How to Pay International Contractors: A Comprehensive Guide

As businesses are expanding globally, foreign firms are more open to hiring and paying international contractors remotely. 

According to Statista, the number of employees working remotely has significantly increased, rising from 20% in 2020 to 28% in 2023.

To operate a business globally, you need to know the right process for paying international contractors. 

To avoid legal issues and fines, you must be mindful of exchange rates, tax compliance, local labor laws, and payroll management. Remember that proper payment processes are integral to efficient contractor management.

That is exactly what we will discuss in this blog. We will cover everything you need to know about how to pay foreign contractors.

What Are International Contractors?

An international independent contractor is an entity or individual who operates remotely and offers services to a business abroad without being deemed an employee under payroll. 

As their very name suggests, these contractors operate independently and manage their schedules and tasks without being under direct supervision, which sets them apart from traditional employees.

Independent Contractor vs. Freelancer

Both independent contractors and freelancers represent distinct working arrangements. It is important to consider them when paying international contractors to avoid misclassification.

Let’s go through some of the key points of differences to help you classify your workers correctly:

Types of Independent Contractors

Contractors are usually broadly categorized into these three common categories:

1. Self-Employed: These contractors operate completely independently as sole proprietors or freelancers. They are responsible for their schedules, clients, and services and manage their taxes, benefits, and compliance independently. 

Some examples include writers, graphic designers, personal trainers, and consultants.

2. Subcontractors: Subcontractors work under a primary contractor to complete tasks related to their expertise and specializations. They often work within a larger project without the employee tag. 

Examples include electricians or carpenters working under a general contractor. 

3. Agency Contractors: These contractors work on-call. They are managed by staffing or recruitment agencies, where the latter arranges client placements, manages payments, and handles compliance. While they enjoy some support from the agency, they retain their independence from the client company.

Common examples include experts in IT, healthcare, and marketing.

Why Paying International Contractors Requires Attention

There are many things you need to take into careful consideration when you’re paying independent contractors. They are:

1. Legal compliance: Every country has unique labor laws and tax regulations. Contractors, although independent, also come under certain jurisdictions. Make sure you properly classify a contractor and comply with local laws. Failure to do so can lead to legal penalties, fines, or disputes. 

2. Currency exchanges: When you pay international contractors, you might often need to convert currencies, which can fluctuate daily. Exchange rate variations impact the amount received by the contractor and may incur additional costs. Choose the right payment provider or an EOR (Employer of Record) for seamless payment.

3. Tax regulations: Tax obligations also differ across countries. Contractors are usually responsible for their taxes, but businesses may still need to issue tax forms or withhold taxes in certain cases for compliance. 

4. Payment system limitations: Not all countries have seamless payment systems, as payment platforms can have high fees and processing delays. This is especially true if you are hiring and paying contractors. 

The Risks of Misclassifying Workers

Misclassification while paying contractors is an act of non-compliance with a country’s labor laws and can result in fines, lawsuits, or audits. 

It can also lead to tax problems since Independent contractors are responsible for their taxes. Misclassifying independent contractors as employees can lead to back taxes, penalties, and interest.

Permanent Establishment Risk

Misclassification and legal penalties can lead to reputational harm and may tarnish your company’s credibility in contractor relationships. 

As a company operating remotely, you may even risk losing your license and authorization to work in that country entirely.

Best Ways to Pay International Contractors

Paying international contractors requires choosing the correct mode of payment by taking factors like cost, speed, and compliance into consideration. 

Here are some of the most reliable methods of making payments to foreign contractors for services:

1) Bank Transfers

Bank transfers are a traditional and widely used method for paying international contractors. They involve directly transferring money from one bank account to another.

• Pros: Secure, widely accepted globally, and suitable for large payments.
• Cons: High transaction fees, slow processing (often several business days), and potential hidden costs from unfavorable currency conversion rates.

2) Digital Payment Platforms

Payment platforms are the best way to pay international contractors. They offer faster and more user-friendly alternatives to traditional bank transfers.

• Pros: Quick transfers, easy setup, and multi-currency support with competitive exchange rates
• Cons: Higher fees for certain regions, limits on transaction amounts, and occasional contractor account restrictions.

3) Contractor Payment Services

Contractor payment services like Skuad are designed to manage international contractor payments and compliance.

• Pros: Streamlined payments, compliance with local laws, and automatic tax management for both parties.
• Cons: Higher costs than other methods and reliance on third-party platforms for legal compliance.

