How to pay overseas contractors: the expert guide

Independent overseas contractors can be a vital asset to a growing global business. These individuals are often specialists in their field, offering companies expertise on a flexible, on-demand basis.

Companies entering new markets can also tap into the knowledge of their overseas contractors to better understand market demand and local practices. 

There’s more to global payroll than simple financial transactions. You must ensure compliance with employee classification and reporting requirements in your home country and in every country where your extended team lives. You’ll also need a plan for handling things like payment methods and foreign exchange before onboarding new talent.

This is where things can get confusing.

Paying international contractors involves navigating international labor laws if your team is spread across multiple countries. It can be a frustrating and expensive process, especially with professional tax and payroll services in every country.

Understanding how to pay overseas contractors at scale is essential for businesses with a global workforce. This detailed guide contains everything you need to know about paying independent contractors in other countries, compliantly and at scale. With the right service provider, this process can be a stress-free, cost-effective experience.

What is an international contractor? 

For US-based companies, an international contractor is someone who doesn’t reside or work in the US and isn’t a US citizen. For other countries, the distinction is the same: different country AND non-citizen status. It’s important to note the definition has to do with where the services are performed rather than which passport the independent contractor holds. 

If the actual work occurs in a country outside of the US, even if it’s done by a US citizen, the local government almost always imposes an income reporting requirement or a withholding obligation. Put simply, you can’t just pay US contractors working abroad without considering where they perform their work.

There are advantages and drawbacks to working with international contractors, so make sure you’re compliant with local regulations. In some countries, these changes are based on the length of your relationship with a service provider. If you aren’t careful, you could wake up one day to discover a longtime contractor is now legally considered an employee entitled to benefits. Misclassifying employees as contractors can bring harsh consequences, even if the mistake is unintentional.

Can I pay an international contractor? 

Nothing prevents you from paying foreign contractors. You can send a bank transfer from your business account(s) in the US or choose from a variety of other payment methods, such as digital wallets or common payment platforms like PayPal. 

Global employment partners like Remote make paying global contractors easy to manage in a quick, easy, and compliant way.

How do I pay international contractors? 

Below, you’ll find an overview of some of the most common ways to pay international contractors, along with some of the pros and cons for each option.

Bank transfers

International money transfers are usually the most expensive way to pay overseas contractors, with unfavorable exchange rates, service charges for every transfer, and other hidden fees. Intermediary bank fees, sometimes called “receiving bank fees,” can be levied multiple times in a single transfer, depending on how the money is routed. As a result of these fees, your international contractor may end up shorted on their invoice, making you look like an unreliable client.

Paper checks

Checks are not a popular option with international contractors because they may require a fee to be deposited, they’re at the mercy of the bank’s exchange rate, and the funds are held in escrow until the check clears. With global delays in mail, combined with a 4-6-week clearing period, your overseas contractor could wait months before they’re paid.

International money orders or wire transfers

Once a quick and safe way to send money, wire transfers through companies like Western Union are now almost as outdated as paper checks. Both they and money orders attract large deposit fees and require the foreign contractor to deposit the payment physically. In countries where digital payments aren’t accepted, this might be the only choice, but these situations are rare today.

PayPal

PayPal is perhaps the most well-known way to make online payments. The platform is useful for paying international contractors in different currencies, and you can make mass payments for up to 5,000 vendors at a time. You can also link credit cards to your PayPal account. However, the recipient will also need to have a PayPal account (not allowed in every country), and you’ll pay fees of around 4%.

Wise

Formerly known as Transferwise, Wise is one of the best fintech platforms for sending international payments. Wise lets you set up multiple foreign currency accounts, gives you bank-level security, and enables batch payments of up to 1,000 transactions in one click. You can send money using the real exchange rate to more than 70 countries with no hidden fees. 

Remote

Remote simplifies international contractor payments worldwide without charging any hidden fees. Beyond handling payments, Remote lets you stay compliant and mitigate risk when working with overseas contractors to scale your international team. You can easily manage and approve one-off and recurring invoices using Remote and initiate payments for contractors in their local currency.

Research in detail: You can find out more by reading our Global Contractor Management Platform overview.

What is the best pay structure for international contractors?

