Paying international contractors: What you need to know

Some supplement office jobs with side hustles. Others forgo full-time employment altogether in favour of flexible schedules. No matter the reason, workers across the world are turning to independent contracting and other self-employed work as an important source of income. 

Contractors can become their own bosses and take on trial projects with multiple clients to see who they enjoy working with most. Companies can access the once-untapped talent pool of skilled remote work without compliance risks or steep employee management costs. 

The arrangement only works if these self-employed workers are paid what they’re owed quickly and efficiently. This guide is a helpful resource for paying international contractors. Learn about correctly distinguishing them from employees, various pay schedules, and all your options for running payroll.

What's an international contractor?

An international contractor is a person who works on a per-project basis for a company headquartered in a foreign country. Contractors have more autonomy over when, how, and for whom they work than employees, and companies aren’t required to handle their payroll taxes or provide benefits. 

While countries will have their own definitions, here are some common distinctions between contractors and employees:

To minimise your compliance risk, you should always check how your foreign worker’s country distinguishes between contractor and employee.

Determining pay delivery for international contractors

International contractors are often paid based on their output instead of a preordained schedule. Ideally, contractors and companies should negotiate their payment terms before they start working together. The terms should then be laid out in a contractor agreement that both parties should sign.

Common pay schedules for international contractors include:

Hourly 

Many contractors set an hourly rate and submit invoices to clients logging how many hours they’ve worked. The agreement should explain how often contractors can expect payment (e.g. weekly, bi-weekly, or monthly). 

These invoices often include itemised lists of materials needed to finish the project, like a subscription to an academic journal for research, for clients to reimburse. You'll save time by using payroll software with time and attendance features that let you automate payments. 

Ensure you’re offering international contractors market-competitive rates and administering pay schedules that don’t conflict with any labour laws within their jurisdiction. 

Per project

Contractors can also be paid a fixed rate upon a project’s completion. While this option appeals to clients, it’s risky for contractors who may work longer hours than anticipated and aren’t guaranteed payment if the final product is unsatisfactory. 

If both parties have a good understanding of the project’s scope, billing a flat fee is a great option. Make sure the contractor agreement outlines workflows, deadlines, and policies for missing deadlines. 

Upfront vs. down payments

International contractors may want full payment for their services as soon as they’re assigned a project, before they start working. While it can be a great signal of trust for experienced freelancers you have a good history with, the pendulum of risk swings against the client, who may face delays and multiple rounds of feedback with newer talent.

A similar, less risky option is to make a down payment to the contractor—i.e., paying a portion of the rate up front and the rest after the project’s completion. This method is helpful for trialling newer contractors and is a good-faith gesture that encourages good work. 

Retainer

If a contractor is on retainer, they’re paid a set amount regularly, similar to a salary (also known as fixed-rate). This makes sense for workers who aren't full-time employees but work autonomously on a mix of tasks for your business. It’s a great option if you can reliably scope out a set number of hours for a reliable freelancer every month. 

The contractor agreement should set expectations for work hours or deliverables the worker handles, as well as the pay frequency. Usually, retained contractors are paid a fixed rate monthly, with new rates negotiated every financial quarter. 

Payment methods for foreign independent contractors overseas

Once you’ve outlined the arrangement with your international contractor, it’s time to decide how to pay them. Here are your payment options:

International bank transfer

What it is: The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a financial system that relays global payments to a network of 11,000 member banks in 200 countries. A contractor provides their:

• Name
• Address
• Bank address
• Bank’s SWIFT code
• Bank account number

Then you can send a payment to most places around the globe.

International money order

What it is: Similar to writing a check, this method involves sending a physical payment in the mail to a contractor living abroad. Companies usually have to go to a Western Union, bank, or post office to buy the money order, then contractors have to go to their bank for a deposit once it’s received.

Money transfer services

What it is: An online platform that lets you quickly (sometimes even instantaneously) send money to international contractors. Such services include:

• Paypal
• Wise
• Payoneer
• Xe
• CurrencyFair

Digital wallets

What it is: An online platform or payment app where you can send, receive, and store money. Contractors can transfer money from their digital wallets into a bank account.

