Technology makes it easier than ever to hire talent from around the world. It’s no surprise that many global companies choose to hire contractors based in Spain. However, when it comes time to pay invoices for those self-employed freelancers, it can get complicated. What steps do you need to take to remain compliant with all of Spain’s employment laws and tax laws?
Before you even receive your first invoice, it’s crucial to learn how to correctly classify, onboard, and pay Spanish contractors.
Step by step: How to run payroll for contractors in Spain
Step #1: Classify your Spanish workers
While there are many benefits of using contractors, be careful not to misclassify your workers. Spain is known for having strong worker protections, including the country’s “false freelancer” policy. If you hire a contractor but treat them like a full-time employee, you could face the following punishments:
- Imprisonment up to six years.
- Fines for labor fraud between 3,000 and 10,000 euros.
- Back taxes on wages.
- Paying out for benefits, overtime, vacation days, public holidays, or leave that the contractor would have accrued as an employee.
The good news is that Spain has a series of tests to determine who is an employee versus an independent contractor. Typically, Spanish courts consider that an employment relationship exists when the independent contractor is subject to the organizational and managerial oversight of the company. If a case goes to the courts, they will look at both the contract agreement as well as how the arrangement works in practice. Here are some of their considerations:
High level of worker control. Contractors organize their activity freely and autonomously. They’re not subject to orders regarding how they render their services. The company can’t control their working time or holidays. The company only sets goals or projects.
Direction from the employer. Employees are subject to more control from their employer, who can guide how to perform the work and set specific hours of work.
Not a part of the organizational chart. Independent contractors don’t have a manager or work alongside employees of the company. They should work on their own premises.
Highly integrated. Employees are typically integrated into the employer's organization and may work at the employer's premises.
Equipment and tools owned by the worker. The worker also shouldn’t be compensated for the use of their tools.
Equipment and tools typically provided by the company. The company may also reimburse them for this cost.
Paid for goals or work achieved. Contractors should not be paid hourly or per a fixed monthly fee.
Paid a consistent monthly salary or wage, regardless of work completed.
No entitlement to benefits. Contractors are also responsible for paying their own taxes. They also should not have company emails. The company does not have to provide them with professional training
Entitled to benefits. Employees are entitled to minimum wage, overtime pay, vacation pay, maternity leave/paternity leave, and other benefits.
No disciplinary action. The company can’t discipline contractors and can only terminate the agreement for breach of contract.
Can receive disciplinary action for workplace violations.
Time-bound engagement. Contractors are typically engaged for a specific project or period of time. The longer the duration of the contract, the greater the risk of misclassification.
Indefinite engagement. Employees are generally hired for an indefinite period of time.
Non-exclusive services. Contractors cannot be contractually bound to a single company or have post-contractual restrictions.
Exclusive services. Employees can be contractually bound to provide services to just one company.
Want help with classification? Try Rippling’s Worker Classification Analyzer.
Step #2: Determine the best way to pay your contractors in Spain
Before you can pay your Spanish contractors, you need to determine the best payment method.
With the rise of global workforces and remote work, employers now have more choices than ever for paying international contractors. Here are some options:
- Bank wires. You may choose to open a Spanish bank account and use that to deposit funds into your contractors’ accounts. Alternatively, you may use your bank to send a global wire transfer.
- International money orders. This payment method can be slow, as you will need to physically purchase the money order and then the contractor needs to physically deposit it upon receipt. Money orders often come with fees and bad exchange rates.
- Digital wallets or payment platforms. Not all digital payment platforms are available in Spain. For example, you can’t use CashApp or Venmo. Some employers use platforms like Wise to transfer money across borders. Remember: Exchange rates can change from day to day, making it difficult to predict your outgoing amounts.
- Global payroll services. Typically, contractors aren't included in payroll, as they aren't subject to the same withholdings as employees. Instead, they invoice for their services, which goes through accounts payable.
Step #3: Use global payroll software to process payments for Spanish contractors
Though there are various methods to pay Spanish contractors, the fastest and simplest is using global payroll software.
Rippling lets you pay contractors across the world. Here’s how Rippling’s global payroll system works:
Step #4: How to manage taxes for your contractors in Spain
While companies aren’t required to withhold and pay taxes on contractor payments in Spain, if your company is based in the United States, have your Spanish contractors (and any other international contractors) fill out an IRS Form W-8BEN. This certifies their foreign contract status for the US government.
Frequently asked questions about running payroll for contractors in Spain
Do you need to withhold taxes when paying contractors in Spain?
No, foreign companies don't have to withhold income taxes when paying contractors in Spain, nor do they need to make social security contributions. Contractors must pay all of their own taxes and social security contributions.
Does Spanish minimum wage apply to independent contractors in Spain?
No, minimum wage laws don't apply to independent contractors in Spain. Contractors must set their own pricing.
Do Spanish contractors get benefits?
Independent contractors in Spain aren’t entitled to employee benefits and offering benefits to independent contractors can even increase the risk that the Spanish courts will say that contractors have been misclassified.
What information do you need from Spanish contractors?
Write up a contract agreement, and agree with your contractor on the payment terms and payment method. Collect their name, date of birth, contact information, bank account information (or other payment information), and tax identification number.
Can you pay contractors in Spain in your home currency?
It’s best practice to pay international contractors in their preferred or local currency, which is the euro (EUR). You may pay contractors in another currency only if they explicitly agree. In that case, have that information outlined in the contract agreement.
Can you manually pay contractors in Spain?
While some small business owners manually process contractor payments in an attempt to cut costs, this can be time-consuming and lead to errors. Payroll becomes ever more complex as your business grows and you add foreign contractors.
Some risks of manually running payroll include:
- Compliance. Entering payroll information manually increases the risk of introducing errors or omitting crucial data.
- Security. Using spreadsheets or paper records brings security risks. Sensitive employee information can be lost, stolen, or misused.
How do you turn a contractor into an employee in Spain?
To hire and pay Spanish employees, you must create an employment contract and also establish a legal entity in Spain. On paper, the EOR is the official employer of your worker, and you can hire and pay employees through their entity. The EOR calculates and withholds the appropriate income tax on employee paychecks, pays your taxes to the Spanish Tax Administration Agency (also known as Agencia Estatal de la Administración Tributaria or Agencia Tributaria), and contributes to social security. EORs also administer compliant benefits.
Why use an EOR as opposed to your own entity? Setting up your own entity can take many months; most small and mid-size companies don’t have the time or resources for this huge administrative burden. What’s more, because you outsource payroll and benefits to EORs, it’s often easier for your operation in the long run. You don’t have to worry about tax rates, time off, healthcare, and so much more. Compliance can be tricky in Spain, which not only has strict labor laws, but collective bargaining agreements that employers must navigate.
Effortlessly manage contractors, no matter where they are
You can pay international contractors directly through Rippling, meaning you need just one system to pay all types of employees—wherever they are. See Rippling today.
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.