Payment policies for overseas contractors can be tricky, especially without an internal HR or legal department that understands international labor laws. Depending on the country where your contractors work, the payment structure you use can affect their employment status.

Different payment structures for overseas contractors include the following:

Project fee

A project fee or fixed-price fee is a pre-agreed payment amount for a specific scope of work outlined in a contract. Fixed-price project contracts should clearly define things like project milestones, progress reporting, and sanctions for missing deadlines. Be sure to include language regarding ownership of intellectual property in these (and all other) contractor agreements.

Retainer

A retainer is a set amount paid on a regular basis. A common retainer arrangement is for a monthly payment that both parties might renegotiate at the beginning of each financial year. You should clarify in the contract what the retainer covers in terms of deliverables and/or time spent working on your behalf. This can be an attractive arrangement if you have multiple tasks or a variety of work you want completed regularly. 

Make sure to address what happens if you haven’t supplied enough work to keep your contractor busy for the hours retained. It’s also important to understand whether it’s legal in the contractor’s country of residence to expect the contractor to roll hours over into the next period.

Time and materials

Time and materials projects are good for work you can easily manage at the task level. The contractor submits an invoice with a timesheet and expense report to prove the time and materials consumed for the payment period. 

If you can accurately account for the time and effort it takes to produce the desired outcome, this could be the best payment arrangement for you. For creative industries, time and materials can be costly because it’s hard to determine how long it will take to arrive at the desired result. 

Beware of the dangers of contractor misclassification when hiring overseas

Keep in mind that different countries determine employment status based on contract and payment structure. For example, you may run into a situation where a country doesn’t recognize long-term contractor agreements and instead requires companies to hire contractors as full-time employees.

After a certain period — sometimes only six months of continual work — your contractor may be considered an employee due to the country’s labor laws. It’s essential to understand the local formula for classifying employees (i.e., how your payment structure, plus the length of time, impacts the local classification of your foreign contracting staff).

Misclassification of contractors is serious and can lead to hefty penalties.

Use our Contractor Compliance Checklist to avoid misclassification

Work through this checklist to help determine if a new hire should have a contractor or employee relationship.

Determining the currency in which to pay contractors 

Before you can know how much to pay, you need to confirm the currency in which the contractor will be paid. Because foreign exchange rates are constantly changing, the way you manage currency payments can have a major effect on cash flow and operating expenses. Options include the following:

• Paying everyone in US dollars. This approach works well if your international contractors have US dollar accounts. Otherwise, they’ll have to pay a fee to receive US dollars into their account.

• Paying contractors in their local currency. This choice is good for contractors, but it means you’ll need to have multiple foreign accounts or use a payment platform that can handle the conversions for you. Expect to pay more in foreign exchange fees. Reconciling your accounts can be complicated.

• Using a hybrid method of payment. Use a contractor management platform or a digital payment tool to help you take advantage of currency fluctuations.

Pros and cons of common international contractor payment options 

Here’s a quick breakdown of the advantages of different international contractor payment options:

Remote:

Pros: Designed to manage international contractors’ payments, contracts, and IP protection. Remote’s contractor management platform lets you:

• Onboard contractors quickly and safely with localized contracts

• Pay contractors on time in their local currency

• Manage all employment documents in one secure platform

• Protect your intellectual property and invention rights

• Receive around-the-clock support

Con: Because Remote was founded in 2019, its contractor payment services are less well-known than Wise or PayPal.

Wise:

Pros: Wise gives you everything you need to grow your business and operate internationally but without the headache of opening bank accounts in multiple countries. Wise provides a transparent pricing structure, and you know exactly how much will be deposited in your contractor’s account.

Con: Does not provide any contract management services or IP protections.

PayPal:

Pros: PayPal is a mature platform with widespread adoption, and its transaction fees average about 4% of the invoice amount.

Cons: It does not provide any contract management services or IP protections, and recipients must have a PayPal account.

Bank transfers:

Pros: Your bank will be motivated to give you personalized attention through an account manager.

Cons: Bank transfers have poor exchange rates and high service fees. Your contractors are likely to experience hidden fees and receive less than you sent them. This method also does not provide contract management services or IP protections.

