How to pay independent contractors: the complete guide

Working with independent contractors is a great way to leverage top talent and scale your operations quickly.

But paying them isn’t so straightforward — especially if they’re based halfway around the world. To ensure there are no hiccups, you need to establish a robust payment process, and understand the exact regulations where your contractors are based. 

In this article, we’ll help you get to grips with paying contractors, and show you the quickest, easiest, and — most importantly — safest ways of doing so.

So let’s dive right in.

How do I pay an independent contractor?

On the surface, the contractor payment process is relatively simple:

1. You create an agreement where the fee and payment structure are clearly outlined

2. The contractor delivers the work as agreed

3. The contractor creates and sends you an invoice for the work

4. You send payment for the invoiced amount through a pre-agreed payment channel

However, there are tax, compliance, and other considerations to factor in among these four steps, especially for international contractors. We’ll dive deeper into these throughout the article.

When do I pay my contractor?

When you draft your initial agreement, you and your contractor should discuss and document the payment terms. Many contractors prefer to structure payment in different ways, so you need to be flexible.

If the agreement is ongoing, then it’s likely that your contractor will want to be paid on a weekly, bi-weekly, or monthly basis. You should outline which day the payment should be made (i.e. the last Thursday of the month).

If the contractor is working on a one-off project, then you might stipulate an exact date for payment in, say, three months’ time. Alternatively, the wording in the agreement might require that you pay as soon as the contractor delivers the project.

Ultimately, there are no set rules here. The date (or dates) of payment should be clearly outlined and agreed upon by both parties in the initial contract.

Laying the groundwork

You can pay your contractors a lot more promptly if most of the groundwork has already been done.

It’s preferable to uncover any issues during the hiring process, than when the work has been done and the contractor is waiting to get paid.

As a result, there are a few things you need to ensure before you start making any payments.

Is your contractor correctly classified?

In almost every country in the world, contractors and employees are classified differently. Employees are entitled to benefits and worker protections, whereas contractors are usually not.

Conversely, contractors are able to exercise more freedom and flexibility in the way that they work, whereas employees are generally subject to the rules and practices of their employer.

It’s vital to understand this difference, so that you don’t create misclassification risk.

For example, if you’re offering additional benefits or bonuses in your payments, you’re creating misclassification risk. This is because benefits and bonuses are usually a hallmark of an employer/employee relationship — not a contractor/client one.

Each country has their own guidelines on how to differentiate between contractors and employees, but generally, a contractor should:

• Determine their own work schedule and working hours

• Perform work (or be able to) for other companies

• Set their own rates

• Provide their own tools or equipment

• Not be integrated into your company and its operations (i.e. they shouldn’t have an internal email address)

• Be able to delegate or subcontract work (if relevant)

• Work without direction or supervision

If you (or your contractor) are doing any of these things differently (i.e. you are setting the working hours), the authorities may accuse you of misclassification — even if it’s unintentional. This can result in penalties, fines, and reputational damage, as well as backdated taxes and social contributions.

Therefore, always assess and reassess the working relationship to ensure you’re not misclassifying.

Does the contractor agreement specify the payment structure and terms?

When you onboard a contractor, you should always have a legal agreement in place before any work begins. This contract should establish the scope of work, pay rate, and pay cycle, and outline the relevant protections for your intellectual properties (including who owns the work).

In terms of payment, the contract should clearly state:

• How much you will pay the contractor

• How the payment is calculated (i.e. for hours or days worked, for project phases completed etc.)

• How the payment is structured (i.e. full sum upon completion, on an ongoing monthly basis, partial sum prior to work beginning etc.)

• The currency of payment

• The method of payment (i.e. through bank transfer, a specific app etc.)

This will help to mitigate any potential confusion or debate when it comes to executing the payments.

Note that, if you’re working with international contractors, the contract may also require specific provisions relevant to the contractor’s country laws.

You can hire a local legal firm to review and structure these contracts, but this can be a costly, time-consuming process. Alternatively, Remote’s in-house, on-the-ground country experts can do all the heavy legal lifting for you.

Has the contractor been onboarded?

A streamlined, country-specific onboarding process makes it far easier to pay your contractors further down the line.

Although it’s easier to onboard contractors than employees, you still need to obtain and complete the relevant paperwork and information, such as payment details and contact information. If this is all handled during the initial onboarding phase, it saves you from chasing documents or signatures come payment time, and creates a smoother payment experience for both parties.

What contractor payment system should I use?

When you pay employees, you do so through an internal or external payroll which is calculated and executed each month. All relevant taxes and other contributions are accounted for and, where necessary, withheld. The net salary is then transferred to each employee’s bank account.

