After Nigeria, Egypt has the largest economy in Africa; it’s no wonder global companies want to access the country's growing freelance workforce. But, when it comes to paying self-employed contractors in Egypt, what steps do you need to take to comply with the country’s intricate labor and tax laws?
Before you onboard a new contractor or receive your first invoice, learn how to properly classify contractors and pay them per Egypt's labor laws. This step-by-step guide walks you through running payroll for contractors in Egypt.
Step #1: Classify your workers in Egypt
Contractors may operate as freelancers or register as a more formal legal entity, including a one-person company or a sole proprietorship. Foreign businesses can engage with contractors using any of these structures.
Regardless of how the freelancer operates, it’s important to classify them correctly. Failing to do so can tie you up in legal battles, harm your reputation, and result in penalties imposed by Egyptian courts, including:
- Fines and penalties
- Back pay for employee benefits and unpaid salaries
- Loss of intellectual property (IP) if a contractor challenges the ownership of a project
- Bans from operating in Egypt
Here are a few ways to evaluate how your workers should be classified:
High level of worker control. Contractors have more autonomy in completing their work, including when, where, and how they complete it.
More direction from the employer. Employees receive more guidance and direction from their employer and may have specific working hours.
Equipment and tools are owned by the contractor.
Equipment and tools are provided by the organization.
Less integrated. Contractors tend to be more independent and often work remotely.
Highly integrated. Employees are more integrated into the employer's organization and may work at the employer's premises.
No entitlement to benefits. Contractors are not entitled to the same benefits and labor protections as employees, and they pay their own taxes.
Entitled to benefits. Employees receive certain employment benefits and protections, such as minimum wage, overtime pay, and paid holidays.
Time-bound engagement. Contractors are typically engaged for specific projects or periods.
Unlimited engagement. Employees are generally hired for an indefinite time period.
Risk of loss. Contractors assume more risk and liability for their work, including financial and tax risks.
No risk of loss. Employees are usually protected from liability for work-related issues.
Subcontracting. Contractors may delegate work to another contractor or business.
No subcontracting. Employees must do their own work and can’t delegate responsibilities without company approval.
Step #2: Determine the best way to pay your contractors in Egypt
Before making payments to contractors in Egypt, choose the most suitable payment method for your organization and your freelancer. With the rise of remote workforces, various options are available for sending paychecks to Egyptian contractors. Here are some choices:
- Bank wires. You can open an Egyptian bank account and deposit funds into contractors' accounts. (Note: To open an Egyptian bank account, you’ll need an Egyptian tax number.) Alternatively, you can use your bank for global wire transfers.
- International money orders. This method can be inconvenient and may involve fees and unfavorable exchange rates. The employer needs to purchase the money order, and the contractor needs to deposit it upon receipt personally.
- Digital wallets or payment platforms. Some platforms allow money transfers, but not all may be available in Egypt. For example, Venmo is not available outside of the US, but PayPal is. Other common alternatives in Egypt include Payfort from Amazon, CashU, and Fawry. Exchange rates may vary.
- Global payroll services. Contractors typically aren't included in payroll because they aren't subject to withholdings. Instead, freelancers send invoices, which are processed by accounts payable. However, with Rippling, you can pay both Egyptian employees and contractors in a single pay run.
Step #3: Use global payroll software to process payments for Egyptian contractors
The fastest and most straightforward way to pay contractors in Egypt is by utilizing global payroll software. Rippling seamlessly pays employees and contractors worldwide in a single run using their preferred currency. Here's an overview of how Rippling's global payroll system operates:
Step #4: Ensure your Egyptian contractors have the right tax information
Employers are not required to withhold and pay income taxes for contractors in Egypt. Independent contractors operating as sole proprietors have a tax rate of 0-25% depending on their income, while one-person companies pay a flat corporate tax rate of 22.5%. Freelancers may also need to charge VAT if they make more than 500,000 Egyptian pounds per year, and then pay VAT to the government monthly.
