Paying international contractors and freelancers can be complex, but it’s necessary in today’s global economy. Many businesses are turning to foreign contractors to access a diverse talent pool, tap into specialized skills, and reduce costs.
This guide will empower you with the knowledge and understanding of making international contractor payments, highlighting the challenges, offering best practices, and discussing tools and platforms that can simplify the process. Whether you’re dealing with contractors or freelancers, this comprehensive guide will equip you with the necessary insights into the complexities of international payments, crucial for smooth and efficient AP operations.
Steps to pay international contractors & freelancers
Here’s a step-by-step guide to paying international contractors.
1. Onboard & conduct due diligence
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Obtain the contractor’s full name, address, and contact details
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Gather tax-related information, such as tax ID or VAT number, if applicable
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Confirm their preferred payment method and related information (e.g., bank account details)
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Perform a risk assessment to ensure compliance with anti-bribery, anti-corruption, and other relevant laws
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Screen the contractor against sanctions lists as necessary
2. Determine the currency and payment method
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Agree on the currency in which the contractor will be paid
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Choose a payment method that is convenient, cost-effective, and secure for both parties
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Ensure the chosen method complies with local and international regulations
3. Calculate the payment amount
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Convert the agreed-upon payment amount to the contractor’s local currency, if necessary
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Factor in any applicable fees, such as transaction costs or foreign exchange fees
4. Comply with tax and legal regulations
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Collect the necessary tax forms (e.g., W-8BEN for US-based companies)
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Withhold taxes as required by local laws and international tax treaties
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Adhere to any other legal requirements, such as reporting obligations
5. Execute the payment
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Initiate the payment using the chosen method
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Provide the contractor with a transaction reference or confirmation
6. Keep accurate records
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Document the payment details, including the amount, date, and method
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Store copies of invoices, receipts, and compliance-related documents for accounting and tax purposes
7. Follow up
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Confirm with the contractor that they have received the payment
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Address any issues or discrepancies promptly
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Maintain ongoing communication to ensure a smooth working relationship and compliance with the contract terms
Challenges of paying international contractors
Currency conversion and exchange rates
One of the main challenges of paying international contractors is dealing with currency conversion and fluctuating exchange rates. These can affect the amount contractors receive and create complications in financial planning.
Using tools and platforms that offer competitive rates and minimize foreign exchange fees is important. Exchange rates can vary significantly from day to day, so it’s beneficial to use a service that offers a stable and fair mid-market exchange rate.
Compliance with local regulations
Understanding and adhering to local regulations, including tax forms and labor laws, is not just a challenge, but a crucial necessity. Each country has its own unique requirements, and failing to comply can lead to legal and financial consequences.
Understanding and adhering to these regulations is crucial for maintaining a good business relationship with your contractors. Knowing when to use forms like Form W-8BEN-E can help ensure tax compliance.
Payment security
Ensuring payment security is essential when dealing with international transactions. Secure methods like SWIFT transfers and digital payment platforms with robust security measures can help protect against fraud and criminal activity.
Ensuring accurate record-keeping of all transactions is a necessity. This practice helps prevent issues with tax compliance and financial audits, and it’s a key part of responsible financial management.
Best practices for paying international contractors
Set up a payment process
Choosing the right payment method is the first step in setting up a payment process for international contractors. Comparing different methods, such as wire transfers, PayPal, and specialized platforms, can help you find the best fit for your business needs.
Negotiating payment terms clearly and using formal contracts can protect both parties and ensure smooth transactions.
Manage currency exchange and fees
Using multi-currency accounts can help you manage currency exchange more efficiently. This allows you to handle payments in different currencies without incurring high conversion fees. Minimizing conversion fees by using tools that offer favorable rates and automating payments can streamline the process and reduce costs. Be aware of intermediary bank fees and other hidden costs that can add up over time.
Set clear payment schedules
Establish regular payment schedules to ensure contractors know when to expect payments, reducing confusion and building trust. This is especially important when dealing with multiple contractors across different time zones.
Maintain transparent communication
Keeping open lines of communication with your contractors about payment processes, fees, and schedules is a crucial element in building a strong and trust-based business relationship.
Regularly review payment methods
Periodically assess and review your chosen payment methods and platforms to ensure they continue to meet your business needs and provide cost-effective solutions. Changes in foreign markets or the introduction of new online payment services can offer better rates or features.
Tools and platforms for international payments
Routable
Routable is an AP Automation platform that offers features like mass payments, multi-currency support, and automation tools that make it easy to manage payments across borders while offering competitive FX rates to help you and your contractors save money.
Routable’s focus on security and compliance makes it an attractive option for businesses dealing with international contractors.
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Easy global payments: Routable simplifies cross-border payments, allowing you to effortlessly pay contractors in their preferred currency. This eliminates the need for multiple payment providers and simplifies your financial operations.
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Mass payments: Routable lets you make thousands of international payments at once with CSV uploads or through our API.
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Competitive exchange rates: Routable offers competitive exchange rates, ensuring you get the most value for your money when making international payments. This leads to significant cost savings over time, especially for businesses with frequent cross-border transactions.
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Transparent pricing: Routable’s transparent pricing model means there are no hidden fees or surprises. You’ll know exactly what to expect when sending international payments.
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Automation tools: Routable offers robust automation features that can simplify recurring payments and reduce manual workload.
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Compliance & vendor risk: Routable includes tools to help ensure compliance with international regulations, reducing the risk of legal issues.
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Real-time, two-way sync: Ensure that all data remains up-to-date with your accounting software, removing the need for manual work and making payments a breeze. Integrate with Oracle NetSuite, Sage Intacct, QuickBooks Online, Xero, and more.
