Contractor Management 13 min

How to manage independent contractor payroll

Written by Pedro Barros
July 14, 2023
Pedro Barros

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One of the most important parts of contractor management is being able to pay people quickly and accurately.

And to do that, you need to have a seamless and efficient payroll structure in place.

This article shows you how to manage payroll for your independent contractors all over the globe, including:

  • The differences between contractor and employee payroll

  • How to effectively set up and manage contractor payroll

  • The main risks and requirements to be aware of in managing payroll

  • The benefits of outsourcing payroll

So, let’s dive right in.

What is the difference between contractor payroll and employee payroll?

Running international payroll is complex, regardless of whether you’re working with contractors or employees. But there are distinctions.

Here are some of the key differences when running payroll for these types of workers.

Independent contractor payroll

An independent contractor is a worker classification. It can vary by country, but contractors generally have control over the nature of their work, how they do it, and the timeline for their deliverables.

Contractors also tend to supply their own software (although some employers provide certain types of software), handle their own marketing, keep their books, and more.

Written evidence of a contractor relationship, such as your contract’s terms and your communications, can offer further proof that “independent contractor” is the correct classification of a worker.

Ultimately, contractors are business owners, and you’re their client.

This means your contractor is (in most cases) responsible for handling their own income tax payments and social contributions.

Let’s look specifically at US-based contractors, sometimes called 1099 contractors, as an example.

US contractors pay the employer and employee sides of payroll taxes or FICA taxes. This entails 15.3% of their net earnings from self-employment for Social Security, Medicare, and unemployment taxes — also called the self-employment tax.

The contractor pays these taxes, alongside income taxes, in quarterly estimated lump sums. You are not required to withhold taxes for them.

Meanwhile, payments to contractors may be considered tax-deductible business expenses.

Both you and your contractor may need to fill out and submit specific paperwork, such as a W-9 form and a 1099-NEC form for tax returns in the US, or an IR35 in the UK.

One other note: your contractor is not (in most countries) entitled to statutory benefits such as:

  • Health insurance

  • Supplementary insurance

  • Paid time off

  • Sick leave

That being said, you can offer these perks if you’d like.

Given the complexities of independent contractor payroll, you need to possess local labor, tax, and intellectual property (IP) expertise. This helps avoid non-compliance and worker misclassification.

Global payroll software like Remote keeps up with changing regulations around the world while also letting you manage all your contractors in one place.

Employee payroll

Employees, another worker classification, generally have less control over what work is done and how and when they do their jobs. The employer provides the software and supplies they need to perform in their position and generally reimburses any necessary expenses.

Employees generally get paid at fixed, regular intervals and often through direct deposit. They can be full-time or part-time.

As with contractors, there are several ways to indicate whether a worker is classified as an employee. Employment contracts, offer letters, benefits packages, and communications, for instance, can all provide the necessary evidence.

In the US, employees are often called W-2 employees since they receive Form W-2 for federal income tax filing. They also give the employer Form W-4, the employee equivalent of the contractor’s Form W-9.

You are (in most cases) required to withhold tax and social contributions. You are also expected to provide additional employer contributions.

For example, in the US, you pay a 7.65% payroll tax rate to cover Social Security and Medicare taxes. The employee pays the other half, but you withhold that from their paycheck.

Here are some other considerations for employees:

  • You are (in most cases) required to provide statutory employee benefits, such as sick leave, health insurance, and maternity leave.

  • You need to possess deep local HR, tax, and legal expertise in each country you hire in.

  • The level of misclassification risk is lower than with contractors. However, there are other potential risks, such as permanent establishment.

  • You may need to set up your own legal entity unless you work with an employer of record (EOR) provider.

How do I set up payroll for independent contractors?

For a contractor payroll structure to work efficiently, it needs to be built on solid foundations. Therefore, it’s important to first lay the right groundwork.

