When it comes to outsourcing some aspects of your business, such as content creation, website design, and other tasks, using foreign contractors may be the most cost-effective way to go about it. This allows companies to work with top-notch talent from anywhere in the world.
Hiring international contractors has a lot of advantages, but can get complicated fast depending on how you approach it. Questions about taxes, compliance, currency exchange, and how to get the money in their accounts will arise. Here we discuss the best way to pay international contractors without incurring too many extra costs to your business.
Why should a company hire international contractors?
Hiring contractors in another country could save you time and money — if a company has a project in another country, they may hire local contractors rather than have someone from their company fly out to that location, which can get very expensive very fast.
It’s also easier to find people with the skills you want when you are searching all over the world, rather than just within your own country. Here are some benefits of hiring foreign contractors:
1. Borderless hires
One of the top reasons to hire foreign contractors is to have team members in other countries. This is a great way to access the best talent and expertise in the world without limiting yourself to your country’s borders, allowing you to fill positions with the most qualified person (who may not necessarily be local). This can also help you grow your business into new markets — local talent will help you land and expand, rather than having someone new adapt to that country’s languages and cultures.
One of the top reasons to hire foreign contractors is cost-efficiency, especially when today’s economic conditions make it difficult for startups and small businesses to maintain high-quality service while also staying competitive in pricing.
Due to the war for talent, some markets (like Silicon Valley and NY) have seen unprecedented wage inflation in recent years — especially for highly sought after roles like software engineers. Globally expanding your search for talent means you’ll likely find locations where the skill level is equally impressive and wages are still at reasonable levels.
3. Save time
Choosing to hire a foreign contractor that's already an expert in their field will save you a lot of time, instead of an extensive training period they can start working immediately. Most international contractors are used to working independently and delivering high-quality work on time.
Hiring international contractors compliantly
When hiring international contractors it’s important to understand the documentation and compliance requirements in each country that your contractors operate in.
To avoid any legal risks, you would need to consider the following in order to stay compliant for each country:
• Local tax laws
• Local labor laws
• Currency exchange rates
• Availability of payment methods
• Tax forms such as the W-8 BEN issued by the Internal Revenue Service of the U.S.
One way to avoid the headaches that come with studying local tax and labor laws is to work with an Employer of Record (EOR) for onboarding and paying your international contractors. An EOR will handle all tax, payment, and legal aspects so that you can focus on work with your contractor.
Challenges of hiring international contractors
Employing international contractors can be a great way to get work done on time and on budget. However, it's not an error-proof process. Here are some of the challenges you might face and how to overcome them:
1. Communication issues
There might be a language barrier when working with contractors in other countries. This can make communicating slightly more difficult, and will require a bit more patience from both parties when working together on a day-to-day basis.
Something that can help with this is asking for the contractor’s preferred communication method. Some people prefer to communicate online via email or chat so that they can digest messages and craft responses with the right verbiage, and others prefer to lay out information on a video call so that there can be an open dialogue and room to ask questions.
2. Time zones
It can sometimes be difficult to coordinate meetings with teammates who live on the other side of the world. You might have to wait until they are awake and working before you can talk to them about a project.
The best way to overcome this is to establish a clear schedule that you can both look at in advance, and set up meetings ahead of time so that both parties are aware of when they need to be online.
Many workers find that working in different time zones allows them several hours per day to get work done with no distractions, since there aren’t constant meetings disrupting their work flow.
3. Employee Classification
One of the challenges of hiring international contractors is employee classification. It can be difficult to determine whether a worker should be classified as an employee or an independent contractor. Every country has different rules for how companies can classify their employees, and you could end up paying thousands of dollars in penalties if you misclassify an employee as a contractor.
If you have a question about whether your international hire should be classified as a full-time employee or contractor, you should consult with a qualified attorney who knows the laws of that country before making your decision.
