With the rise of global commerce, it has become more and more common to contract help located in another country. There can be many benefits to hiring foreign contractors. Your business could benefit from drastically different points of view, and the cost benefits can't be ignored either. The hold up for many businesses is that conducting business and operating a staff overseas brings its own host of complications. No matter where your staff is located, just down the block or across the pond, compensating them in a secure timely matter is one of the premier responsibilities of any employer. But with international contractors and freelancers, it is never as simple as just paying talent an hourly wage. With local law, exchange rates, income tax, and other tax obligations all coming into play, international borders can make B2B payments tricky.
What most of the big companies know is that the benefits definitely outweigh the costs in the long term. Getting to a place where both employer and staff feel secure in their international payments begins with understanding the options and intricacies of international compensation. During a time when many of the older, trusted methods are being challenged by newer, sleeker tools, taking the time to explore your options is more important than ever.
So, what is the best method for paying international contractors and freelancers? Most businesses will need to weigh the pros and cons of the different methods individually and decide on what best fits their needs.
Related reading: A guide to cross-border payments
Payment apps like PayPal are a money transfer service. They shuttle funds from one user to another through their own payment intermediaries.
With most features and transfers available from the user's phone, this is the flagship benefit of payment apps. Most have simple, intuitive interfaces, meaning much of the difficulty is centered around creating profiles or getting the recipient to create a profile in order to receive or initiate the transfer. You don't even need bank account info, just the email used to create the profile.
Unlike some of the methods we'll discuss below, most of the transfers and features are, for most purposes, basically instant. The transfer can be completed and the recipient is able to spend the funds in a matter of minutes.
It's no secret that online payment apps are fast and convenient. So what's stopping businesses everywhere from instituting these as the standard payment method for their companies?
In the majority of cases, the sender and recipient must have a profile on the same payment app. Domestically this doesn't pose as tall of a hurdle. Internationally, however, this can be a big problem. Many payment apps, even PayPal, are not allowed in certain countries. Some don't do international payments at all.
Payment apps suffer from hard to understand invoices. PayPal syndrome describes the pain of decoding an invoice for a transfer that somehow ends up costing much more than expected. Even though many of the accounts are free to set up (PayPal did a promotion where they paid new users $10, even), it doesn't mean that the process itself is free. There can be business fees which are often a combo of percent and flat deductions whenever you sell or transfer funds. There can be exchange rate fees in which you are charged to exchange money, such as from USD to the Euro, and the recipient pays fees upon receiving the funds as well. All of these fees add up to be a heavy blow on everyone's bottom line.
The speed of these apps is a blessing and a curse. While the funds can arrive instantly, they may not be accessible to the recipient for days after. The apps generally take up to three days for the money to be deposited. This discrepancy between money received and money accessible can make the waiting all the more painful. The recipient can pay a fee to transfer the funds instantly, or many apps offer a debit card attached to their online funds to bypass the waiting times. However, many places do not accept the cards as payment yet, and in many cases, there are additional fees associated with the cards use if they are credit.
International wire transfers have shown up in movies and tv for decades, and the line "Wire me the money" has made this a well-known payment option. Most often, bank wire payments will go from your bank to your recipient's bank through the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, network. Because international money transfers often use this network, international wires will often be called SWIFT transfers.
The SWIFT network is comprised of more than 10,000 financial institutions. It was developed in Brussels in 1973 as a way of sharing common processes and standards for financial transactions, as well as information of the financial transactions themselves, between the more than 200 countries participating including France, Argentina, Canada, and the UK.
The great majority of American banks are able to do international transfers with contractors or suppliers, even if international banking isn't their forte. This means that most people will not need to change banks or sign-up for any additional programs. If you're working with a financial institution you trust, this can be a great boon. Also, the transfer will go directly into your target's bank account in their destination country. Which most likely means your staff won't have to jump through any hoops to have access to their deposit.
Banks have a long history of being safe and secure. They are held to high standards and have incredibly tight insurance. Their size and standing as a permanent establishment protect you and your workers from the misfortune of improperly protected funds.
Banks are set up for handling large amounts of money. Often they won't bat an eye even if you're sending your whole full-time payroll overseas.
While SWIFT transfers have been a staple for many years, there are still some parts that have not aged well. Many things that used to be perks have lagged far enough behind to be considered a drawback. Here are some downsides:
These are major drawbacks in a couple of different ways. First and foremost, in the form of a banking fee. Now, most of the fees will be a fixed, upfront cost. The fee will not scale up with the amount sent, which means the larger the transfer, the better the deal on the fee. The less you send, the more the fees are going to sting. Additionally, with the way SWIFT is set up as a network of banks, each intermediary bank and the destination bank will take their own cut.