International money orders or wire transfers

Pros: People can receive money if there is no option for digital payments in the area where they live.

Cons: This option has high fees, and the recipient must appear in person to receive the funds.

Paper checks

Pros: There are very few upsides to using paper checks to pay contractors, although some traditional vendors may prefer checks for certain types of work.

Cons: Paper check payments are dependent on international mail services, are highly susceptible to fraud, and have high fees and long payment cycles.

How much do international contractors make?

Ideally, you’ll want to attract and retain new talent at the right point in time to help your business achieve its goals in a financially sustainable way. Before you start onboarding anyone, it’s worth considering the financial and social consequences of your payment structure.

With a global workforce, determining fair compensation policies can be complex. Contractor pay expectations vary from country to country, as does the cost of living. Some contractors will be comfortable telling you what they need or negotiating with you to arrive at a mutually agreeable pay rate. Others may not negotiate at all and merely accept or decline your initial offer.

To avoid a payment faux pas, consider the following strategies:

#1. Set a global payment standard by role, and pay everyone the same amount in US dollars

Pros:

• You know exactly how much it will cost your business to bring on new contractors.

• No one in the organization will feel disadvantaged or disrespected.

Cons:

• Your costs for contractors will be higher than average.

• Your labor costs (and incentives) will hinge on the strength of the US dollar.

• Your rates may not be attractive to people living in countries with a higher cost of living than the US

#2. Localize your pay structure to meet the going rate for each country

Pros:

• You’ll know you’re offering a locally competitive rate without overpaying your contractors.

• Your international contractors can enjoy a local standard of living in line with their education and skills.

Cons:

• Your contractors may resent making less than contractors from other countries.

• If an international contractor moves from one country to another, they may not be happy if their wages decrease to reflect the local economy.

Unintended consequences:

Your company could be seen as taking advantage of cheap labor, fragile economies, or civic instability if you don’t have a thoughtful approach to localization. Remote cares deeply about offering fair and equitable compensation globally. We strongly advise our customers and partners to do the same, and we share practical insights on how to manage this.

Research in detail: Read through Remote’s dedicated guide that explores how to calculate compensation for remote employees

Offering benefits to international contractors 

Fringe benefits packages can be a great way to attract the top contractors in a region and, in some cases, may be more important than pay. Just as pay varies between countries, so do benefits packages.

If the contractor has access to socialized healthcare, like in the UK and Australia, health insurance will be of limited value. In other countries, the norm is to provide additional benefits that may seem unusual in the US. For example, in Latin American countries, contractors may look for childcare subsidies and food allowances. You can also consider offering paid time off for public holidays, cultural or religious festivals, and vacations.

Keep in mind that fringe benefits are taxed differently overseas. You need to understand the fringe benefit tax obligations for each country in which you have contractors. In addition, while you can offer benefits to international contractors, crossing certain lines could lead to misclassification.

Research in detail: Use Remote’s Country Explorer to find specific data about typical benefits and holidays in more than 170 countries.

If you’re confused about the best way to approach pay and benefits policies for international contractors, Project FAIR has developed principles and standards for fair reward. Project FAIR is supported by the University of Edinburgh Business School and focuses on helping international aid organizations arrive at fairness in overall compensation through a combination of pay and benefits. 

Their free toolkit includes the following:

• A self-assessment quiz designed to help you think through different aspects of your pay and benefits

• Key strategic considerations to make as you review your international contractor compensation policies

Project FAIR bases all its efforts on the United Nations’ Sustainable Development Goals and aligns with the Core Humanitarian Standard on Quality and Accountability. Their five principles and standards for fair compensation across international borders provide excellent guidance for startups and businesses who want to ensure their contractors feel valued and connected. These principles are as follows:

1. Ethical Reward: Your compensation policy for international contractors is fully aligned with your mission and values.

2. Transparency: Compensation is transparent, evidence-based, and easy to understand.

3. Equity: Compensation packages for different contractors are fair, consistent, and justifiable.

4. Sustainability: The compensation you provide ensures long-term organizational financial viability, and pay levels ensure sufficient wages for all contractors in all countries.

5. Compliance and Risk: All compensation policies and practices meet local and international legal and regulatory requirements while also respecting broader organizational social responsibility.

