How to Pay International Contractors: Best Practices

Hiring international independent contractors is a powerful strategy for businesses to expand their reach, access global talent, and boost operational efficiency. 

In 2023, there were about 36.6 million independent contractors in the USA, a significant increase from 15.8 million in 2020.

However, paying foreign contractors comes with challenges. Unlike salaried employees, contractors invoice for time or deliverables, and factors like transfer fees, exchange rates. 

In this scenario, payment processing times can complicate the contractor payment system. 

To navigate these complexities, it's essential to understand contractor pay stubs as part of the process clearly.

If you're looking for ways to ensure accurate payments to foreign contractors, this article provides insights into the contractor payment system, available methods, compliance considerations, and best practices.

Why Hire International Contractors?

Before we discuss the details of the multiple methods of payment to foreign contractors for services, let’s first understand why many companies worldwide are so keen on hiring independent contractors.

As mentioned earlier, hiring international contractors has numerous advantages for an organization. They include,

1) Access to the Global Talent Pool

One of the major benefits of hiring international contractors is that it allows you to tap into a vast talent pool worldwide. 

Whether you are looking for niche technical skills or require individuals with proficiency in a specific language, international contractors bring a diverse skill set, which is very important for your business’ success. 

2) Cost Efficiency 

Unlike salaried employees, independent contractors or self-employed individuals are typically not covered by minimum wage laws, overtime pay, or employee benefits. 

Payments are based on the nature of the task or the time spent completing it.

Independent contractors are exempt from social security contributions and other employment-related taxes in many countries. 

This can save employers significant resources compared to hiring full-time employees. 

3) Increased Diversity

Diversity has long been deemed a potential tool for business growth. Diverse teams foster innovation and performance. 

This is why more and more companies are willing to employ independent contractors. 

This paves the way for cross-cultural exchange, enabling the organization to adapt and cater to a broader audience.

Common Payment Methods for International Contractors

Now, regarding your question about how to pay independent contractors, as mentioned below, we have highlighted some of the most common tools deployed by businesses to make payments to foreign contractors for services.

1) International Bank Transfers

International bank transfers, also known as wire transfers, are one of the most widely used methods of payments to overseas contractors. 

It refers to a direct transfer of funds from your business account to the contractor’s business account. 

These international bank transfers are usually made through the SWIFT network, a secure international system that connects financial institutions worldwide.

2) Digital Wallets

Moving on, another standard mode of payment to overseas contractors includes digital wallets or peer-to-peer payment apps. These include Payoneer, PayPal, Wise, and Venmo, among others. 

When you send payments to foreign workers for services, your P2P provider will source the funds from your business account and directly transfer them to an account with the provider. Then, the amount is transferred to the vendor.

3) Contractor Payroll Platforms

By partnering with contractor management software, such as Skuad, you can pay your independent contractors instantly and accurately. 

Skuad is an all-inclusive platform that features some robust payroll capabilities, such as

• Automated invoicing and payments
• Payroll in 100+ currencies
• Built-in payroll compliance 
• Real-time reporting and expense management
• Competitive FX rates, and more. 

4) Cryptocurrency

With rapid technological advancements, cryptocurrency has become a popular payment method for foreign contractors. 

Bitcoin, Ethereum, and other altcoins provide borderless payment solutions, offering autonomy and flexibility to both employers and contractors. 

Businesses can now execute instantaneous global transactions without relying on traditional financial intermediaries.

How to Ensure Compliance when Paying International Contractors

Below are some of the most important considerations you must make to guarantee a compliant independent contractor payment process.

1) Misclassification Risks

When you hire independent contractors for your business, it is of utmost importance that you guarantee they are, in fact, contractors and not employees in disguise. 

Misclassifying workers can result in your company's reputation loss, and you might also have to fear hefty penalties and even serve jail time. 

For example, fines and penalties for misclassifying workers in the USA can reach as much as $500,000. 

Conducting comprehensive job analysis, creating transparent hiring processes, and thoroughly reviewing employment agreements and contracts are some ways to avoid the risk of worker misclassification. 

Suppose all these seem too much to handle, you can seek the services of contractor management software. It will mitigate the risk of misclassification and guarantee smooth and timely payments to foreign contractors for services.

2) Local Tax Obligations

Before making payments to overseas contractors, it's essential to understand the tax obligations in both your country and the contractor’s country, as regulations can vary.

For instance, in the USA, independent contractors are classified as self-employed and must file and pay their income tax quarterly. 

Unlike employees whose employer withholds taxes, contractors are responsible for paying SE (Self Employment) Tax, which covers Social Security and Medicare taxes.

When hiring independent contractors from India, note that those with tax liabilities over Rs. 10,000 must pay advance tax in four installments. 

Depending on their income and business type, they must also file income tax returns using ITR-3 or ITR-4 forms.

Choosing the Right Pay Structure

With so many options available, most companies struggle to determine the best way to pay their independent contractors. 

Below, we have highlighted several types of pay structures businesses utilize to process payments to overseas contractors.

1) Project-Based Fees

A project fee or fixed-price fee is a set amount agreed upon for completing a project, regardless of time or resources used. 

