How to pay foreign contractors

Evan Dunn3 minutes
How to pay foreign contractors
In this article

Hiring remote contractors is more commonplace than it has ever been. The COVID-19 pandemic has pushed companies of all types outside of their boundaries, urging them to adjust their growth plans. In many cases, this means hiring remote talent

Hiring foreign contractors also offers several benefits for your business, such as bringing in new perspectives, discovering best practices for operations, and much more. And having a thorough understanding of the best ways to pay your foreign contractors will improve your business operations as well as create stronger relationships with your employees.

It’s vital that businesses operating on a global level are well informed on how to pay foreign contractors to drive their overall success.

Considerations when paying foreign contractors for services

The primary area of concern when hiring and paying foreign independent contractors is navigating the murky waters of taxes and distributing payments. Knowledge and the right tools will help you prepare for any legal uncertainties that you might run into along the way. 

Why do local labor laws matter?

Following local labor laws is important when making payments to foreign contractors for services so that you avoid conflict with revenue and federal agencies. 

Your business is required to comply with the relevant laws in a contractor’s country when it comes to making payments to them. These laws vary from country to country. However, the local labor laws in an employer’s country aren’t relevant when making payments to a foreign contractor. 

It’s best practice to research the labor laws of the country that your foregin contractor resides in before bringing them onto the team. Some countries are less strict than others, which helps make the payment process smoother. 

IRS considerations for employee misclassification

The IRS has particular criteria when it comes to the classification of contractors and full-time employees. Employers need to carefully consider these criteria so that they can properly manage employment of all types, as well as the payroll that goes along with it. 

According to the IRS, an independent contractor meets the following criteria:

  • Provides services to the public or companies

  • Is hired for their specialized skills

  • Works on multiple projects at the same time

  • Manages and pays their own taxes

Any employer who hires a contractor is required to offer them flexibility in terms of work hours and processes to complete a given task. An employer has the final say in the result or final product of any assigned contractor work, but not so much in how they choose to get it done.  

If an employer doesn’t meet these conditions, they’re required to classify that employee as a full-time employee, not as a contractor. Additionally, certain countries require employers to classify foreign contractors as international employees depending on the conditions of the contractor’s jurisdiction.

If you fail to correctly classify them and pay them under incorrect titles, you might face tax penalties such as paying overtime and back tax withholding. It’s important to closely follow these considerations because you’ll run into trouble down the road when it’s time to pay your foreign contractors.

Tax reporting and other obligations 

Foreign contractors manage their own taxes, so you don’t have to withhold money from them. But there are some other obligations you have to fulfill as the employer of a foreign contractor.  

If you’re an employer located in the US, you have to use Form 1042 and Form 1042-S when reporting the amount paid to your foreign contractors. The US federal agency also recommends that employers ensure their contractor has a place of business or office in the foreign country they are located in. 

Additionally, contractors can’t make more than $3,000 per year from your company if they want to maintain their independent contractor status. You’re required to report and withhold your foreign contractor’s income if they don’t meet any of the above conditions. 

Paying foreign contractors: your options

There are various ways you can pay foreign contractors. Each form of payment will have its own advantages and disadvantages, whether making payments online or through traditional methods.

Wire transfers

Wire transfers are a traditional way of paying foreign independent contractors. 

They’re generally easy to implement in your operations. You simply contact your bank to arrange the transfer and supply your contractor’s bank information. However, their bank account needs to be able to receive international payments — not all foreign contractors have this type of bank account.

While wire transfers are the least risky when it comes to large payments, mostly because they’re insured by the bank or respective reputable financial institution, they aren’t the quickest. 

Wire transfers often take a while to reach foreign contractors due to bank transfer delays. This is frustrating for contractors as it may rob them of financial stability. 

Checks and money orders

Making payments to foreign contractors for services via check or money order is slightly outdated, but it’s still a method of payment nonetheless. 

The only real benefit to paying international contractors with a check or money order is that it offers flexibility on where and when they can collect their payment. 

However, mailing a check or money order usually takes quite a while. Additionally, there’s always the risk of it getting lost along the postal route. 

Another major downside to this payment method is that USPS money orders are only accepted in 28 countries. If your foreign contractor is located in a country that doesn’t accept US money orders, this method of payment is off the table.

SWIFT payment transfers

One of the most reliable and risk-free forms of payment is through the global SWIFT payment network

Banks will simply collect money from you (the employer), and then transfer it to your contractor’s bank account. They handle real-time conversion rates, and have a large network of banks involved in the process to ensure the transfer is as smooth as possible. 

However, SWIFT often charges hefty transfer fees in foreign markets, which causes businesses to lose money when converting currencies. This is discouraging for foreign contractors who might end up with less money than expected. 

As an employer, you might have to send more money than you owe your contractor to ensure they receive exactly what they’re due. This can cost you money in the long run by affecting your ROI

Digital wallets

Digital wallets make global payments feasible without too much hassle. 

PayPal, for example, is a great platform for making payments if your foreign contractor has an account. Fortunately, PayPal will facilitate payments in over 25 currencies and in more than 200 countries, making it a viable solution for paying your contractors. 

However, PayPal’s commission structure consists of international fees reaching as much as:

  • $4.99 USD

  • A 30-cent fee per successful transaction

  • A currency conversion fee of up to 3.9%

  • The exchange rate for international transfers

Fortunately, there’s an available platform upgrade called PayPal MassPay that allows employers to pay multiple contractors at the same time. This might save you a hassle depending on how many contractors you work with, but you’ll still have to face fees. 

Global business accounts

Sending money through a global business account is the fastest and easiest way to pay foreign contractors. You can streamline your finances on a global scale to ensure your operations always run smoothly. 

Airwallex, for example, allows you to open domestic and foreign currency accounts in just a matter of minutes, free of cost. We work with EUR, GPB, AUD, and USD. What’s more, you won’t have to worry about visiting a physical branch to open your account or access your money. 

We offer competitive rates for transfers and foreign exchange (FX), and can transfer your payment to foreign contractors in over 30 countries. Look forward to no signup fees and zero monthly account fees to ensure you’re not losing any money along the way. 

Get started with Airwallex to pay foreign contractors 

Create a borderless online foreign currency account with Airwallex today for reliable payment transfers with market-beating FX rates. Our easy-to-use platform facilitates paying international contractors spanning the globe at any time. Sign up or call us at +1 (855) 932-3331 to get started. 

Related article: The ultimate guide to paying overseas vendors

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Evan Dunn
Growth Marketing Lead, US

Evan Dunn manages the growth of Airwallex's SMB business in the US through marketing avenues. Evan is a generalist with expertise in SEO, paid media, content marketing, performance marketing and social selling. He also enjoys slam poetry and waffle making.

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