4) Cryptocurrency as a Payment Option

Cryptocurrency payments like Bitcoin or Ethereum provide borderless transactions, offering contractors in underserved regions access to funds.

• Pros: Fast and secure, minimal transaction fees, and no reliance on banks or third parties.‍
• Cons: Highly volatile exchange rates, limited acceptance, and potential regulatory challenges.

Compliance Considerations When Paying Contractors

Businesses should mandatorily follow both local and global rules when paying international contractors. They must also provide contractors with the right tax forms (W-8BEN for the U.S.) to report payments periodically. These are the obligations you need to follow as an employee.

1) Tax Obligations for Contractors

Businesses must provide contractors with the right tax forms to report contractor payments periodically. Independent contractors are responsible for paying taxes and reporting income in their country. Businesses also have the right to withhold tasks. 

Awareness of these rules can make paying overseas contractors and tax processing smoother for both sides and help prevent mistakes.

2) Employment Agreements

Having a clear contract with international contractors is key. The contract should explain the work, payment terms, deadlines, and tax responsibilities. 

This helps prevent misunderstandings and protects both the business and the contractor.

Optimizing Contractor Payments with Technology

Technology has made contractor payment management simpler and more accurate. Automated tools reduce manual work, reducing errors and saving time. These platforms also handle recurring contractor payments and compliance, ensuring smooth operations. 

Using technology, businesses can make contractor payments on time, avoiding delays and disputes while improving contractor relationships.

1) Contractor Payment Management Platforms

Payment platforms can be a blessing once you’ve onboarded contractors. They help businesses manage the whole process of paying overseas contractors more effectively. It is, hands down, the best way to pay independent contractors. Some of the key features include:

• Automated invoicing: Streamlines invoice creation and approval, reducing delays.
• Batch payments: Allows multiple payments in one go, saving time.
• Multi-currency support: Enables payments in local currencies while handling exchange rates.

2) Best Payroll for Contractors

The right payroll solution is essential for managing and paying international contractors. Top options include:

• International money orders: Money orders are a secure way to pay contractors in different countries. While reliable, they can be slower than digital methods and may involve significant processing fees.‍
• Digital platforms: This payment method enables fast and secure payments across borders. They offer convenience, but transaction fees and unfavorable exchange rates can reduce their cost-effectiveness for large payments.‍
• International Wire Transfers (SWIFT): SWIFT transfers are a direct method for sending money to bank accounts worldwide. They are reliable for large sums but can be slow and incur high fees, depending on the banks involved.
• ‍Employer of Record (EOR): EOR services are ideal for handling international payroll management regardless of the industry or sector. An EOR like Skuad can help manage payroll, compliance, and tax obligations all in one platform.

How Skuad Simplifies Paying and Managing International Contractors

Skuad offers a seamless solution for businesses operating remotely and working with international contractors. With Skuad, you can eliminate the added administrative burden and focus on growth while ensuring smooth contractor management.

Here’s how Skuad can help managing and paying international contractors:

• Global hiring: Easily hire contractors across multiple countries without setting up local entities.
• Optimized payments: Easily automate payments in multiple currencies while maintaining accuracy and timeliness.
• Compliance assurance: Stay aligned with local labor laws and tax regulations, minimizing legal risks.
• Contract management: Generate region-specific contracts that meet local compliance requirements.
• Tax management tools: Simplify tax reporting and ensure proper deductions and documentation.
• Efficient onboarding: Quickly onboard contractors with a user-friendly platform.
• Transparent operations: Track payments, contracts, and compliance in one centralized system.

Ready to Simplify Contractor Payments with Skuad?

Skuad specializes in making global contractor management easy and efficient. 

If you want to hire, manage, and pay international contractors, you can place your trust in Skuad, who will handle it all while ensuring full compliance with local laws. 

As a company looking to grow your team across borders and simplify payments, Skuad’s team of experts is well-equipped to help you save time, reduce errors, and support your business every step of the way.

Explore how Skuad can transform your global workforce management. 

Book a demo today!

FAQs

1. How to pay international contractors from the USA?

You can pay international contractors through bank transfers, digital payment platforms, or global payment services in the U.S. However, you must adhere to U.S. labor regulations. This also answers the question of how do independent contractors get paid.

2. Do you issue a 1099 to a foreign contractor?

No. Foreign contractors don’t need 1099 forms and you as an employer don't need them for paying 1099 employees.

3. Are payments to foreign contractors taxable?

Payments to foreign contractors are not subject to a country’s taxes set by the tax laws.

4. Can a US company hire an international contractor?

Yes, they can, but they need to comply with the local labor laws of the country.