4. Local Labor Laws
Many countries have strict laws regarding overtime pay and minimum wage requirements. Some countries also require businesses to withhold income tax from their employees' paychecks and pay social security tax on behalf of workers who are classified as employees. For example, Portugal requires their full time employees to be paid mandatory 13th and 14th month salaries - one for Christmas, and another one for Holidays in June. If you were to miss those additional payments, you would be in breach of Portuguese labor laws.
If you are hiring employees or contractors in a country where you do not have a local entity, we recommend working with an Employer of Record to avoid hefty fines, penalties, and fees. EORs take care of all formal employment tasks, including compliance documentation, and ease the burden of managing international workers.
Payment methods for international contractors
There are several methods you can use to pay international contractors, all of which come with their own pros and cons. There are several different methods you can use to pay foreign contractors, including:
1. International Bank Transfers
This is a popular choice for its security, but is not always practical depending on which country your contractor lives in. When you transfer money from one country to another there may be fees, and it can take several days for the money to arrive. If you need your contractor to be paid immediately or if they don't have access to an international bank account, this option isn't ideal.
The use of cryptocurrency for cross-border payments is becoming increasingly popular. The advantage being that it eliminates the need for banks and other intermediaries to transfer funds (which translates into faster processing times).
With cryptocurrencies, all transactions are recorded on a public ledger called a blockchain that can be accessed by anyone with an internet connection. While this can result in lower costs and greater transparency for both parties involved in the transaction, it can also be bad for the contractor if the value of cryptocurrency decreases.
3. Digital Payment Networks
Digital payment networks allow you to pay someone from anywhere in the world with a bank account or a credit card. Some examples include PayPal and Payoneer. You send the payment from your account and the recipient gets it in moments.
The main drawback with these services is that they can have high fees and only work with certain countries. They also don't always have the best exchange rates.
4. Employers of Record (EOR)
An employer of record serves as a legal entity for workers in other countries. Most companies use EORs to convert contractors to employees, but some EORs (like Remofirst) also provide contractor payment solutions. If you’ve established a relationship with a highly valued contractor and you are ready to convert them to a full time employee, working with an EOR makes it very easy to make that transition when the time comes.
How to compensate Contractors
There are several ways you can pay international contractors, and each country has its own rules and regulations regarding the payment of wages. As a general rule, these are the options available to contractors:
1. Pay up front
Some contractors may ask you to pay them upfront before they start working on your project. This can be risky because there are no guarantees that they will deliver on time. This is best for simple tasks that require little oversight and are not very costly for your business.
2. Pay by the hour
An hourly rate may be more expensive than paying upfront, but it's better than not having a guarantee that the work will be done (or done well). The hourly rate should be negotiated before any work begins so both parties know what's expected, and what the responsibilities are in terms of cost and time frame for completion.
3. Pay by project
If you want to hire someone for a specific project, you need to give all the instructions and requirements in advance so that your contractor knows what exactly needs to be done, and how long it will take them to complete the job.
Once everything is finalized, your contractor will start working on it until the project is completed successfully (according to your specifications and requirements). When the project is finished, it is your duty to pay the contractor on time and in full.
4. Pay by milestone.
If you have a job that will take more than one month to complete, it might be a better option to pay for each phase as it is completed. This will ensure that your money is used efficiently and that you can stop the work if necessary.
This method requires good communication with the contractor and regular updates on progress. Once a milestone is reached, you coordinate payment with the contractor for the work that is complete before they continue the project.
Hiring an international contractor is a great way to find global talent. They are independent workers and have a separate legal classification and tax treatment than full-time employees.
There are many ways to pay your contractors, though not all of them ensure your company's compliance and tax obligations. It's strongly recommended for businesses to work with an EOR who will handle their contractors’ onboarding and payments. That way, you can sit back and relax knowing that you are paying international contractors compliantly and on time.
Remofirst is an EOR provider available in 150+ countries and we offer solutions for both full time employees and contractors. The best part? It's free for contractors, forever.