Using an Employer of Record (EOR)

What it is: For full-time employees rather than contractors, an EOR is a service that hires foreign workers on a company's behalf while handling payroll, taxes, contracts, timesheets, and benefits. Check that you’re correctly classifying your employees and contractors with our free quiz.

Why hire international contractors?

In addition to considering all the options for when and how to pay overseas contractors, you should also think about why you’d want to hire contractors in the first place. There are plenty of reasons Nick Wiesner, VP of Brand at Rippling, calls contractors his team’s 'competitive edge.' Here are some of the advantages:

Cost savings

There are far more costs associated with hiring full-time employees than independent contractors. In addition to paying for an employee’s equipment, you’re also in charge of administering benefits, including superannuation. You also have to account for steeper training, management, and recruitment costs. 

Self-employed contractors, on the other hand, use their own equipment, manage themselves, and are typically in charge of covering their own benefits and handling their own payroll taxes. In short, hiring a contractor can cost up to 30% less than hiring an employee.

Access to global talent

According to the ADP Research Institute, about a third of the world’s workers participate in the gig economy. In an era where the labour force is job-hopping en masse, and the talent pool is larger than it’s ever been, contractors allow companies to commission services from workers across the globe without hasty commitments.

Hiring a contractor is also a great way to vet a new worker; you can decide whether they’d fit in as an employee after they’ve already done some work for you. It helps to have a payroll system that can quickly switch contractors into employees, steering clear of any paperwork hold-ups. 

Rippling is the only system that lets you seamlessly transition from hiring and paying contractors, to paying full-time employees through an EOR, to paying employees hired through your own entities. See Rippling today.

A more limber workforce

The work-on-your-own-schedule nature of contracting paves the way for a more flexible arrangement. Contractors aren’t beholden to 9-to-5 availability and decide when (and when not) to work. Companies can quickly hire and onboard contractors to take on assignments that full-time employees don’t have the bandwidth for. Steve Taplin, CEO of Sonatafy Technology, a software development firm, wrote about the flexibility benefits of gig workers in Forbes:

Less compliance risk

Since labour laws like minimum wages, tax withholdings, and severance pay vary between and within countries, hiring international employees can leave your company vulnerable to global compliance issues—i.e., employment practices that are legal in one jurisdiction but illegal in another. 

There are fewer compliance issues to keep track of with independent contractors. Once you’ve established terms in the contractor agreement and set up international payments, there’s only one main issue you should monitor (see next).

Beware of misclassification

While there are plenty of benefits to hiring a contractor, you have to make sure your business relationship with them looks nothing like that of an employee. The distinction between the two kinds of workers is crucial. If you don’t categorise workers accurately, you’re exposed to misclassification penalties, which can incur steep fines, legal fees, and reputational damage. 

Uber, for example, owed Dutch drivers back pay and benefits after a court ruled that the workers were employees. If you want a hand further delineating between contractor and employee, use Rippling's Worker Classification Analyser, which asks a series of questions to determine your work conditions and risk factors. (Hint: If your contractors are really full-time employees, you can pay them quickly and compliantly with Rippling EOR.) 

Pay contractors around the globe in 90 seconds

Rippling is the best solution for quickly paying international contractors—all while managing your entire workforce at every stage of your company’s growth. 

While most global payroll systems process payments through third parties (which can cause long delays), Rippling is the rare native global payroll software and HRIS that allows you to pay contractors and employees in local currencies in a single pay run. 

Rippling simplifies paying international contractors by:

• Providing country-specific consulting agreement templates and storing for e-signing.
• Sending payment in local currency or AUD.
• Paying all contractors in a single pay run, no matter their location.
• Consolidating contractor and employee data in the same global HRIS.
• Automatically collecting business registration documentation.
• Tracking and managing invoices.

And the best part? It does all this while fully managing employees, administering benefits, monitoring compliance, and running payroll, within the same system.

Request a demo today to see how Rippling makes paying international contractors quick and easy. 

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.