliance by working with a trusted international independent contractor management service like Remote.

How to create a contract for an independent contractor

Contracts for independent contractors should cover items including the services being rendered, the length of the agreement, intellectual property rights, and confidentiality. International contract management requires specialized knowledge of each country’s laws and tax systems. You cannot approach every country the same way.

Make sure your agreement is legally valid in the country where the contractor resides. Every country will have different requirements, so be prepared to tailor your independent contractor agreements for each country where you hire.

Basic items to include in each contractor agreement include:

  • The services being contracted

  • Length of the agreement, with clear start and end dates

  • Contractor obligations to the assignment

  • Confidentiality or nondisclosure agreement

  • Intellectual property protections

  • Contractor obligations to your business for things like liability insurance and indemnity

How do I pay an independent contractor?

You can pay international contractors around the world using an independent contractor payment service, like Remote. Depending on the country where the contractor lives, you may be required to pay in a certain currency.

Developing a contractor onboarding system will ensure you haven’t skipped any important steps in payment, which could lead to delayed payments and damage your relationships with contractors. Some areas to consider include:

  • What are the pay rates?

  • How are expenses managed?

  • Do you need to make an upfront deposit?

  • What is the frequency of payment?

  • What currency should the payment be?

  • Are there milestones to trigger contractor payments?

  • Do you have to file summaries for each independent contractor at the end of the financial year?

  • Where do you report taxes for contractors?

  • Is there a tax treaty between the country where you are headquartered and the countries where your contractors reside? This could impact the amount of withholding you have to do, if any.

See also: Read Remote’s Global Payroll Management Guide

How do I manage taxes for international contractors?

Different countries use different date ranges to determine their tax years. 

This has an impact on when you must report annual earnings for your contractors. For example:

  • The US tax year runs the same as the calendar year, from January 1 to December 31.

  • The UK tax year runs from April 6 to April 5.

  • The Australian tax year runs from July 1 to June 30.

Governments all over the world are becoming more sensitive to tax fraud brought about by people who pretend to reside abroad for tax purposes. Other countries are intentionally offering tax incentives that are attractive to digital nomads and remote workers. Keeping on top of ongoing tax reforms is essential to staying compliant in every location you have independent contractors working on your behalf.

link to Remote Contractor Management: Tax compliance for US companies just got easier

Remote Contractor Management: Tax compliance for US companies just got easier

We’re excited to share the details of our new tax compliance feature for Remote’s Contractor Management platform, specifically designed to help HR and finance administrators meet IRS rules. 

Ensure you have all the required tax forms completed before work commences. Every country has different requirements. If your company is in the US, for example, you’ll be expected to report the income of non-US residents to the IRS, regardless of their tax obligation.

Independent contractors and 1099-NEC tax forms

If you have contractors in the United States, you must file Form 1099-NEC. The 1099-NEC, which replaced the 1099-MISC, is used to report all payments made to non-employee individuals. Regardless of whether your company is based in the United States, you must file this form if you have contractors within the country.

Do I need to issue a 1099 to an independent contractor?

If that contractor works from the United States, then yes. Form 1099-NEC is required by the Internal Revenue Service for all independent contractors receiving payments in the U.S. You do not need to file Form 1099-MISC, however, as those forms were phased out in 2021 in favor of Form 1099-NEC.

link to What is a 1099 form? A guide for companies with US contractors

What is a 1099 form? A guide for companies with US contractors

Are you making payments to contractors or freelancers? If so, learn more about Form 1099 to stay compliant and penalty-free.

What is a W-9 form, and why is it important for hiring independent contractors?

Another form for US residents, Form W-9 collects basic information like the independent contractor’s identifying tax information, which can be either a social security number or an employer identification number (EIN). As the employer, you must collect these forms from any US contractors.

You can’t claim expenses for independent contractors on your business taxes at year-end unless there is a corresponding W-9 form on file from the contractor. You can use the information provided to ensure you file taxes for your US contractors correctly.

A W-9 form also ensures that you are not inadvertently hiring undocumented workers who are not legally allowed to work in the United States.

How do I convert a contractor into an employee?

Converting a contractor to an employee requires you to collect different tax forms, provide certain benefits, and withhold various amounts from paychecks, depending on the country. In our guide on when to convert contractors to employees, we discuss several situations when doing so might make sense. Examples include:

  • You discovered your contractor is misclassified.

  • You want your contractor to play a bigger role in your business.

  • Your contractor requests to be a full employee.

  • You want to strengthen protections for your IP.

  • You plan to engage the contractor indefinitely.

  • You want to offer benefits.

  • You want to prevent your contractor from going to work for a competitor.

In many countries, withholding tax rates need to be adjusted when workers change from contractor to employee. This chart from the Tax Foundation, A Comparison of the Tax Burden on Labor in the OECD, is a good example of the “tax wedge” between employee and contractor taxation rates.

You can explore current tax data by OECD country, updated weekly, using an interactive tool at Tax Foundation to get an idea of tax rates, collections, and tax burdens, among other things. You can also make your own index of tax complexityfor each country where you have contractors. The interactive tool measures both tax code and tax framework complexities. You can also use Remote’s Country Explorer for detailed information by country.

If you convert a US contractor to an employee, be sure to keep your tax forms up to date:

  • W-4: Employees must complete form W-4 so you can withhold the correct federal income tax from their pay.

  • W-2: Shows the taxes you withheld from an employee’s wages during the calendar year. Employees need to receive this form from you by January 31, and you must also send a copy to the Social Security Administration.

Set up contractor payments with automated contractor management software

Using automated contractor management software allows you to pay and manage independent contractors around the world quickly and easily. To get started, all you need to do is create an account to begin onboarding your contractors in minutes.

Automated contractor management software can relieve some of the compliance management burden. In addition, your contractor management software should be able to pay contractors in their local currency, which is a requirement in many countries.

Have questions about global payroll and contractor management? Our Global Payroll Management Guide has all the information you need to keep your company compliant with international labor laws.

Hire independent contractors with Remote

Building a global team is an exhilarating experience. There’s never been a better opportunity to create a company filled with passionate people who have a shared mission without worrying about geography or international borders.

Remote can help you pay and manage independent contractors in countries all over the world. If you need help developing your global hiring strategy, you can book a session with our global employment experts to get answers to all your questions.

Don’t let contractor management headaches derail your company’s growth. Let our teams of experts all over the world help you stay on top of foreign tax codes and labor laws. With Remote, your team always receives consistent, professional, and thorough contract and payment services.

Learn more: Use Remote to pay international contractors in your local currency in just one click.

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