What To Know About Paying Foreign Contractors

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There are a lot of benefits that come with hiring foreign contractors and freelancers. U.S. startups and businesses have access to a wider talent pool and more specialized skills, they can avoid overhead costs that come from having traditional employees, and there’s a lot of flexibility in these arrangements.

Of course, there can be downsides as well. Some of the downsides of hiring foreign contractors can include problems related to communication and time differences, as well as challenges that come with quality control.

Regardless, for many businesses, particularly startups, the pros outweigh the cons when it comes to outsourcing to foreign contractors.

So what should you know about paying them? How can you effectively pay someone in Nicaragua, China, India, the Philippines or anywhere else in the world? Are there specific things to know or guidelines?

Understand the Difference Between An Employee and a Contractor

If you’re a U.S.-based business and the IRS determines your independent contractor is actually an employee, you may be liable. A lot of startups and independent business owners don’t know the legal differences between employees and contractors, so they inadvertently blur the lines and find themselves in trouble.

Make sure you’re clear because otherwise, you could end up having to pay more if someone is taking on an employee role.

You should think about not only laws and regulations in the U.S., but also the laws of the country where your contractor resides.

Also worth noting is the fact that many countries have protections for contract workers in place. As a result, you may need proof from your contractor that they’re complying with their local tax laws.

Complete IRS Form W-8BEN

If you’re a small business owner or a sole proprietor and you work with foreign freelancers who do meet the guidelines for contractors, you don’t have to report the payments you make to that person to the IRS.

However, most professionals recommend completing Form W-8BEN which is for individuals. If you’re working with a foreign company on contracting work, you can complete the W-8BEN-E.

Online Payments

You’re more than likely going to be using an online payment service to get money to your overseas contractors. However, when you’re choosing a specific payment service, there are things to be aware of.

First, there is the potential with some payment services for accounts to be frozen. You should look for an online payment service that doesn’t have a record of arbitrarily freezing business accounts because this can create obstacles in how you do business.

You might also want to speak with your contractor about the payment option that’s going to work best for them. You want your contractors to actually be able to access the payments you make to them at a local bank, so look for online payment services that make this an option. Otherwise, you may pay your contractors or freelancers, and they can only use those payments online.

Speaking with your contractor beforehand can help alleviate this problem, and keep your working relationship moving along smoothly.