Fairly straightforward, right?

However, paying contractors is different. They are self-employed, which means that they invoice you for their time or output (i.e. an hourly or daily rate, a project fee, or whatever else you both agreed upon in the contract) instead.

Paying these invoices isn’t like settling a bill, either. Contractors depend on timely, accurate payments in the same way that employees depend on their paycheck.

As a result, you need a reliable, efficient platform through which to receive, manage, and pay all your invoices.

There are three ways you can do this:

An in-house contractor payment system

One option is to handle things yourself in-house, although this will likely involve a lot of manual work. It also increases the likelihood of emails getting misplaced or mistakes being made.

You’ll have to stay up to date with any local laws that could affect your contractors (domestically and internationally), and establish banking arrangements that allow you to pay workers in a timely manner (and in the appropriate currencies).

Keep in mind, too, that some countries require you to pay through government-approved banks. And while contractors are typically responsible for their own taxes, in-house contractor management may, in some cases, require you to manage certain types of taxes or withholding.

A digital payment tool

If you’re comfortable handling the invoicing process and the payments process separately, methods such as PayPal, banks, or wire transfers may be a good idea.

However, this approach is difficult to scale without extensive support, while some countries may not support your desired payment method.

A contractor management tool

A full contractor management platform allows you to manage invoices, set up recurring invoices, generate tax forms, and make payments — all in one place.

In addition, it can help you understand your legal responsibilities to contractors in different areas, and assist you with classification questions.

Whether you’re working with one contractor or 100, this is easily the most efficient way to manage your contractors and process their payments.

What are my tax obligations when paying contractors?

As mentioned, contractors are self-employed and responsible for handling their own taxes come payday.

However, that doesn’t mean that you’re completely devoid of any responsibilities. For example, if you’re a US company, you are required to file a 1099 form for each of your US-based contractors, while in some countries, you may be required to fill out VAT paperwork on behalf of your contractor.

If you’re hiring contractors in different countries (or even different states), it can be difficult to establish what exactly your obligations are (if any), and how you should meet them.

Therefore, it’s advisable to work with qualified, experienced tax professionals who can keep you above water. Our local, in-house tax experts can safely guide you through these processes, and tell you exactly what your obligations are across the globe. 

How do I stay compliant when paying contractors?

In some countries, there may be specific labor laws that are relevant to paying contractors. For example, in certain locations, contractors must be registered with the government before they can accept contracts and receive payments as independent workers.

Knowing about such laws (let alone complying with them) requires a lot of time and effort. And if you’re working with contractors across the globe, you need to follow multiple sets of rules — any of which can change quickly.

To stay on top of these laws (and their amendments), you can work with a local law firm, but this can be costly and time-consuming.

Our legal experts constantly monitor compliance laws in every single country we operate in, ensuring that you avoid any potential legal pitfalls along the way. 

How do I pay contractors in different currencies?

If your contractors are all based in the same country as you, this obviously isn’t an issue. But when you’re paying people across the world in different currencies, it can be difficult to manage. For instance, you have to navigate:

• Different banking systems

• Local laws related to currency transfers (including amounts, methods, and restrictions)

• Foreign exchange fees

• Different technology platforms and providers

As well as eating up time and resources, all of these things can cause payment delays, affecting your relationship with your contractor.

It’s far quicker, easier, and cheaper to manage foreign payments through a single platform, such as Remote’s. We handle payments in over 100 currencies, with ultra-low exchange rates, allowing you to handle multiple payments in just a few clicks.

How much should I pay an independent contractor?

This is a difficult question. Usually, contractor costs are specific to region, role, and industry, although contractors with more experience or a better portfolio may demand more.

In most cases, the contractor sets the rate, and you decide whether you want to pay that rate or negotiate. However, always remember that contractors are responsible for paying their own taxes, insurance, and overheads, so their rates are determined accordingly.

Ultimately, it’s up to you to determine if the market rate for a particular role in a particular region is fair — and if you’re willing and able to pay it.

Paying independent contractors with Remote

On the surface, hiring and paying a contractor may seem like less work than hiring an employee.

But to do it efficiently and compliantly — and protect your business — it’s recommended to work with a reliable, experienced partner.

Whether you’re hiring contractors locally, internationally, or both, Remote’s all-in-one contractor management platform enables you to:

• Receive, manage, and pay all your contractor invoices, at scale

• Comply with all tax and legal requirements in your contractors’ countries

• Make payments in multiple currencies with low exchange fees

• Mitigate potentially costly misclassification risks

Start onboarding and easily paying your contractors today — wherever they are in the world.

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