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

Hands down, finding top talent is the best way to grow your business and satisfy customers. In the era of remote work, digital nomads, and the gig economy, you can build a powerhouse team regardless of where they live or work. 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.

Understanding the pros and cons of hiring independent contractors, especially those in other countries, is essential for businesses looking for a little help. This complete guide will tell you everything you need to know about hiring independent contractors.

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.

This guide covers all the following subjects:

• What is an independent contractor?
• What are the benefits of hiring independent contractors?
• How do I hire independent contractors compliantly?
• How do I pay an independent contractor?
• When should I hire an employee instead of a contractor?
• How do I set up contractor payments with automated contractor management software?
• How do I create a contract for an independent contractor?
• What are the penalties for misclassifying workers?
• Can I hire international contractors?
• How to create a contract for an independent contractor
• Practical considerations when hiring international contractors

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.

What are the benefits of hiring independent contractors?

• You can source talent quickly anywhere in the world.
• Hiring a contractor is quicker and easier than onboarding an employee.
• International contractors can be more cost effective.
• International contractors do not come with the same compliance challenges as employees.
• Contractors do not require training or resources to perform their duties.

Benefits of hiring contractors include more control over your budget, greater speed in onboarding, and fewer legal hurdles to overcome — provided you do not misclassify employees as contractors, of course. 

Perhaps the biggest benefit to hiring independent contractors is they come ready for work. You are not required to provide equipment, supplies, office space, training, or benefits. Independent contractors are meant to be self-sufficient and a hassle-free way to supplement your team.

What are the drawbacks of hiring independent contractors?

• Laws regarding contractor classification vary among countries.
• Your intellectual property may not be protected as well.
• Managing risk becomes more challenging when you hire in multiple countries.
• Contractors can be expensive in the long term.
• Contractors who would prefer to be employees may not feel valued by the company.

The challenge for businesses is understanding the complexity and differences in local labor laws, an undertaking that can quickly become overwhelming if you’re not a fan of administrative work. Managing risk across multiple countries is difficult without the support of local labor experts for independent contractor management services. Chances are, your HR department does not have a full complement of international lawyers to navigate the intricacies of contracts from multiple countries.  

If you want to scale and grow your business, hiring independent contractors can keep you nimble, as long as you can navigate the complexities involved with local labor laws in each country. 

When should you hire an employee instead of a contractor?

Employees provide companies with stability and help establish all-important company culture. In addition, employees are more loyal to their employers than contractors are to their clients, so employees tend to have longer engagements.

While employees do carry additional costs, such as benefits and paid time off, employing full-time workers is usually cheaper than paying contractors in the long run. Further, it is usually easier for companies to guarantee ownership of IP created by employees than by contractors.

Hiring employees does have drawbacks, though. If hiring in another country, the presence of employees could expose your company to permanent establishment risk. Hiring internationally also requires your company to open a new legal entity in that country or work with an employer of record.

Every business is different. Your reasons for hiring an employee or independent contractor can change over time. Consider the long-term benefits of an unlimited talent pool and balance those benefits against your appetite for risk, especially regarding compliance obligations.

Practical considerations when hiring international contractors

If it makes sense for your business to hire international contractors, consider the practicalities of having foreign members on your team. 

• How will you handle working hours across multiple time zones?
• Will you encounter language barriers, and how will you overcome them? 
• What type of project reporting will you require from your contractors?
• What software and tools will you use?
• How will you structure your contracts?
• Is there a minimum or maximum duration for contract workers in the country? 
• Will you need to arrange for work permits or visas for people working abroad?
• Will your company need a local presence or branch office to operate in the country? 
• What currencies can you use for payment?
• How will you manage foreign exchange?

How do I hire international contractors compliantly?

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 who 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 USA 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 relation 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 for 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 for 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 USA tax year runs the same as the calendar year, January 1 to December 31.
• The UK tax year runs from April 6 to April 5.
• The Australia 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.

See also: How Remote makes international contractor tax management easy

Ensure you have all the required tax forms completed before work commences. Every country is different in their requirements. If your company is in the US, for example, you’ll be expected to report 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. Replacing the 1099-MISC, 1099-NEC 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.

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

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

Another form for US residents, Form W9 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 to 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 at 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 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 complexity for 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 burden of compliance management. 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 contractors in 170+ countries in one click.