How to pay international contractors: Expert guide

To pay international contractors, you must consider a few extra requirements to ensure everyone is treated fairly — and to ensure you don’t expose your business to unnecessary risk. You’ll need a plan for handling things like payment methods and foreign exchange before you start onboarding new team members.

Remember, there’s more to global payroll than a simple financial transaction. At the very least, you want to ensure your business is compliant with employee classifications and reporting requirements in your home country and in every country where your extended team resides.

This is where things can get confusing.

When paying international contractors, you need to navigate unique labor laws for each location (especially if your team is spread across multiple countries). It can be a frustrating and expensive process, especially if you’re engaging professional tax and payroll services in every country.

Understanding how to pay overseas contractors, and doing it at scale, is essential for startups and businesses looking to take advantage of the benefits of having a global workforce. This detailed guide tells you everything you need to know about paying independent contractors in other countries. Here’s the good news: with the right service provider, this process can be a stress-free, inexpensive experience.

What is an international contractor?

If your company is based in the U.S., an international contractor is someone who does not reside or work in the U.S. and is not a U.S. citizen. For other countries, the distinction is the same: different country AND non-citizen status. It’s important to note the definition has more to do with where the services are performed than with what passport the independent contractor holds. If the actual work occurs in a country outside of the U.S., even if it’s done by a U.S. citizen, the local government almost always imposes an income reporting requirement and possibly a withholding obligation. Put simply, you cannot simply 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 the local definitions. 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 your favorite longtime contractor is now technically an employee and 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 pay from your business account(s) in the U.S., or you can use a variety of payment methods including fintech services, digital wallets, or common payment platforms like PayPal. Global employment partners like Remote make paying global contractors easy to manage in a fast, simple, and compliant way.

How do I pay international contractors?

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

Bank transfers

Your bank can arrange your international money transfers, but this is usually the most expensive way to pay overseas contractors. Bank transfers do not give competitive exchange rates and you’ll have to pay a service charge for every transfer. Another annoying feature of bank transfers is 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. Fees can run between $15 and $30 and are hard to predict. One transfer may attract multiple fees, then the next might incur none. You won’t receive any accounting of these fees either. 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

You can write a check from your business account and post it to your contractor through the mail or express courier. Checks are not a popular option with international contractors because they may be charged a fee to deposit; they’re at the mercy of the bank’s exchange rate; and funds are held in escrow until the check clears. With global delays in mail due to Covid-19, 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, going down the wire transfer route through companies like Western Union is now almost as outdated as paper checks. Both money orders and wire transfers 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 few and far between today.

PayPal

Perhaps the best known way to make digital payments is using PayPal. 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. You will pay fees of around 4% of the total payment, which can add up quickly. The other drawback to PayPal is the recipient must have a PayPal account to receive payment, which is not always straightforward, depending on the country.

Wise

Formerly known as Transferwise, Wise is one of the best fintech platforms for sending international contractor payments. Wise lets you set up multiple foreign currency accounts, gives you bank-level security, and lets you make 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, and it’s the fastest way to get money to your international team. Wise claims half of all payments arrive instantly or within the hour. You stipulate how much you want to deposit into your overseas contractor’s account and there are no hidden fees. Wise is one of the most cost-effective ways to send money overseas, coming in about 19 times cheaper than PayPal.

Remote

Remote has the ideal platform to simplify paying international contractors. Financial transactions for international payments are fast and easy. There are no additional or hidden fees.

Remote lets you stay compliant globally, mitigates your risk when working with overseas contractors all over the world, and enables you to scale your international team.

You can easily manage and approve one-off and recurring invoices using the Remote platform and initiate one payment for all contractors in your local currency.

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

What is the best way to pay international contractors?

Putting policies in place for paying overseas contractors can be tricky, especially if you don’t have an internal HR department or legal department who understands international labor laws. Depending on the country where your contractors work, the payment structure you use can have ramifications on their employment status.

Different payment structures include:

Project fee

A project fee is a pre-agreed amount for a specific piece of work. This is also called a fixed-price project fee. Both parties know at the start what the budget is for the project. It’s important to have an ironclad contract when working on fixed- price projects to consider things like project milestones, progress reporting, and sanctions for missing deadlines. Major projects like technology development or engineering design often attract a fixed-price arrangement. 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 and is renegotiated 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 performed regularly. Make sure to address what happens if you haven’t supplied enough work to keep your contractor busy for the hours retained. Will you forfeit those hours, or will they roll over into the next month? 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 time sheet and expense report to prove the time and materials consumed for the payment period. If you can closely time the effort it takes to produce the outcome you want, 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. The other problem is time and materials contracts offer no incentive to work efficiently. The longer it takes to deliver results, the more the contractor is paid.

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.

Download

Beware the dangers of contractor misclassification

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

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

Misclassification of contractors is serious business and can attract hefty penalties.

Global Payroll —

2 min

[Webinar Recording] Managing contractors and avoiding misclassification

In this one-hour webinar on contractor management, three expert panelists discuss best practices for the contractors on your team, including what to include in a contract, who should own the contract, contractor status reviews, and more. 