Egyptian contractors should register with the Egyptian Tax Authority (ETA) within 30 days of signing their contract—this can be done online. US-based employers need to comply with the Internal Revenue Service (IRS) by getting their contractor’s legal name, date of birth, bank account or other pay information, contact information, and tax identification number (or TIN). Employers must have foreign independent contractors fill out a Form W-8BEN. After that, employers will fill out a 1096 Form which outlines details about their foreign contractor.
Tax compliance in a country like Egypt can seem challenging. However, Rippling’s global payroll system makes it easy. Rippling offloads all administrative duties, submits the correct paperwork, makes calculations, and files taxes on your behalf.
Frequently asked questions about running payroll for contractors in Egypt
Do you need to withhold taxes when paying contractors in Egypt?
No, foreign companies are not required to withhold payroll taxes when paying contractors in Egypt. Contractors must pay their own taxes.
Does the Egyptian minimum wage apply to independent contractors in Egypt?
No, minimum wage laws do not apply to independent contractors in Egypt. Instead, contractors set and negotiate their own rates. In Egypt, the minimum salary for private sector employees is 2,700 Egyptian pounds (EGP) per month.
Do Egyptian contractors get benefits?
No, independent contractors in Egypt are not entitled to benefits in the same way as full-time employees. Providing employee benefits to independent contractors can even increase the risk of misclassification in the eyes of the courts.
Can you pay contractors in Egypt in your home currency?
Ideally, you should pay international contractors in their local currency. The local currency in Egypt is the Egyptian pound (EGP). However, if contractors agree to it in writing, you can pay them in another currency.
Can you manually pay contractors in Egypt?
While small business owners might manually process contractor payments to save costs, this can become time-consuming, especially as your business grows and you work with multiple contractors in Egypt or from different countries. There are also risks associated with manual payroll processing:
- Compliance: Manual payroll processing carries the risk of human errors and omissions. Using a system like Rippling can help enforce compliance with local laws, regardless of where your contractors are based.
- Security. Manual processing, especially using spreadsheets or paper records, can pose security and privacy risks, potentially leading to the loss, theft, or misuse of sensitive employee information.
Rippling offers an automatic payroll solution that syncs your business's HR data with payroll, eliminating the need for manual data entry. This system ensures quick and compliant payments to employees and contractors worldwide in a single pay run.
How do you turn a contractor into an employee in Egypt?
Hiring independent contractors has financial benefits and flexibility, but you may decide to transition your contractor into a full-time employee. In that case, there are some legal requirements to consider, many of which mirror onboarding any new employee across borders:
- If you don’t already have other Egyptian employees, you’ll need to decide whether to establish a local entity or use an Employer of Record service (EOR). To establish your own entity, you’ll need to get an Egyptian tax number, register your business, and obtain licenses and permits. Using an EOR can simplify the process. Read more about hiring through an EOR.
- Draft an employment contract in Arabic, which includes an official offer letter. The contract should outline the job’s duties, your probation period (of up to three months, per Egyptian law), working hours, termination policy, and more.
- Familiarize yourself with the Egyptian Labor Law of 2003, which strictly protects workers. Some of the provisions in that law include prohibitions on hiring discrimination, mandated raises of 7% each year, and rights to breaks.
- Enroll the employee in benefits. Per Egyptian labor laws, employees are required to receive overtime, health insurance, social security, maternity leave, sick leave, religious pilgrimage leave, disability insurance, and unemployment compensation.
- Set up payroll so employees are paid monthly, deductions are made for taxes, and payments are made into social insurance. In Egypt, employers must file quarterly tax returns and an annual salary tax reconciliation.
Sounds complicated, right? Luckily, Rippling simplifies managing contractors and transitioning them to full-time employees. Rippling files all necessary legal paperwork, completes benefits administration, and fulfills compliant payroll, making the transition seamless from onboarding to offboarding.
Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.