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Contractors 15 min

How to pay independent contractors: The complete guide

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Independent contractors can be a great way to leverage top talent and scale up your operations quickly. In this guide from Remote, you will learn how to pay your independent contractors quickly, easily, and in full compliance with the appropriate labor laws.

Managing and paying a distributed team requires a global payroll strategy, as well as an understanding of taxes, laws, and regulations in all the places where your contractors are. Hiring independent contractors also means paying close attention to classification, compliance, and risk management.

Despite the obstacles, paying independent contractors can be quite easy. (In fact, with Remote, you can sign up now and begin onboarding and paying contractors all over the world in minutes!)

To get you started, we have put together this helpful guide on everything you need to know about how to pay independent contractors around the world. For more help, check out some of our other guides:

No matter what your questions on how to pay independent contractors (or where those contractors may live), Remote is here to help. Let’s take a look at everything you need to know to pay your contractors fairly, on time, and in the appropriate currency.

What is an independent contractor?

An independent contractor is a non-employee worker who provides goods or services to your company. Contractors work for themselves, usually with their own equipment, in their own spaces, and on their own time. They are their own employer, so you have limited control over them. In fact, in most countries, independent contractors are defined by this lack of employer control.

Why use independent contractors?

Companies use contractors for a variety of reasons. Working with contractors allows you to access talent and services outside of your company. Most of the time, independent contractors already have the necessary skills to complete your project, which means you don’t have to spend precious time on training. Contractors immediately increase your bandwidth without the extended onboarding period required for employees, allowing you to scale up or down depending on the situation. Contractors can also be very cost effective, because they don’t require benefits packages, paid time off, or company-withheld taxes. However, to account for this difference, contractors usually cost more than employees on a strict per-hour basis.

It can be tempting to classify workers as contractors because of the apparent ease and financial savings. However, if you don’t manage contractors correctly, the penalties of misclassification more than offset those savings — and those penalties are not only limited to monetary fines.

Read our guide to the dangers of contractor misclassification for more information.

What are the challenges of managing independent contractors?

Managing independent contractors can be challenging. Working with independent outsiders involves a lot of moving parts, including invoicing systems, complex labor laws and regulations, taxes, and classification. In addition, paying international contractors is a bit more complex than paying workers in your own country. Let’s go over the basic challenges.

Collecting and processing invoices

Because contractors work for themselves, they track and manage their own time and output. Then, they invoice you for payment based upon whatever agreement you have in place, be that an hourly or per-project basis. So, before you can do anything else, you need a system to process invoices and pay contractors.

Paying a contractor isn’t like paying a bill. Contractors depend on timely and correct payments the way employees depend on their salary, so it’s vital to make payments quickly and reliably. The challenge is managing different currencies and banking systems, as well as local regulations that may mandate payment in local currency. All of this can cause delays, affecting your relationship with your contractor. Be sure your contractor payment tool can handle all your contractor payment needs to avoid unpleasant surprises.

Staying compliant with local labor laws

Every country has its own local labor laws and regulations. For example, in some places, you need to provide safe working environments if the contractors ever come to your office. In other areas, contractors must be registered with the government before they can accept contracts as independent workers.

If you’re managing global workers, you have more than one set of rules to follow — and those rules can change without notice. Monitor the laws in all areas where you use contractors. If your company does not have the resources to monitor changing laws in all the countries where you hire contractors, be sure you’re working with a partner who has the necessary international legal infrastructure.

Managing tax requirements and relevant tax forms 

As with local labor laws, every country has its own tax requirements and tax forms. For example, US companies are required to file Form 1099 for each of their contractors. Failure to do so can result in penalties. These requirements can change from year to year. Be sure you are properly collecting and filing the appropriate forms on behalf of each contractor.

Minimizing misclassification risk

More countries are cracking down on contractor misclassification, so it’s more important than ever to get classification right. Minimize your risk of contractor misclassification by:

  • Researching classification criteria for each country where you hire
  • Paying contractors appropriately for contract work
  • Periodically reviewing the nature of your relationship with each of your contractors

In some cases, the country’s government may have a system in place for contractors to use. Be sure to work within that system to avoid entering into illegal contracts.

What are the key stages of the contractor payroll process?

The process of paying international contractors starts with classification and ends when you are no longer engaged with a particular freelancer. Here’s how it all works.

