Hiring contractors in Switzerland is an enticing idea; the country has a growing population of highly-skilled freelance workers. But, there's a long list of Swiss tax and labor laws to know about, classification considerations to remember, and compliance rules to follow. So, how can you ensure your contractors get paid on time and without legal hiccups?
This guide will familiarize you with the must-knows of hiring and paying Swiss contractors. Additionally, we'll break down the methods to properly classify your Swiss workforce and ensure compliance with local laws.
Step #1: Classify your workers in Switzerland
False self-employment or misclassification can happen when employers don't fully understand the rules for hiring and paying contractors. That's why it's crucial to know your responsibilities before you start expanding your workforce in Switzerland.
If misclassification occurs, there can be significant consequences. Swiss authorities might initiate inquiries into your practice, and if deliberate misclassification is proven, you could be compelled to provide all the employee benefits the worker should rightfully receive.
The repercussions extend to potential tax evasion investigations. Violations related to minimum compensation and working conditions can trigger substantial administrative fines for foreign employers, reaching up to CHF 30,000. In serious instances, exclusion from the Swiss market could be a possibility.
In general, the main cause of misclassification is wrongful subordination, i.e. when workers are treated as employees when they're actually contractors and vice versa. If the situation ends up in court, the officials will examine the contract and circumstances of the relationship. Here are some of their considerations:
High level of worker control.
Contractors are generally given more freedom to decide how to complete their work and when to do it.
More direction from the employer. Employees are usually subject to more oversight and direction from their employer, who provides instructions on how to perform the work and may set specific working hours.
The worker provides tools and equipment.
The employer provides tools and equipment.
Less integrated. Contractors tend to be independent, often working remotely and using their own equipment.
More integrated. Employees are typically more integrated into the organization. They’re more likely to work at their company’s office or headquarters.
Not entitled to benefits. Contractors are not entitled to the same benefits and protections as employees. They also pay their own taxes.
Entitled to benefits. Employees are entitled to benefits from their employer such as minimum wage, overtime pay, and paid time off. They may also receive health insurance, pensions, and sick leave.
Time-bound engagement. Contractors are typically engaged for a specific time period or task.
Indefinite agreement. Employees are usually hired for an indefinite time.
Risk of loss. Contractors often assume liability for their work (and any related issues).
Protected from risk. Employees are generally shielded from liability for work-related concerns.
Subcontracting. Contractors can delegate work to another individual or entity freely.
No subcontracting. Employees are expected to do their own work. They can’t delegate responsibilities to others without approval from their higher-ups.
Step #2: Determine the best way to pay your contractors in Switzerland
With the rise of global employment, the methods for compensating workers across international borders have also expanded. Consequently, a diverse range of options are now available to facilitate payments to Swiss contractors.
- Bank wires: Creating a Swiss bank account lets you seamlessly deposit payments into your Swiss contractors' accounts. Alternatively, you can initiate international transfers from your domestic bank account. Bear in mind that bank wires often entail significant fees for both the sender and the recipient.
- International money orders: With a long-standing history, international money orders are familiar to most individuals. However, they come with a drawback—they can be painfully slow. You have to purchase the money order physically, and your contractor must deposit it manually upon receipt. Additionally, using money orders can be costly due to associated fees and fluctuating exchange rates.
- Digital wallets and payment platforms: The popularity of digital payment platforms is on the rise for contractor payments. However, not all platforms are universally available (e.g., Venmo and Cash App don't work in Switzerland). Furthermore, many of these platforms are influenced by day-to-day exchange rate variations, which can complicate cost projections.
- Global payroll services: While contractors typically fall outside the scope of payroll due to differing tax and withholding regulations, certain payroll services—such as Rippling—offer the convenience of automatically paying employees and contractors worldwide, in a single pay cycle.
Step #3: Use global payroll software to process payments for Swiss contractors
Among the various methods available for paying Swiss contractors, using global payroll software is the swiftest and most straightforward approach. With Rippling, you can compensate your employees and contractors across the globe, all within a single pay cycle.
