Paying foreign contractors: Best practices for startups

*This article was contributed by our partners at Deel.

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According to Ceridian’s 2021 Executive Survey, 71% of executives will hire more remote workers in the next two years, and 63% will hire outside of their country. 

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Hiring foreign contractors and freelancers comes with many advantages over hiring employees, such as more flexibility and lower costs. But paying foreign contractors can be a hassle. You need to stay compliant with international employment laws and minimize the cost of moving money across borders, all while keeping your contractors happy with timely payments.

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In this article, you’ll understand how to set up a compliant, easy process to pay international contractors and freelancers.

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What you’ll learn:

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• The benefits and challenges of hiring foreign contractors

• Best practices for paying foreign contractors

• 5 of the best ways to pay international contractors

• Meet Deel: An easier way to hire and pay foreign contractors

• How to get started with Zeni and Deel

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The benefits and challenges of hiring foreign contractors

Hiring foreign contractors can give your team a competitive advantage at a cost-effective price. Knowing how to pay international contractors can save you from accruing penalties and fees for improperly managing finances across borders.

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Let’s look into the pros and cons of hiring foreign contractors.

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Benefit: A limitless pool of talent

Before the rise of remote working, most startups and small businesses only hired workers in their local area. But those geographical borders also limit the caliber of talent you can hire. 

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By broadening your recruitment to foreign contractors and freelancers, you can hire the best contractors, not the nearest ones. 

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Challenge: Risk of misclassification

Worker misclassification is when a worker’s day-to-day job resembles employee status, but the company hired them as an independent contractor. If the IRS determines you’ve misclassified an employee, you can face hefty fines and possible jail time. 

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In the U.S., an independent contractor is someone who controls their working schedule and style, pays their own taxes, and can work for multiple companies at once.  However, the companies foreign contractors work for control the final product or service.

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If an employer controls the worker’s entire process, the worker is more likely a full-time employee. In that case, the employer must pay employment benefits and cover payroll taxes. 

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The rules around worker misclassification vary by country. To avoid the risk of misclassification when hiring foreign contractors, you must comply with the foreign countries’ labor laws and classification standards, which may differ from your own. 

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Benefit: Diverse perspectives

Hiring foreign contractors from around the world gives startups access to unique and diverse skills, approaches, and insights by combining both local and international viewpoints. 

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You can also leverage those diverse backgrounds to better understand foreign markets, giving your company a competitive edge in international expansion.

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Challenge: Complying with foreign tax laws

Many startups and businesses shy away from hiring foreign contractors because of the new tax obligations and paperwork they’ll have to learn. 

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For example, U.S. companies don’t need to pay taxes or participate in tax reporting for foreign contractors because they are self-employed and report their own earnings. Foreign contractors pay their own income tax, which eliminates the need for U.S.-based companies to withhold taxes on payments. 

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Companies do, however, need to collect IRS Form W-8BEN or W-8BEN-E from contractors performing work outside the US. These documents confirm the worker’s foreign status to the US government and collect their individual taxpayer identification number (ITIN), which is like a social security number for non-US citizens.

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Learn more about the tax forms and obligations involved in hiring foreign contractors.

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Benefit: Cost savings

A contractor’s hourly rates are typically higher than an employee’s, but the cost of paying foreign contractors is less expensive overall. That is because you legally don’t have to pay employee benefits or payroll taxes to international contractors, saving you up to 30% on hiring costs . 

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If your business is in a high cost of living area, hiring foreign contractors in an area with a lower cost of living can significantly reduce your hiring costs. However, we strongly encourage companies to avoid using international hiring solely for cost savings and pay competitive rates worldwide.

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Challenge: International payment processes and fees

Moving money across national borders comes with transaction fees, unstable currency exchange rates, and the chance of unsupported methods in certain countries. Below, we’ll provide some payment methods well suited to paying international contractors.  

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Benefit: Low training requirements and costs

Most foreign contractors are highly-skilled workers who have broad expertise and can seamlessly fit into your team’s workflow. They’re likely already familiar with the tools or software you use, so there’s less training time required and few training costs.

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Explore more of the challenges and benefits of hiring independent contractors.

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Best practices for paying foreign independent contractors

Before you start an employment relationship with a foreign contractor, do your due diligence to ensure your company and your contractor are protected:

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Complete a KYC check

A KYC (Know Your Customer) check is a vital step in the hiring process and should be taken before you onboard a contractor and start paying them. This process verifies the contractor’s identity to ensure you’re not working with someone whose bank account is associated with criminal activity. 

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Some international wire transfer services will handle KYC checks on your behalf, as do some payment apps like Payoneer and freelance marketplaces like Upwork.

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Define the payment terms

Once you’ve confirmed the contractor’s identity, work with the contractor to define their payment terms. The payment terms should include four factors:

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• Rate and rate type: Do they have an hourly rate, per-project rate, or retainer?

• Payment milestones: Will you pay them weekly, bi-weekly, or once the project is completed? Do they require an advanced deposit?

