Paying Foreign Independent Contractors: Everything You Need to Know

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December 25, 2020
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Have you ever considered hiring foreign contractors? If you aren't doing it already, you are missing a great opportunity. There are many ways that independent contractors can improve your business. If you haven't embraced this idea because you aren't sure how to go about it, we are here to help. Apart from hiring foreign independent contractors compliantly, paying them is one of the biggest issues. We have tackled the most important challenges that you can face, along with providing you with an objective and detailed list of all your options. In addition, in this article, you will be able to read all about the possible legal repercussions of hiring foreign contractors and how to avoid it. So, let's dive in.

What are the benefits of hiring foreign contractors?

The broad variety of different options available to us via the internet is staggering. The ability to work with people coming from different continents, cultures, perspectives and educational backgrounds is at our fingertips. How can these help you and your business improve?

  • Different perspectives - Working with people that don't share our environment and culture can help us see things differently, thus allowing us to tap into an experience we never had. Their points of view will surely bring something new and exciting to the table. Perhaps this is exactly what your company needs.
  • Minimal training required -  Independent workers are usually very skilled workers, who are hired based on their specific knowledge that will benefit the company. Once you expand your search to the global market, the chances of finding the absolute best fit are increased.
  • Cost-efficiency - Even though sometimes, at first, independent contractor fees are higher than employees' hourly rates, the total cost of one employee is much higher, given that the businesses who work with contractors do not cover traditional benefits, and there is no federal tax withholding, which makes hiring them very cost-effective.

What do I need to consider before hiring and paying foreign independent contractors?

There is no doubt that hiring foreign independent contractors is great for your business. So, why isn't everybody doing it? Well, simply because it can be a little complicated. Although recruiting the best market has to offer can be a fairly simple process, hiring is where things get tricky. Before you extend an offer to your potential collaborator, there are a couple of things that you need to have in mind.

Local labor laws

It is very important to note that if you hire a foreign contractor, all of the potential disputes will have to be handled in the court of their home country. This also means that local labor laws will apply, and in most cases, they favor the employee instead of the employer.  This could also require you to hire a local lawyer to help you navigate a legal system you aren't aware of, perhaps in a language you don't speak. This is all because you might find yourself breaking laws you didn't even know apply to your business relationship.

You shouldn't let this discourage you. Just because it might happen, it doesn't mean it will. There are ways to avoid getting into any legal trouble, locally or internationally. Let's see what are the ways to reduce potential risks when hiring independent contractors.

Employee misclassification can cause you problems with both IRS and foreign governments

This is one of the most common issues when hiring independent contractors, locally or internationally. There are certain criteria that need to be met in order for someone to be considered either an employee or a freelancer.

This is because tax implications are different for employees and contractors. Employers are required to withhold taxes from their employees' salaries, causing them to spend a significantly higher amount of money on them. If the IRS decides that your independent contractor should in fact be your employee, you will be required to pay all of the Social Security payments that you missed, along with several others - benefits, medicare, unemployment taxes, etc.

Actually, you will be obligated to pay interest on those late payments as well. You, as a payor, will face such liabilities for every foreign individual that you misclassified. When the Labor Department discovers issues with a business and suspects misclassification, they dedicate their resources to investigate every single company's employee, as well as independent contractors, for the last three years.

All of these regulations can be even stricter, under the local law. Make sure that you have aligned any written agreement and your business relationship accordingly. For a more detailed overlook, check this article about employee misclassification.

Determine the necessary tax withholding and reporting obligations, according to the IRS

Like we already mentioned, there is no obligation for withholding tax for your contractors, like you need to do with your employees, according to the labor laws of the United States, as well as US tax laws. For domestic independent contractors, and all about Form 1099-MISC and 1099-NEC, you can read more here.