Interested in taking a closer look at Rippling's global payroll system? Here's a preview:
Step #4: Ensure your Swiss contractors have the right tax information
In Switzerland, the cantonal tax administrations handle everything tax-related. Switzerland has 26 cantons (each with its own administration) responsible for collecting taxes on behalf of the Confederation.
As an employer, you're not obligated to withhold or manage any payroll or income taxes for your contractors in Switzerland. They are responsible for completing self-registration, submitting the appropriate forms, filing their tax returns, and meeting the annual tax payment deadlines. However, you can offer guidance on including their municipality for online tax return submission.
Swiss freelancers earning more than CHF 100,000 need value-added tax (VAT), with exceptions for sectors like insurance, healthcare, or farming. They must:
- Notify Federal Tax Administration (AFC).
- Register for VAT.
- Verify liability conditions on the AFC website.
Independent contractors must also declare their earnings as income and incorporate them into their overall taxable income. Their tax return should be based on their business and private financial records—plus, they can offset their business expenses against their revenue.
Once the contractor completes their tax return, they can pay taxes online or visit a bank to submit their completed forms and make the payment. If there's no tax owed, the forms can be stamped and processed at a bank.
Seems complex? Choosing a global payroll software like Rippling simplifies contractor payments by streamlining the entire process. Rippling handles calculations, filing, international tax compliance, and associated paperwork, delivering a seamless experience from start to finish.
Frequently asked questions about running payroll for contractors in Switzerland
Do you need to withhold taxes when paying contractors in Switzerland?
No, foreign companies aren't obligated to withhold payroll taxes when compensating Swiss contractors. It's the responsibility of contractors to handle their own tax payments and social security contributions.
Does the Swiss minimum wage apply to independent contractors in Switzerland?
No, the Swiss minimum wage laws don't apply to self-employed people and independent contractors in Switzerland.
Do Swiss contractors get benefits?
No. Self-employed individuals in Switzerland, including independent contractors, do not fall under the protection of Swiss employment law and are not eligible for benefits.
Can you pay contractors in Switzerland in your home currency?
Opting for the local currency (Swiss franc or CHF for Swiss-based contractors) is typically advisable when compensating international contractors. Nevertheless, some contractors might favor alternative currencies like USD for payment.
Can you manually pay contractors in Switzerland?
Paying Swiss contractors manually is often chosen by small business owners to cut costs. But this can become time-consuming as your business grows and deals with more foreign contractors.
Additionally, manually handling payments comes with certain drawbacks:
- Compliance: Manual payroll processing introduces the risk of human errors and omissions.
- Security: Using spreadsheets or paper records exposes sensitive employee data to security vulnerabilities like loss, theft, or misuse.
Rippling simplifies the process by automating payroll. It seamlessly integrates your business's HR data with payroll systems, eliminating the need for manual data entry and the possibility of human error. This means your global contractors and employees can be paid swiftly and compliantly—all in a single payroll run.
How do you turn a contractor into an employee in Switzerland?
In Switzerland, labor laws mandate payroll deductions, benefits, and other considerations for full-time employees, which may not apply to contractors. Moreover, employing workers demands setting up a legal entity or utilizing an Employer of Record (EOR) service.
Here are the steps to convert contractors to employees in Switzerland:
- Prepare a new employment contract that adheres to legal standards and specifies employment terms.
- Ensure compliance with relevant laws by establishing a legal entity in the country or using an EOR.
- Collect essential employee documents, including their ID, tax forms, and bank account details. A valid work permit showing authorization to work in Switzerland is required for non-Swiss residents (e.g., EU and EFTA citizens).
- Enroll the employee with local authorities to meet labor law requirements.
- Provide the legally mandated employee benefits; ensure they’re clearly outlined in the employment contract.
Navigating these legal demands can be overwhelming. Luckily, you can simplify the transition process with Rippling. We’ll ensure your documentation and benefits are legally compliant, manage your payroll, and more. With Rippling, you’re supported throughout the entire employee journey.
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.