Here are some key tips to follow:

Don’t ignore compliance

To effectively manage payroll for independent contractors, you first need to understand who qualifies as one. Otherwise, you may create worker misclassification risk, which can result in fines, penalties, and reputational damage.

Misclassification occurs when, essentially, you treat your contractors like employees. If you dictate the contractor’s working hours and processes, provide them with tools and equipment, or provide them with health insurance, these are the hallmarks of an employer/employee relationship — not a client/contractor one. Misclassifying contractors in this way is illegal, as it relieves you of the obligation to pay employment costs, provide statutory benefits, and withhold taxes.

However, correctly classifying workers can be a challenge, as different countries (and even different US states) have different definitions of what exactly an independent contractor is.

Generally, though, if workers have control over when, how, and where they work and use their own equipment, they’re more likely to be classified as contractors.

Draw up and sign a contractor agreement

When you work with an independent contractor, you should still draw up a legal agreement, even if the contractor is only working on a one-off, short-term project. This is important, as it protects both you and the contractor.

It’s also important for payroll management, as your agreement clarifies the agreed pay rate and pay cycles.

The conditions of these agreements should always align with any relevant payroll laws in your contractor’s country, including restrictions on certain types of work activities.

Bear in mind, too, that some countries require contractors to register with a specified authority before they can be legally deemed contractors.

Identify any relevant forms in the contractor’s country

In some countries, you may be required to submit certain payroll-related forms if you hire contractors there.

For example, if you pay a US-based contractor (or a US citizen in another country) more than $600 in a year, then you probably need to submit Form 1099-NEC to the Internal Revenue Service — even if your company is not based in the US. This document specifies the exact remuneration you’re going to pay your contractor there.

The required form used to be Form 1099-MISC, but the IRS made changes — so don’t use that form for regular contractor payments anymore. Form 1099-MISC is now used for other payments, like rent, rewards, and prizes.

Alternatively, if you’re a US-based company and you work with a contractor outside the US, you may need to fill out a W-8 form. These forms are used to specify any unique conditions (like economic treaties between the US and your contractor’s country) and help you understand if you need to withhold and settle any payroll taxes in the US on the contractor’s behalf.

Technically, it’s up to your contractor to identify any relevant conditions in the W-8 form, but in practice, this is difficult. Therefore, it’s important for you to be able to verify the taxation status of the contractor as, if you fail to do so, your company may be held accountable.

Of course, if you’re hiring a lot of contractors from multiple locations (or plan to), all of these obligations can quickly become overwhelming. That’s why it’s a good idea to work with a trusted, experienced global HR provider like Remote, which can handle all the heavy legal lifting for you.

When you onboard new contractors through Remote, they’re automatically asked to fill out the correct form wherever they are based.

Coordinate your international obligations

When working with an international contractor, you must account for their local regulations to ensure you’re fully compliant. When you’ve got multiple contractors across the globe, keeping track of everything can get tricky.

Again, Remote can help ensure that you stay within the lines at all times. Our payroll experts let you know what exactly needs to be done and when no matter where your contractors are based.

Onboard the contractor properly

There are a wealth of benefits to properly onboarding a new contractor, especially if they’re going to be working with your company on a long-term basis. But a thorough onboarding process also makes payroll a lot easier further down the road.

It allows you the opportunity to collect relevant payment information, establish and execute any legal requirements, and answer any questions your contractor might have.

Establish the payment method

One of the most important elements of seamless contractor payroll is the method of payment.

If you want to have a good relationship with your contractors, you need to pay them correctly and promptly. You should also be able to pay them in their desired currency, although if a contractor requests to be paid in a non-local salary (e.g., an Indonesian contractor requests US dollars), you need to check that this is allowed.

To simplify this process, you can use a dedicated aid, like Remote’s Contractor Payout Explorer. This quick, free, and easy-to-use tool allows you to see:

  • Which currencies you can pay in

  • The various withdrawal options (across Wise, Stripe, and Connect)

  • The approximate payout speed for each option

You can also easily set up and manage payments with Remote using our Contractor Management system.