Contractor classification

You must ensure that each contractor relationship meets the contractor classification criteria for that country. This is vital. If you misclassify employees as contractors, you risk serious consequences. Learn more about hiring employees and contractors in different countries around the world on Remote’s Country Explorer

Contracts

You should have a legal agreement with your contractor in place before work begins. The contract should establish the scope of work, pay rate, and pay cycle. Your contract should also outline protections for your intellectual property, including who owns the work the contractor produces on your behalf.

Contracts may require specific changes depending on the country where your contractor resides and the country where your company operates. A legal team with local expertise should review contracts periodically to ensure they are up to date with local laws.

Onboarding

A streamlined, country-specific onboarding process is a key component for paying independent contractors quickly. Although onboarding contractors is easier than onboarding employees, you still need to collect appropriate information, make sure the contracts are signed, and get your new team members working.

Invoicing and payroll

Tactics for managing contractor invoices and payroll are unique to each company. Whatever your strategy may be, it is vital that you correctly pay your contractors for the work they perform. Pay workers in local currency where required by law or when the contractor requests to provide a great experience. If your contractor requests a non-local currency, like US dollars, be sure you can legally pay your contractor in that currency before agreeing. Once you have the accuracy part down, try to speed up your contractor payment cycle. Fast payment of invoices builds trust and improves your reputation among freelancer circles.

The other question is how much to pay contractors. Costs are specific to region, role, and industry. In most cases, the contractor sets the rate, and you decide whether you want to pay that rate or negotiate. Contractors are responsible for their own taxes, insurance, and overhead, so their rates are determined accordingly, which usually means more on a per-house basis than an employee performing the same tasks.

Classification review

Periodic classification reviews will help you minimize misclassification risks. Classification laws change over time, both locally and internationally. Regular reviews help ensure you are following any updated rules and regulations. In some countries, the length of a relationship is part of the criteria for classification, which is another great reason to schedule recurring reviews of independent contractor agreements.

The substance of your relationship with a worker may change over time, necessitating reclassification from contractor to employee. Depending on the situation, your needs or the needs of the contractor may change and require reclassification. Periodic review will show you when relationships have shifted or need to shift toward employment relationships. 

Termination

You have much more flexibility terminating contractors than employees. Terminating an independent contractor can be as simple as not renewing a contract or not requesting new projects. However, if you have improperly classified a worker as a contractor, such termination could violate statutes and open you up to fines, penalties, and litigation.

A contractor who has been terminated may alert the authorities if they are upset with your company, which could draw more attention to whether the worker was classified correctly. This is another reason proper classification and periodic reviews are vital. Working with a partner with local expertise can help minimize risk.

How do I manage payroll for independent contractors?

There are several options for managing payroll for independent contractors. These include managing independent contractor payments in house; using a payment-only tool; or using with a contractor management platform.

In-house independent contractor payments

If you handle things yourself, you will need a way to collect and manage invoices. This means staying up to date with any local laws that may affect your contract workforce. You will have to establish banking arrangements that allow you to pay workers in a timely manner in the appropriate currencies. Keep in mind that some countries require you to pay in local currency or through government-approved banks. While contractors are typically responsible for their own taxes, in-house contractor management may require you to manage certain types of taxes or withholding.

Contractor payment tools

Simple contractor payment tools include online options like PayPal as well as direct bank or wire transfers. If you are comfortable handling the invoicing process outside the payments process, this may be a good option. Be sure to keep your records organized and accessible in case you need to review them later on a regulator’s request.

Contractor management tools

A full contractor management platform allows you to manage invoices, set up recurring invoices, generate tax forms, and pay contractors for services rendered, all in one place. In addition, a contractor management platform can help you understand your legal responsibilities to contractors in different areas and may be able to assist you with classification questions.

To see how it works, sign up for now to use Remote’s contractor management platform. With Remote, you can manage contractor invoices, payments, and documentation all in one easy-to-use tool. If you decide to convert a contractor to an employee, Remote can help you with those conversions as well.

How do I know if a worker is a contractor or an employee?

The exact criteria for classification varies from county to country. Typically, if you are hiring international contractors, the laws of the country in which the contractor resides take precedence over the laws in your own country. That means you will need to be familiar with relevant regulations.

In general, the classification of employee or contractor depends on the level of control the company has over the worker with respect to factors such as working hours, working location, equipment, etc. The more the company has a say in where or how a worker completes their tasks, the blurrier the line between contractor and employee becomes.

For more information, see Remote’s guide to contractor misclassification.

When is it time to reclassify a contractor as an employee?