But what about hiring foreign contractors? Even without tax withholding, tax reporting is still necessary. If you are a US company, or a US person, paying a non-US citizen, you need to report that amount to the IRS using Form 1042 and 1042-S, Foreign Persons’ US Source Income Subject to Withholding. This is only necessary if your foreign contractor has US source income. IRS provides guidance in order to facilitate this determination, but we summarized it here. According to them, even if a foreign freelancer works for a US company, the income they receive isn't considered US source income, if their service is performed outside of the US.

There is another possible option - your contractor is foreign, but they are working in the United States. If you want to avoid tax obligations, you need to meet certain conditions. Luckily, these conditions aren't too harsh. Firstly, the nonresident alien you hired can spend up to 90 days in the US during a tax year. Secondly, they need to have an office or any sort of place of business in a foreign country. And finally, the total amount they will be earning cannot exceed $ 3,000.

It is important to note that provided these conditions aren't met, the business is required to both report and withhold income for the foreign contractor. In this case, they need to provide you with ITIN - individual taxpayer identification number. It is possible to get a tax exemption, for the so-called “independent personal services”, only if the home country of the contractor has a tax treaty with the US. In order to claim this exemption for income tax and tax withholding, the contractor needs to submit Form 8233 to the company.

Collect all the necessary paperwork and tax forms

Just because you aren't required to pay any taxes for your foreign workers, doesn't mean that you aren't obligated to report that you are doing business with them. Every foreign person that you are working with or an entity needs to fulfil a certain form, according to the Internal Revenue Service. Similar to the US contractors filling in Form W-9, every foreign national working as an individual needs to complete Form W-8BEN, and foreign entities need to fulfil IRS form W-8BEN-E.

These forms are used to determine the foreign status of your contractor. This way you can prove that you are meeting all of the IRS's tax requirements. And if they provided you with information that wasn't truthful, the business can't be held responsible. This is a great way to protect your company when dealing with foreign contractors.

If you have doubts about the information provided to you, it is best to withhold taxes on the payments. If your contractor doesn’t owe any taxes, they can file a US tax return and claim a refund for the tax that was withheld.

Now, when it comes to local laws, things aren't as strict. In most cases, if the business has no assets in the country of the contractor, no taxes need to be reported or withheld. Most countries seldom require businesses to report their payments to international contractors to their respective tax agencies.

Bear in mind that this isn't always the case. With so many full-time workers turning into self-employed ones, countries are adapting and changing their laws accordingly. A couple of laws have been enacted, in order to protect independent contractors and to make sure that everyone involved is contributing to the country's economy by paying their taxes.

What can you do to protect yourself? Well, it would be great if you could hire a taxing professional that is familiar with the local tax law and all of your obligations.  In this case, even the best CPA can't help you. In addition, you can insert a clause in your written agreement with the contractor, obliging them to provide proof of tax compliance, according to local tax requirements.

Always have a written contractual agreement in place when hiring an independent contractor

A written contractual agreement (or simply contract) between both parties doesn't trump IRS regulations, and you can still be penalized if you misclassify an employee. However, you can protect yourself in different ways and create a stable, mutually beneficial relationship.

We have already mentioned that your written agreement should hold your payee accountable for complying with local laws and regulations, regarding taxes, as well as everything else. What else should you include?

This written contract isn't that different from a typical employment contract. First of all, your written agreement should include general information about the scope of services. It should also include a level of control, deadlines, and other obligations to be met, and in the end, a manner of compensation.

You should also clearly state who owns the work produced by the contractor. According to US laws, copyrights stay with contractors, unless it is stated otherwise. This can cause a significant setback for your company when you terminate a relationship with your contractor.


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Different options for paying foreign contractors

Once you have figured out the best way to protect your business and thoroughly enjoy the benefits of working with an independent contractor, you need to determine the best way to distribute contractor payments. There are several options offered currently, all of them have their pros and cons. You need to determine what is best for you, as well as your collaborators, so let's dive in.

International bank transfer SWIFT

This is one of the oldest, most commonly used ways to pay foreign contractors. A global transfer network, SWIFT, is used to connect financial institutions across the world, and companies pay their contractors via international bank transfers.