To learn more about paying your contractors — and how Remote can help — check out our in-depth guide below.

link to How to pay overseas contractors: the expert guide
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How to pay overseas contractors: the expert guide

Are you confused about paying your overseas contractors? This guide will tell you everything you need to know — and how Remote can help.

How do I manage contractor payroll?

Once you’ve established a solid grounding for your contractor payroll, there are a number of things you can do to make it run smoothly, such as:

Set a payroll expenses budget

When setting a payroll budget, you should account for two types of costs: fixed and variable. Fixed costs relate to your yearly employee benefits plans, salaries, and payroll taxes, while variable costs include employer retirement contributions, contractor payments, overtime, bonuses, commissions, raises, etc. Fixed costs usually don’t change for the year, while variable costs tend to fluctuate.

Agreeing on a budget means knowing exactly how much wiggle room you have to hire independent contractors — and at what rates.

Frequently audit contractor payments

It’s highly advisable to regularly review your contractor payments for benchmarking and accounting purposes as well as — perhaps most importantly — to monitor regulatory and tax compliance. This is especially important if you make international contractor payments.

For instance, in some countries, frequent monthly payments of the same amount can potentially trigger misclassification risk.

Combine your payroll solution for employees and contractors

Many contractor management services allow you to do only that: i.e., handle contractor agreements. This is grossly inconvenient, as it forces you to use and jump between two payroll software solutions for contractors and employees.

Therefore, it’s advisable to use a single platform that handles both — like Remote. Our platform allows you to:

  • Hire people either as contractors or employees and ensure compliance in terms of their payroll, contracts, and benefits

  • Quickly and easily convert long-term contractors to employees

  • Onboard new contractors and employees in minutes

  • Manage invoicing and payments in one click

Automate where possible

Instead of assigning manual, repetitive tasks (such as emailing the right tax form template to your contractors), try to automate as many payroll tasks as possible. This can save you and your team countless hours and headaches, allowing you to scale your contractor recruitment far more effectively.

You can do this by using a contractor management platform like Remote. Our platform identifies your new contractor’s country of residence and legal status and then automatically assigns the right forms.

You can learn more about automating payroll — and other contractor management tasks — here.

Regularly review your contractor arrangements

Local labor laws and guidelines are often subject to change, meaning you need to frequently reassess your contractor relationships from a legal point of view. As well as creating compliance risk, law changes can affect your payroll.

Each country uses its own employee/contractor classification formula to assess the validity of your agreements, with a particular focus on payment schemes, contract durations, and the exact number of working hours.

For instance, one of your contractors might be based in a country that only recognizes short-term independent contractor arrangements. After a certain period, the local labor authority requires you to convert the contractor into an employee. If you’re unaware of this law, you can easily run into serious legal and tax issues.

The more countries you hire contractors from, the more time-consuming it is to monitor and comply with regulations. Remote’s local, on-the-ground experts stay on top of any proposed law changes and ensure that everything is compliant, saving you countless headaches.

If you review a contractor arrangement and realize there is a misclassification risk, you should immediately consider converting that contractor into an employee.

Can I outsource contractor payroll?

Outsourcing your payroll for contractors is highly recommended, especially if you’re working with global talent. If your organization is (or will be) remote and looking to scale, you don’t need to worry about handling the workload or managing the costs of hiring in-house payroll specialists.

In fact, working with a contract management provider like Remote has many advantages. It enables you to:

Offer benefits to contractors

As mentioned, contractors are not entitled to statutory benefits (unless there are unique, local laws in place). However, this doesn’t necessarily mean that you can’t offer them.

Self-employed workers are an essential part of the evolving digital workforce, and non-employee talent shouldn’t be seen as second-class team members. This is especially true in cases where contractors are handling long-term projects and working closely with your teams.