When acting on your behalf, banks will exchange money without checking with you on the rate first. This means that banks will look for exchange rates that benefit them. It is wise to always compare the exchange rate you are being offered to the market exchange rate. The difference between the two is essentially what the bank charges to convert the currency for you and can often be much more expensive, and harder to spot, than the standard fees.
Despite its name SWIFT transfers are not speedy. Banks can sometimes even be evasive when discussing timelines. Though for general information purposes, your transfer will usually be completed within 5 business days.
International money orders are basically pre-paid checks. They are available at a variety of locations from many grocery stores and Walmarts to Post Office branches. Once paid for they can be mailed anywhere and cashed. In some countries, especially in the Latin and South Americas, these may even be the expected type of payment.
Though money orders are a bit old-fashioned (the only sending option is the mail, after all) the fact that they are relatively straightforward makes them easy to understand and accessible even in places athat do not have access to a great deal of technology. If you have the funds on hand you won't need a bank in order to purchase a money order, and your recipient will not need a bank to cash it either.
Unlike checks, money orders cannot bounce. They are a guaranteed source of funds because they are paid for upfront with no possibility of bouncing, something that can help prevent a lot of headaches in something like an independent contractor agreement.
The old-fashioned and easy-to-understand nature of money orders works both positively and negatively against your company, whether doing only a single transaction or multiple payments.
Money orders have not progressed as far as transaction fees are concerned. There can be substantial fees on both sides of the exchange. You will be charged a fee upon purchase and they will be charged a fee upon cashing. And since money orders have been around a long time and a person does not need a bank in order to cash one, a number of predatory establishments have cropped up offering to cash the orders with high fees or poor currency exchange rates. Sometimes, predatory services add as much as %10 or %15 to the spread on the exchange rate and pocketing the difference. Remaining in contact with your recipient and researching a chosen establishment is the best way to avoid scams.
While popular, or even expected, in some places, the overall use and popularity of money orders have sharply declined in comparison to options like SWIFT, ACH, and direct deposits. It is important to talk to your recipient and double-check that there is a place that will cash the order.
Because money orders rely on the postal service, they can be slow to send and receive. Plus, once the person receives the order it still needs to be cashed and, if desired, deposited. If there happens to be an issue, it can be notoriously difficult to cancel and re-issue, potentially adding large amounts of time, think a month or more, to your compensation schedule.
It is the nightmare scenario of every business contracting out help overseas to be bogged down in a quagmire of penalties, disputes, and attorney fees trying to figure out how the company got so stuck in the first place. So what are some steps you can take to stay on the right side of compliance and out of the quagmire?
It's up to the government of the country you are contracting in to define the difference between the two. Misclassifying a worker as a contractor when the host country believes them an employee can cause tax penalties to stack.
Making sure you don't fall into foreign labor law issues requires research into the country where your contractor is located. Many countries will have different employee/contractor regulations. Maintain comprehensive records of contractor agreements and payment transactions in the case of an audit
The W-8BEN is an IRS mandated form to collect correct Nonresident Alien (NRA) taxpayer information for individuals for reporting purposes and to document their status for tax reporting purposes.
This is a required document when paying NRA's for non-US sourced income.
Stay in close contact with local HR experts and create a thorough and standardized process for managing your contractor agreements. Creating and fostering these professional relationships gives you the ability to get questions answered and ensure compliance.
Ensure hiring managers and HR teams are informed of the risks contractors may pose and adhere to clearly defined company guidelines. Create templates for contractor agreements that are vetted and revised to ensure legal protection.
Many companies with payroll have to pay close attention to IRS obligations, such as tax withholding. Consulting a tax specialist or getting legal advice is the best way to avoid running into horrible tax penalties down the line.
While confusing, paying international freelancers and contractors doesn't have to be hard. Here are answers to some common questions:
The US tax rate applies to any person who has made an income sourced in the US. Sourced in this case merely means the location where the services were performed. If a foreign independent contractor works in the US then they may be subject to US taxes unless they work less than 90 days in the US, they make less than $3000, or they are working on behalf of an office maintained in a foreign country.
Independent contractors are responsible for withholding their own taxes. Companies who hire international contractors generally do not need to worry about taxes except for maintaining and reporting the total compensation.
To learn about paying US-based freelancers and independent contractors, check out our previous blog.
An international ACH transfer is one way for businesses to send payments globally, and it’s commonly used to pay vendors and suppliers abroad.
Form W-8BEN-E is a tax document collected by a U.S. based business from foreign entities who receive income from U.S. sources.