• Currency: Do they want to be paid in a currency other than their local currency?

• Payment method: How do they want to receive their payments and what payment solution do you need to facilitate it?

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Create a contract

Finally, create an independent contractor agreement compliant with their local laws. The contract should include the following, at a minimum:

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• Name and title

• Payment terms (how and when they’ll be paid)

• Employment relationship (contractor vs. consultant)

• General information about the scope of work

• Dispute resolution process

• Ownership of work and protection clauses (as per their country’s laws)

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See more of the best practices for paying foreign contractors.

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5 of the best ways to pay international contractors

While you could send a paper check to pay your non-U.S. contractors, most prefer a faster method.

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1.Online payment apps

Online payment apps are a great option for business owners looking to pay international contractors without linking personal bank accounts. Employers can send payment via an email address or the payee can send their employer a payment request via the app. 

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Here’s a look at some of the most popular online payment apps you can use to pay foreign contractors:

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PayPal

PayPal has low transaction fees (2.9% + 0.30 in the US, 3.9% + exchange rate for international transfers), but it’s restricted in some countries. They allow international payments through credit card payments and money transfers to local banks. You can also use PayPal’s MassPay option to pay multiple contractors at once. 

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Payoneer

Through Payoneer, you can send international payments per project or set up automatic monthly payments. You can pay your foreign contractors using ACH bank debit (secure international bank direct deposit), credit cards, or local bank transfers. Payments to other Payoneer users via your Payoneer Balance are free. You can also pay EU and UK VAT (Value Added Tax) from your account for free.

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Wise

On Wise (formerly TransferWise), you can pay your contractors through direct debit, debit card, credit card, or bank transfer. Wise is currently available in 80 countries, and you can send payments in 10 currencies. A free Wise account lets you hold 50+ currencies and receive money. Receiving USD wire payments, holding more than 3,000 EUR, and sending money involve fees that vary by currency.

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Revolut

Revolut is currently available in 30 countries and 30+ currencies. International money transfers are free, though they charge a 0.5% fee for anything above $8,000 CAD each month. They also charge a flat mark-up fee for transfers completed on weekends and certain currencies. Users can request and send money quickly on the app, and employers can set up recurring contractor payments.

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2. Digital wallets

Contractors use digital wallets to store money securely online and receive  or send payment transfers to their bank accounts instantly without high fees. 

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PayPal is a digital wallet, as are Cash App, Google Pay, Samsung Pay, Apple Pay, and Venmo. Some digital wallets also allow users to securely store cryptocurrency and sensitive information (like their ID, driver’s license, and health insurance card) on the app. 

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3.Cryptocurrency

Getting paid in crypto is an increasingly popular practice, with companies like Tesla and Microsoft announcing plans to accept cryptocurrency as payment. By paying your contractors with cryptocurrency (like USD Coin, Bitcoin, Libra Coin, or Ethereum), you can avoid high exchange rates and bank fees.

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Crypto is an easy-to-use method and allows employers to send funds anywhere in the world in just a few clicks, but the payee must have a crypto wallet to receive the funds. One challenge of paying with crypto is the volatile market, which experiences sharp price surges and plummets.

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4.International wire transfers (SWIFT)

SWIFT is a global money transfer system that connects financial institutions in over 200 countries. SWIFT is safe and reliable, but it also comes with high upfront and intermediary bank fees. Due to fluctuating exchange rates, payment amounts made through the SWIFT system can dip or rise depending on where you and your contractor are located.

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5. International money orders

International money orders are similar to sending a physical check, except through online banking. The process can be slow, and fees and exchange rates can increase for the employer and impact the amount received for the payee.

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Senders have to physically purchase a money order from a bank, post office, or money order outlet, like Western Union. Once the payee receives the money order, they have to physically deposit the money into their bank account. 

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Learn more about how to pay foreign contractors. 

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Meet Deel: An easier way to hire and pay foreign contractors

Deel makes working with foreign contractors easy by taking care of the most time-consuming and complex tasks for you:

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• Quick contractor payments: You can pay international contractors in seconds and make mass payments with over 200 supported currencies

• Flexible pay options: Contractors can choose from 15 payment options, including crypto, and can get paid up to 30 days before their payday with Deel Advance

• Local tax compliance: Our network of legal experts review local tax requirements to ensure compliance

• Automated invoicing: You can automatically create digital invoices for your entire team and integrate Deel with your accounting software to seamlessly sync your data 

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Learn more about how Deel helps startups and global companies hire and pay foreign contractors.

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How to get started with Zeni and Deel

With Zeni and Deel on your side, you get expert support for all of your finance and payroll functions while you focus on growing your business and supporting your employees.

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Zeni uses AI-powered services to manage your accounting, bookkeeping, and more, while Deel provides compliance, onboarding, invoicing, and payment solutions for your foreign contractors. 

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As a Zeni client, you’re eligible for a discount on Deel services for both foreign contractors and EOR employees, so you can seamlessly grow your international team.

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Book a demo with Deel (and Zeni) to see both platforms in action.

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