Research in detail: Read about Remote’s commitment to refugee workers.

Preparing offers for international contractors 

There’s no universal contract for a global workforce. Once you’ve decided how you want to approach compensation, you can work with local experts to help you prepare the correct paperwork to comply with local employment laws.

Another option is to work with an employer of record (EOR) like Remote to onboard, manage, and pay contractors in multiple countries around the world — or you can use Remote’s contractor management service to scale your team with maximum speed.

Here’s the best part: you can onboard international contractors compliantly in minutes with customizable contracts. This lets you focus on growing your business instead of getting lost in the details of international labor laws and work contracts.

Find out more about the fast, hassle-free way to onboard and pay international contractors with Remote.

Do foreign contractors have to pay taxes?

Yes, your international contractors will have to pay taxes in the country where they live and work. Tax obligations should be clearly stated in the work contract, and both contractor and client should be aware of their respective liabilities.

Depending on the country, you may have to withhold payments for income tax, social safety net payments, or national pension fund contributions, although such payroll deductions for contractors are very rare. Don’t trust your contractor to know the local laws. You’ll want to ensure your business is compliant with foreign government mandates.

If you’d like help understanding the tax obligations for foreign contractors working in different countries, find out how Remote can help you hire international contractors with minimal hassle. Remote’s contractor platform automatically generates the right US tax forms for you to send to the US federal government. For overseas contractors, we offer compliant contracts on a self-service basis.

Do overseas contractors need a 1099?

1099 is the IRS code for US-based contract workers, not contract workers in general. The IRS doesn’t require companies to withhold taxes or submit income reports for non-US contractors engaged in work that takes place outside the US.

So, for example, if you have a US contractor working for you while they live in Peru, you’ll need a 1099 for them. What about a Canadian contractor living in Canada? As they aren’t subject to US taxes, they don’t need a 1099. 

Companies are required to submit a 1099 for overseas contractors who are:

• US citizens living abroad but working for a US company

• US citizens who perform some work in the US but are based internationally

If you’d like to learn more about 1099 form management and requirements for your team, make sure you read through Remote’s dedicated what is a 1099 form? Guide

Contractor Management —

7 min

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.

Other countries have their own rules for hiring overseas contractors. The UK classifies contractors according to IR35 legislation, and other countries in the EU set their own labor laws. These rules are constantly changing, and hefty consequences can result for companies that incorrectly classify their international employees as contractors — from monetary fines and back taxes to loss of IP. 

Remote’s Contractor Compliance Checklist can help you determine if a new hire should be treated as an employee or an international contractor. 

What are the benefits of hiring foreign contractors? 

The most obvious benefit to hiring foreign contractors is the ability to work with top talent, regardless of where that talent lives. It’s quicker and easier than hiring an employee, and international contractors are often more cost-effective because you don’t have to pay for benefits.

A contract relationship is also a good way to test-run someone for long-term employment, allowing you to convert a contractor into an employee at a later date. For instance, you might hire a contractor in a foreign country to work on a year-long project. During that time, the contractor might turn out to be a great fit for your company culture. Also, they learn about your work processes and increase their skills while collaborating with your internal team. At the end of the contract, you can offer your contractor a full-time position and bring in someone who’s already familiar with your company rather than recruiting and hiring from scratch. 

Best of all, international contractors arrive ready to contribute and require very little of your time and other resources before they begin adding value to your organization.

Research in detail: Read more about working with international contractors with our expert guide to hiring international contractors.

What are the differences between an international contractor and an employee? 

An international contractor is a self-employed individual who provides services to your company. An employee is just that, someone who is considered part of your staff and typically does not work for any other company.

That being said, the definition is not always straightforward and can vary from country to country. International employment laws dictate the parameters that define a contractor and an employee. Contractor classification across international borders may sometimes feel like trying to hit a series of moving targets.

Your contractor can easily slip into an employee classification simply by dedicating most of their time to your project or working with you over an extended period. The way you pay an international contractor can also impact their employment status, depending on country-specific laws.

Misclassifying an employee as a contractor comes with consequences and a heavy financial penalty, even if you make an innocent mistake. You’ll want to assess the pros and cons of working with foreign contractors to determine whether it makes more sense to employ someone directly.