It works well for projects with explicit scopes and outcomes. However, it can be risky if the project scope changes or unexpected challenges occur.

2) Retainer Agreements

Retainer agreements involve paying contractors a fixed monthly fee for their availability to perform a set amount of work. 

They are ideal for ongoing projects, providing contractors with a steady income and reliable access to their services.

However, they may not suit projects with variable workloads due to the risk of underutilization, where companies might pay for unused services. 

Ensuring this payment structure is legal in the contractor’s country is also essential.

3) Time and Materials

The time and materials payment arrangement is best suited for projects that require task-level management. 

The contractor simply submits an invoice with a timesheet and expense report highlighting the time and materials utilized for the payment period. 

However, if your business operates in the creative domain, it may not be the best decision to pay contractors using this structure since it can become extremely confusing and difficult to determine how long it will take to complete tasks or achieve the desired results.

Currency Considerations

One of the most important decisions businesses have to make for a smooth and efficient contractor payroll process is to select the right and the best currency for their transactions. 

What most people do not realize is that this decision can have a huge impact on the profitability and risk exposure of the business. 

As mentioned below, we have highlighted three primary currency considerations that must be considered when processing payments to overseas contractors. 

1) Paying in USD

The USD is widely used by businesses for international transactions due to its stability, low volatility, and high liquidity, making it easily convertible into other currencies.

However, while many businesses pay overseas contractors in USD, it's important to consider the contractor's preference. 

Contractors often prefer payment in their local currency—such as INR in India or VND in Vietnam. 

Additionally, if the USD is stronger than their native currency, contractors might choose to skip the exchange altogether.

2) Paying in Local Currency

Making payments to overseas contractors in their local currency reduces the involvement of foreign banks, leading to fewer fees and faster transactions.

However, this approach comes with its challenges. Currency exchange rate fluctuations can affect the amount paid to contractors, so employers must stay updated on exchange rates and factor them into payment calculations.

3) Hybrid Payment Methods 

A hybrid approach to paying contractors globally is to make multi-currency payments. It refers to the practice of processing payments in different currencies. 

During the transaction, you will make the payment in your domestic currency, and the contractor will receive the monetary compensation in their domestic currency. 

This allows for a more streamlined and efficient international contract payment processing method. 

Contractor Management Platforms

Needless to say, processing payments to foreign contractors for services is not an easy task. 

This is why more and more businesses are switching to contractor management software or contractor payroll services that will help them deal with all these complexities. 

They not only reduce errors and risks by automating most of the work for you but also guarantee compliance by ensuring that you stay up-to-date with all the latest regulations and provisions. 

Skuad AOR

• By partnering with an AOR, such as Skuad, you can streamline the entire contractor onboarding process, including making accurate payments and ensuring compliance. 
• It simplifies the entire international payment process, ensuring that all salary payments are accurate, every regulation is followed, and taxes are managed easily.
• Additionally, Skuad guarantees compliant contractor agreements, automates invoicing, and features a built-in IP protection system to protect your business’ IP under the relevant laws.

Make Payments to Foreign Contractors with Skuad

As quite evident by now, making payments to foreign contractors for services involves a lot of detailed tasks and complexities. 

From understanding their tax obligations to choosing the right pay structure or currency, the list goes on and on. This entire process gets even more difficult when you are hiring multiple contractors at the same time. 

Therefore, to avoid such hassles and, most importantly, to guarantee compliance at every stage, most companies partner up with contractor management software or an AOR, such as Skuad. 

Skuad’s automated payroll solution enables you to manage multi-currency payments with just a few clicks. 

It features numerous amazing capabilities, from handling contractor payments and tax deductions to expense management and real-time reporting. 

Furthermore, Skuad offers built-in payroll compliance in 160+ countries so that you never have to worry about facing legal challenges and penalties.

‍Book a demo today and simplify the international payment journey only with Skuad!

FAQs

Q1: Are payments to foreign contractors taxable?

Ans: According to the IRS, the location where the work is performed determines the source of income for tax purposes. US-based companies are usually not required to withhold taxes from money paid to independent contractors, provided that the work performed is outside the vicinity of the United States. 

Q2: Do I send a 1099 to a foreign contractor?

Ans: You must send Form 1099 to a foreign contractor only if you paid that individual more than $600 or more in a single year under two specific conditions: the contractor must be a US citizen or perform work or provide services within the US.

Q3: How do we pay contractors internationally?

Ans: Some of the most common ways to pay contractors globally include international bank transfers, utilizing digital wallets such as PayPal or Wise, and cryptocurrency.

Q4: Which platform is best to pay international contractors?

Ans: From automatic invoicing and making accurate and timely payments to guaranteeing payroll compliance, Skuad is an all-inclusive platform that streamlines international contractor payment processing. Additionally, it features multi-currency payroll, making the entire journey as effortless as possible.

Q5: How do I hire a contractor outside the US?

Ans: You can either hire a contractor outside the US directly by complying with all the relevant laws and regulations or partner with a contract management system /AOR, like Skuad, to help you with the hiring process.