How do you know when it’s time to reclassify a worker from a contractor to an employee? A contractor should be converted to an employee when they meet the criteria for an employment relationship or when both parties agree to make the change.

Here are some key things to consider:

  • Are you in compliance with local laws and regulations with the relationship today?
  • Do you want to offer benefits to this worker?
  • Do you want the contractor to work on more sensitive projects?
  • Have you worked with the contractor for an extended period?
  • Do you face competition for the worker’s time?
  • Is the contractor asking to join your company as an employee?

For more information, see Remote’s guide on how to convert a contractor to an employee.

What are the risks of misclassifying independent contractors as employees? 

The risks of independent contractor misclassification can be severe. They include financial consequences, such as fees and penalties; litigation; and damage to your company’ reputation.

Fines and penalties

Improper classification comes with fines and penalties both for breaking the law and for failure to pay employment taxes you would have owed had the contractor been classified correctly from the start. Fines depend on the country, length of misclassification, and company intention. For example, in the Netherlands, fines increase if you are found to have willfully misclassified workers.

Back pay, taxes, and benefits compensation

Even if you misclassified the employee by accident, you will be responsible for unpaid taxes as well as relevant back pay and compensation for benefits the employee was denied. 

If you began working with a contractor two years ago and are found to have misclassified them the whole time, you will owe the government taxes and payments into social programs like Social Security for the entire two years. If they were paid at a rate below minimum wage, you will also owe back pay. You may also have to pay the contractor the monetary equivalent of required benefits such as paid time off, sick leave, or retirement contributions.

Litigation

Misclassified workers may be entitled to sue you for damages, putting you at risk for judgements and legal fees. If many employees are involved, this can be a very costly risk.

Audits

If you are found to have misclassified workers, your company may be audited to determine the extent of the issue. Audits are expensive and time consuming when unprompted, but they can be especially grueling if investigators believe they are looking for something specific. If you are found to have additional violations, you may receive additional penalties and consequences.

Damage to brand

Word gets around. Misclassification results in workers being denied pay and benefits. You may get a bad reputation for treating workers poorly, which can include negative press. This could limit your opportunities to engage with partners and investors if association with your brand becomes problematic.

For more information, see Remote’s guide to penalties of contractor misclassification.

Tax and compliance practices for paying independent contractors

In general, companies are not responsible for withholding taxes on contractor payroll or for paying payroll or unemployment taxes. However, requirements vary from state to state or country to country. In addition, your country of headquarters may require you to report payments made to contractors overseas. For example, US-based countries have additional reporting requirements when working with international contractors.

A local expert can guide you through tax and compliance considerations unique to each country. Click here to get started hiring international contractors.

Tax forms needed for US contractors and employers

In the United States, the Internal Revenue Service requires companies who pay contractors more than $600 to collect and file specific forms.

  • Collect Form W-9 from US contractors.
  • Collect Form W-8 BEN from contractors outside the US.
  • Collect Form W-8 BEN-E from contractors who bill through their own entities.
  • File Form 1099 for each contractor earning more than $600.
  • File Form 1096 with physical 1099 forms.

If this seems complicated, don’t worry. A partner like Remote can simplify contractor management. Here are some resources to help you get started:

What’s the best way to manage global contractors while mitigating risks?

To avoid issues of misclassification, missed payments, or invoicing mistakes, it is best to use a contractor management platform like Remote to manage your global contractors. With Remote, you can:

  • Manage US tax forms. Remote automatically requests the appropriate tax forms so you don’t miss anything.
  • Hire like a local across the globe. Remote makes it easy to manage and pay contractors right around the world. See our Country Explorer for more information.
  • Comply with international laws and regulations. Our experts stay on top of changes in the law so you don’t have to.
  • Edit and sign contracts within Remote. Compliant contractor agreements no matter where you hire. Our platform allows for easy signatures and approvals.
  • Easily convert contractors to employees. View and manage contractors and employees on one platform and initiate conversions easily.

The fastest, easiest, safest way to hire international contractors  

Independent contractors can be a great asset to your business. To get the most from your freelance workforce, you must ensure you pay your contract team on time, in the correct amount, and in the proper currency. 

Remote Contractor management makes it easy to onboard and pay contractors all over the world. With Remote, you can:

  • Onboard contractors in minutes with customizable contracts
  • Save time with automated invoicing approvals and payments
  • Easily manage and approve one-off and recurring invoices
  • initiate one payment for all contractors in your local currency

Sign up now and start accepting invoices and paying contractors across the world!