PayPal
PayPal is a widely used platform for international payments. It offers services for both small and large businesses, making it a versatile option for paying international contractors.
Pros
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Ease of use: PayPal’s interface is user-friendly, making it easy for businesses and contractors to manage payments.
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Global reach: PayPal operates worldwide, supporting multiple currencies and making it accessible for international transactions.
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Buyer and seller protection: PayPal offers protection for both buyers and sellers, adding a layer of security to transactions.
Cons
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High transaction fees: PayPal’s transaction fees can be higher than other platforms, especially for currency conversions and international payments.
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Account holds: PayPal may hold funds for extended periods, which can be inconvenient for contractors expecting timely payments.
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Limited support for larger transactions: PayPal may not be the best option for high-value transactions due to its fee structure and limits.
Wise (formerly TransferWise)
Wise is known for its international payments and competitive exchange rates. It’s a good option for businesses looking to minimize foreign exchange fees and handle cross-border payments efficiently.
Pros
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Low fees: Wise offers some of the lowest fees in the market for international transfers, making it a cost-effective choice.
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Transparent exchange rates: Wise uses the mid-market exchange rate, ensuring fair and transparent conversions without hidden fees.
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Multi-currency accounts: Businesses can hold and manage multiple currencies in a single account, making it easier to handle international transactions.
Cons
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Transfer speed: While Wise is generally fast, some transfers can take a few business days, depending on the destination country and banking systems.
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Limited payment methods: Wise primarily supports bank transfers and may not be suitable for all payment needs, such as debit or credit card payments.
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No cash pickup: Unlike some services, Wise does not offer cash pickup options, which may be a limitation for contractors in certain regions.
Payoneer
Payoneer is another popular platform for paying international contractors. It supports multiple payment methods, including bank transfers and prepaid debit cards, making it a flexible solution for businesses of all sizes.
Pros
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Wide range of payment options: Payoneer supports various payment methods, including bank transfers, prepaid cards, and direct transfers to bank accounts.
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Global reach: Payoneer operates in over 200 countries and supports over 150 currencies, making it highly accessible for international transactions.
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Integration with marketplaces: Payoneer integrates with many online marketplaces and platforms, making it a convenient choice for freelancers and contractors.
Cons
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Fees for receiving payments: Payoneer charges fees for receiving payments, which can add up, especially for small transactions.
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Account maintenance fees: There are maintenance fees associated with inactive accounts, which can be a disadvantage for occasional users.
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Customer support: Some users have reported issues with Payoneer’s customer support, noting delays and difficulties in resolving issues.
Compliance and tax considerations
Compliance with local tax laws
Understanding local tax laws is crucial when paying international contractors. This includes being aware of withholding tax requirements and reporting obligations in both the contractor’s country and your own. Using forms like Form W-8BEN-E for tax compliance can help you meet these requirements and avoid penalties.
Reporting requirements
Accurate reporting is essential for compliance with local tax laws. This includes keeping detailed records of all transactions and ensuring that you meet the reporting requirements in both the contractor’s country and your own. Using tools and platforms that offer robust reporting features can simplify this process.
Vendor risk checks
Vendor risk checks are essential to prevent fraud and compliance issues when dealing with international contractors. This involves verifying the contractor’s identity, assessing their compliance with local regulations, and ensuring they have a good reputation. Vendor risk management tools can help you conduct thorough checks and maintain secure business relationships.
Hire tax professionals
Seeking professional advice from tax professionals can help you navigate the complexities of international contractor payments. Legal experts can guide you on compliance issues, tax requirements, and contract management, ensuring you meet all regulatory requirements and protect your business interests.
FAQs
How do I pay a contractor from another country?
To pay a contractor from another country, you can use international payment platforms like Routable, which offer automation tools, high-security standards, and compliance features. These platforms prevent fraud, ensure compliance with local tax laws and reporting requirements, and conduct vendor risk checks.
Do you issue a 1099 to a foreign contractor?
No, you do not issue a 1099 to a foreign contractor. Different countries have their own tax reporting requirements, so it is important to consult with a tax professional to determine the appropriate forms to use for reporting payments to international contractors.
Are payments to foreign contractors taxable?
Yes, payments to foreign contractors may be taxable depending on the tax laws of the contractor’s country. It is crucial to consult with a tax professional to understand the tax implications and ensure compliance with local and international tax regulations.
Do you need a W9 for international contractors?
No, you do not need a W9 form for international contractors. Each country has its own tax reporting requirements, so it is important to consult with a tax professional to determine the appropriate documentation needed when paying international contractors.
Can a US company pay a foreign contractor?
Yes, a US company can pay a foreign contractor. However, it is essential to adhere to international tax regulations and compliance requirements and consult with a tax professional to ensure proper documentation and reporting of payments to international contractors.
Do I need to send a 1099-NEC to a foreign contractor?
No, you don’t need to send a 1099-NEC to a foreign contractor. Tax reporting requirements for international contractors vary depending on their country of residence, so it’s important to consult with a tax professional to determine the appropriate forms and documentation for reporting payments.
How to report payments to foreign contractors?
To report payments to foreign contractors, consult with a tax professional to determine the required forms and documentation based on their country of residence. Adhere to both local and international tax regulations to ensure compliance and avoid potential penalties or legal issues.
Conclusion
By following this comprehensive guide, businesses can effectively manage paying international contractors, ensuring compliance with local regulations, minimizing costs, and maintaining secure and efficient transactions.
Whether dealing with independent contractors or international employees, understanding the intricacies of international payments is crucial for smooth and efficient operations.