However, this method is slowly declining, since the difference in employment laws and regulations can pose challenges for these international money transfers.  

Another downside of international wire transfers are hefty bank fees, as well as exchange rates. When wiring higher amounts of money, too much is lost in translation, so to speak.

International money order

These kinds of payments, as well as traditional paper checks, are also less and less in circulation. What was once the only available option now possess too much of a risk.

One of its biggest downsides is how slow the transaction is. In order to process it, first, you must physically purchase the money order at the post office, bank, a Western Union outlet, etc. Upon receiving the money order from the payer, the contractor will have to physically deposit the payment as well. Just like with international bank transfers, fees and exchange rates can significantly increase the cost for the payer, and the total amount received for the contractor.

However, in countries where there is no digital option, this is the only route you can take.

Variety of digital wallets

Due to the limitations of traditional methods, online transfers are being used more and more. Instead of long queues, you can now transfer money in just a few clicks. Since the industry is expanding, more and more options are becoming available.


PayPal is the oldest and most frequent method of transferring money internationally. It is present in more than 200 countries and it can support 25 currencies. However, there are many countries with talented workers who still don't have the option of using this digital wallet.  Fees are also quite low, 2.9% + $0.30 in the US, and 3.9% + exchange rate for international transfers.

In addition to this, PayPal allows international payment through a company credit card, in addition to transferring money to a local bank account. And for those working with several contractors, there is the option of obtaining an advanced business solution called PayPal MassPay. It helps decrease the time needed to pay all of your contractors, since you can make multiple payments at once, just by uploading the necessary information. In addition, it has significantly lower fees than the regular account.

It is important to mention that PayPal has a certain restriction - you aren't allowed to use friends and family option for business purposes. You can use PayPal to pay contractors, and you can use it to send money to your family, you just need to clearly state what kind of transaction you are making.

You need to have in mind that if PayPal becomes insolvent, you will be in danger of using all of your funds. Since PayPal isn't a bank, it isn't FDCI-insured.


Another great option for paying an independent contractor is Payoneer. It also has a global presence, and it offers multiple options for money withdrawal, one of them being a Mastercard issued by them. They ship the card worldwide, so it can be a great alternative for your contractors since the money can be used as soon as it is deposited into the account. This is much faster than waiting for the funds to be deposited on regular bank accounts, although Payoneer offers that option as well.

On the downside, Payoneer fees are also substantially higher, $2 to $4 to load the debit card, and up to 3.5% for currency conversion. There is also a % fee for transferring money to your local bank account.


Another digital payment option, currently used by 12 million customers, Revolut offers not only money transfer, but it also deals in gold and crypto payments. This app offers transactions internationally, to both private customers and business, with no hidden fees.

They also offer their customers a card that currently supports up to 130 currencies. There are various subscription options you can choose from, offering different fees and products.


The biggest upside of using this kind of payment method is the fact that they have the fairest exchange rate, allowing for local bank payouts in multiple currencies. Every other payment service adds a premium to the wholesale exchange rate, making the transaction more expensive. They also list the benefit of offering rates and fees before the money is sent. However, TransferWise is present in only 59 countries so far. If you aren't working with large sums of money, and your contractors are located in one of the countries they cover, this could be a good option for you.


Although still considered a novelty, many businesses are opting for paying their contractors in cryptocurrency. Some still consider cryptocurrency payouts to be sketchy, mostly because the market for cryptocurrency business payment is still very new and untested. However, this prejudice is proving to be untrue, and cryptocurrencies have many benefits, especially if you are working with internationals, thus operating with more than one currency. Cryptocurrencies can help you avoid exchange rates and hefty fees, and allow your contractors to choose their own method of payment and the currency they want to use. This is why Deel contractors have the option of using cryptocurrencies as a means of payment.  It would be an unusual move for your business, but it doesn't necessarily have to be a risky one.

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