What are the different types of international contractors?

An international contractor is a self-employed individual, also called a freelancer. Contractors use a variety of work models:

• Independent contractors work for you in other countries, but they are not employees. The engagement is governed by a localized contract directly with the contractor that defines the parameters of the relationship and the work being performed.

• Subcontractors partner with an umbrella company that acts as a talent supply chain between your business and your international contractors. The umbrella company manages all the compliance requirements, including payroll, taxes, benefits, and withholdings. Your business is charged a recurring fee to manage each overseas contractor.

• Agency contractors are employed through an agency and move from one contract to another while maintaining stable employment. Agency contractors usually get paid when they’re between contracts. The agency helps maintain the quality of work, but it also puts a sizable markup on every billable hour or fixed-price project.

It’s worth reviewing the advantages and drawbacks of working with different kinds of international contractors when deciding on the best arrangement for your company.

What are the pros and cons of working with international contractors?

One of the top reasons to work with international contractors is the ability to remain agile when sourcing talent for your project, especially if you have short-term requirements.

With an unlimited talent pool, you’ll have more potential candidates to choose from. You also can hire overseas contractors more easily than employees.

And, just like with hiring overseas employees, international contractors bring different perspectives, knowledge, and skills to the table, driving innovation and growth. Ultimately, hiring overseas contractors helps you create a more diverse and inclusive workforce. More diversity can benefit your business and help to retain your existing workers — over 60% of adults say companies focusing on diversity and inclusion in the workplace is something they want to see. 

There are drawbacks to working with international contractors, however, including the following:

• The expense of working with them over long periods of time

• IP exposure risk in foreign countries

• Compliance regulations in different countries

• The time needed to manage foreign payments

• HR and benefits for a global workforce

Before deciding what employment model is right for your business, explore the pros and cons of working with international contractors.

What else does compliance entail when hiring compliantly?

If you’re thinking about hiring independent international contractors, you’ll want to consider what’s required to stay compliant in every country in which you operate. Some of the areas to investigate include the following:

• What foreign tax obligations will you have?

• What tax forms will you need to lodge with the IRS?

• How will you develop localized contracts for each country?

• Do you have access to legal advice in the countries where your foreign contractors reside?

• Are there HR consultants in the local area whom you trust to give you good advice?

• Are you entitled to your intellectual property by default, and how do you protect yourself in advance?

• Is there a minimum or maximum duration for contract workers in the country?

• 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?

The more you know before entering into a contract, the better positioned you will be to have a fruitful relationship with global contractors while avoiding unnecessary legal problems and liabilities. Remote makes it easy to work with international contractors all around the world.

What are the penalties for misclassifying workers? 

When it comes to misclassifying employees, intent is not taken into consideration. Making a genuine mistake will attract the same harsh consequences as an intentional misclassification.

Misclassifying your contractors can attract penalties and fines, subject your company to scrutiny from foreign governments, and impact your ability to operate in a country going forward. You can even lose rights to your company’s intellectual property.

Luckily, contractor management doesn’t have to be difficult or expensive. Remote’s platform ensures that you begin attracting, onboarding, and contracting global talent without ever needing to second-guess your compliance standing overseas. We take care of the legal headaches so you focus on building your international dream-team and growing your business. 

Find the right contractor management platform 

If you would like a quick and easy way to automate your contractor management, choosing a contract management platform like Remote is an excellent place to start. You can begin sourcing, onboarding, and paying international contractors in just a few minutes.

With the right contractor management solution, you’ll be able to pay your contractors in their local currency without any hidden fees. Automated contractor management software also simplifies compliance management to protect your business from legal complications.

Remote’s Contractor Management platform provides you with the peace of mind you need to hire contractors in compliance with local labor laws while reducing the management burden of filling out tax forms.

Here’s the best part: you can build a global workforce, accept invoices, and pay contractors across the world. Easily manage and approve one-off and recurring invoices using the Remote platform, and initiate one payment for all contractors in your local currency. Our Expert Guide to Working with Remote Contractors covers all the details you’ll need to know.

Book a demo with one of our compliance experts to learn how Remote can help you find, hire, and pay international contractors compliantly.