Offering benefits makes them feel like you appreciate their work. It also enables your contractors to focus on you as a client. If you can offer excellent benefits at a low cost, contractors won’t feel the need to scramble for more work to cover their insurance or other benefits-related costs.

Moreover, just as you have access to far more talent when hiring contractors, they have access to far more opportunities. Companies that offer solid benefits packages to contractors catch the attention of — and keep — the best candidates.

While you can offer benefits for your contractors, it's important to note that this can create a misclassification risk (you may also face restrictions in certain countries). Remote’s global hiring experts can help you establish which benefits might be best for each contractor, given their circumstances. We also make sure that offering extra perks doesn’t put you at risk of employee misclassification.

Minimize misclassification risk

The definitions of an employee/employer relationship and a client/contractor relationship can vary between countries (and even between individual US states). As a result, it can be hard for businesses — especially small ones — to understand all the relevant international laws and regulations, let alone comply with them.

When you work with a contractor management provider, you don’t need to understand everything. Our in-house, on-the-ground experts are proficient in local, regional, and national laws and ensure that you remain compliant. Not only can we help you avoid fines, penalties, and reputational damage, but we can also save you a whole load of paperwork.

Seamlessly manage payroll and taxes

As mentioned, a reliable, all-in-one contractor management platform automates the most time-consuming workflows and does all the legal heavy lifting for you. It also helps by generating custom payroll reports for easier analysis and decision-making.

Many of these platforms come with mobile browsers or, even better, mobile apps. Payroll team members and even non-payroll employees can access the information they need from anywhere on any device.

This allows you to focus on growing your business and making your customers happy while also ensuring you pay your contractors on time instead of getting swamped under spreadsheets and tax forms.

Reduce payroll costs

Outsourcing payroll to contractor payroll services can also be a significant money saver. When you run payroll internally, you buy payroll software, hire payroll professionals, and regularly check if everything is being run correctly. What’s more, you have to provide training to guarantee that your staff is up to date with changing laws, tax rules, and accounting deadlines, all of which require time and money.

By outsourcing payroll, you cut long-term costs by:

  • Staying compliant with payroll regulations and avoiding any legal penalties

  • Improving the contractor experience, reducing costly turnover

  • Giving your HR and payroll staff time to focus on more productive activities, which are more valuable for the company

  • Saving on payroll software costs

Enable easier scaling

Outsourced payroll services can scale up and down with your business as needed.

If you’re growing rapidly, then you need more features and capacity from your software to keep things going smoothly.

Let’s say the economy takes a turn for the worse, though. If you have to scale back on payroll, you can also downgrade your plan to save money and cut features you don’t need.

For example, smaller companies managing just a few independent contractors can start with Remote’s Contractor Management plan, a contractor-only plan. As they grow, they can move up to Contractor Management Plus for advanced features.

Meanwhile, bigger firms expanding their workforce across borders can use Remote’s Global Payroll or Employer of Record services.

Save time and energy for other operations

Outsourcing payroll saves time on payroll-related tasks for relevant teams like accounting and HR. This means they can work on bigger-picture tasks.

To save even more time, look for options with employee self-service (ESS). Platforms with ESS, like Remote, give employees the power to add and manage matters like payslips, direct deposit info, and benefits. That means fewer rote tasks for HR to deal with.

Managing contractor payroll with Remote

Working with independent contractors gives you the opportunity to work with some of the world’s most talented individuals. However, the more you bring on board, the more complex your contractor payroll can get.

With our all-in-one platform and our team of tax and legal experts, Remote can help you manage and pay your contractors smoothly. Specifically, we provide:

  • Documentation management (for both you and your contractors)

  • Localized, fully compliant contractor agreement templates

  • Automated invoice payments in multiple currencies

  • In-house, on-the-ground expertise in tax, legal, and compliance

To learn more about contractor payroll, download our free Contractor Management Guide or speak with one of our friendly, knowledgeable experts.

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