Determining what currency to pay contractors

Before you can know how much to pay, you need to confirm in which currency the contractor will be paid. Because foreign exchange rates are constantly changing, the way you manage payment to independent contractors in other countries can make a big difference to your cash flow and operating expenses. Options include:

• Pay everyone in US dollars. This 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.

• Pay each contractor in their local currency. This is good for contractors but means you’ll have 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.

• Use 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 is a quick breakdown of the advantages of different international contractor payment options:

Remote:

Pros: Designed to manage international contractors including 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

• Around-the-clock support

Cons: Because Remote was founded in 2019, Remote's contractor payment services are less well known than Wise or PayPal.

Wise:

Pros: Everything you need to grow your business and operate internationally but without the high fees and 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.

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

PayPal:

Pros: Mature platform with widespread adoption. Transaction fees average about 4% of invoice amount.

Cons: Does not provide any contract management services or IP protections. Recipients must have a PayPal account.

Bank transfers:

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

Cons: Poor exchange rates and high service fees. Your contractors are likely to experience hidden fees and receive less than you sent them. 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: High fees. Must appear in person to receive 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: Dependent on international mail services. Highly susceptible to fraud. High fees. Long payment cycles.

How much do international contractors make?

Ideally, you’ll want to attract, retain, and motivate the right talent at the right point in time and 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 for the same role. Cost of living in each country has a big impact on those expectations. 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.

#1. Set a global payment standard by role and pay everyone the same amount in U.S. 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 hinge on the strength or weakness of the U.S. dollar.

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

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

Pros:

• You 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 not making as much as 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 supporting governments who have oppressive policies if you don’t have a thoughtful approach to localization. Remote cares deeply about offering fair and equitable compensation to everyone, everywhere. We strongly advise our customers and partners to do the same, and we share insights on how to manage this in practice.

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

Offering benefits to international contractors

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

If the contractor has access to socialized healthcare, like the United Kingdom 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 United States. For example, in Latin American countries, contractors may be looking for childcare subsidies and food allowances. Also consider offering paid time off for public holidays, cultural or religious festivals, and vacations.

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

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

If you’re confused about the best way to approach your pay and benefit 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. Any business paying international contractors can use their toolkit, including:

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

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

Project FAIR bases all their 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.

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 is 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

Unfortunately, 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 and 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. You must comply with local tax laws in each country. You may potentially have to withhold taxes like 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.

For tax purposes in the U.S., the Internal Revenue Service (IRS) describes someone who is not a U.S. citizen and does not live in the U.S. as a non-resident alien. If the work foreign contractors do for you is performed outside the U.S.:

• You do not need to report payments made to them to the IRS.

• You do not need to withhold any U.S. tax from payments to non-resident aliens.

• You will have to get them to complete an IRS W-8 BEN-E form as proof of their non-resident alien status to exempt you from withholding U.S. taxes.

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 U.S. tax forms for you to send to the U.S. federal government. For overseas contractors, we offer compliant contracts on a self-service basis.

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.

A contract relationship is also a good way to “trial run” a person for long-term employment, allowing you to convert a contractor to an employee at a later date. Best of all, international contractors arrive ready to contribute and require very little of your time or 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 vs 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.

Unfortunately, the definition is not always so straightforward and can vary among countries. International employment laws dictate the parameters for who is a contractor and who is an employee. Contractor misclassification 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 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 another country, 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 the 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, so it’s on the agency to find them work. The agency helps maintain the quality of work, but they also put 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 the best arrangement for your company.

What are the pros and cons of international contractors?

One of the top reasons to work with international contractors is your ability to be agile when sourcing talent for your project, especially if you have short-term requirements. With an unlimited talent pool, you can hire overseas contractors easier than onboarding an employee.

There are drawbacks to working with international contractors, not least of which is the expense of working with them over long periods of time. Your intellectual property may not be protected in the same way as in the U.S., or maybe not at all. If you’re hiring overseas contractors in more than one country, managing risk becomes more complicated for every country where your team works.

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

How do I hire international contractors compliantly?

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

• 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 country where your foreign contractors reside?

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

• What are the legal requirements for paying people?

• Are you entitled to your intellectual property by default, and how you need to 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 are to have a fruitful relationship with your global team while avoiding any unnecessary legal problems or expense. Remote makes it easy to work with international contractors all around the world.

What are the penalties for misclassifying workers?

Intent is not taken into consideration in most foreign industrial relation laws. Making a genuine mistake will attract the same harsh consequences. Being a novice to international labor laws is no defense. 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 now and into the future. You can even lose rights to your IP and innovations.

Luckily, contractor management doesn’t have to be difficult or expensive. All it takes is a good partner like Remote to take the sting out of contractor administration and help you get on with growing your business.

Finding the right contractor management software

If you would like a quick and easy way to automate your contractor management, creating an account with Remote is a good way to start. You can begin onboarding your contractors in a few minutes and work with multiple countries with ease.

You’ll be able to pay your contractors in their local currency, something that’s required in many countries. Automated contractor management software can also relieve some of the burden of compliance management.

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.

Learn more: Expert Guide to Working with Remote Contractors