Hiring offshore workers has been a prominent feature of globalization for years. An ever-increasing number of companies have decided to tap into the vast pool of talent available beyond the U.S. borders.
Hiring this way is different, and it’s natural to feel nervous about it the first time. “How do I find workers?”, “how do I make sure they do a good job?”, and “how do I pay a foreign contractor?” are all reasonable questions. They all have straightforward answers. An entire ecosystem exists to help with every concern from HR, operations, accounting, or the CTO.
Making The Right Hire
Like any contractor, the first thing you’ll want to do is interview the candidate and ensure that they can perform the tasks you need done. As precisely as possible, work out an agreement of the work to be done, the payment terms, and the payment schedule.
Part of the appeal of international contractors is you get more “bang for your buck.” Research the country you’re hiring from, find out what a competitive payment rate is there, then do your best to negotiate a win for everyone.
The best workers, the superstars, tend to get hired by big companies in America. Google grabs them before you get chance to hire them. Hiring internationally gives you a chance to hire superstars in countries that don’t have a Google grabbing them all first.
For paying international contractors, the first thing we need to do is define some terms. A payment processor is a company that helps you get the money to a foreign contractor. A foreign contractor, or international contractor, is simply someone outside of the United States who does work for you. “Contractor” has specific legal, accounting, and taxation meanings that vary by country, but they can be thought of as a worker who operates more like an independent business compared to a typical worker.
Although the details vary between countries and organizations, typically the difference between contractor and employee will be a matter of supervision. A contractor will solve problems according to their own judgment, with their own tools, and on their own schedule. An employee works as instructed by their supervisor.
Types of Contractors
For the most part, employers will think of independent contractors when they think of contractors. These are workers who are a lot like employees, but with more flexibility in how they’re hired, fired, and how they get work done. Subcontractors are when your independent contractor hires other people to help them perform the work. This is exactly like when you hire a roofer and they then hire helpers to assist them. Agency contractors are businesses that specialize in sending their own employees to do work for another company, like yours.
You’ll need to comply with local and foreign laws (where the contractor lives and works) to make sure the contractor isn’t considered an employee and that their country’s local laws and taxing regulations permit them to export services as an independent contractor. Before you make the first payment, you’ll want to have the contractor fill out a W-8BEN or W-8BEN-E form. The contractor will ultimately be responsible for their own foreign taxes, but you need to use these forms to notify the IRS that you’re paying the contractor’s fees.
The danger in misclassifying workers (treating employees as if they’re contractors) is that a government agency can retroactively apply payments for what would have been required if they were an employee, along with a large penalty. It’s a financial danger. It’s important to point out that it’s very unlikely that the IRS would pursue this. It’s more likely that issues would come from the foreign country, which is the risk being mitigated.
History of Outsourcing and Offshore Hiring
Outsourcing became a popular business strategy around 1990. At the time, rather than hiring internationally, parts of the business would be outsourced to other companies, usually within the same country. The core competency of the business would be retained, while the other companies were hired for peripheral operations. Offshoring was when these outsourced companies were in other countries. Many industries joined manufacturers, who had been offshoring since the 1960s.
This evolved into a greater focus on contractors, which were important to businesses long before this, but became a better way to manage variable staffing needs. As the pool of local labor was exhausted for competitive specialties, contractors from further afield were tapped until this process went beyond national boundaries.
The internet has further fueled this expansion. High-speed internet, with sophisticated audio-visual communication, has made remote employees virtually interchangeable with in-person employees. With working from home becoming wildly popular during the COVID lockdown, remote employees are now completely interchangeable with local workers for many positions.
Countries usually associated with remote technical workers, such as India, are having their pool of specialists exhausted. Smart companies are now looking elsewhere, such as Latin American countries, where world-class talent is still available. Latin America also has the benefit of time zones that are closer to the U.S. For example, Buenos Aires is 1 hour ahead of New York, whereas Mumbai is 9.5 hours ahead.
Traditional Payment Options
Although you won’t be able to put payment directly into a foreign contractor’s bank account, you can consider paying them in a similar way to how you might pay a U.S. worker. For the most part, these are likely bad options and you’ll probably want to use one of the more modern options detailed in the next section.
Cash is king, but if you’re considering stuffing a wad of bills in an envelope and putting it into the mail, please don’t! Cash can go missing in transit and there’s no record of its receipt even if the contractor gets it. Contrary to popular belief, the U.S. Postal Service doesn’t prohibit mailing currency, but it’s a terrible idea to do so.
Most banks allow you to arrange transfers, including to foreign banks. After you’ve received the worker’s banking details, you can arrange the transfer and, after a few days, the money should show up in their account. Banks charge very high fees for this and the exchange rate is terrible. Mostly you’ll want to avoid this just because it’s very expensive.
Mailing a USD check
Writing a check and putting it in the mail might seem similar to sending cash, but it’s actually not a terrible idea. The worker will receive the check and can deposit it in their foreign bank account. The issue is that cutting the check, then mailing it internationally, then waiting for it to clear all take time, adding up to a lengthy wait for the worker to receive payment. It’s not as bad as the bank transfer, but a lousy exchange rate will also make this more expensive than other options.
While many countries allow checks from U.S. sources to be deposited, some don’t. It is important to ensure your contractor will be able to deposit it before you send a check.
Money Orders / Certified Checks
These will likely be time-consuming, requiring either going into a bank branch or calling your bank. Like the other traditional options, they’re very expensive once you’ve considered fees and currency conversion.
Like checks, you’ll want to ensure the recipient will be able to deposit these before you send them.
Part of the ecosystem that exists to support paying foreign independent contractors is payment processors. This is a mature, competitive industry and the below six tools are all companies we like and recommend. They aren’t listed in any particular order.
Employer of Record
In addition to being a payment processor, which just entails getting money from you to the contractor, some companies will also act as an employer of record. This means that they will set up a local company in every country where they operate and this local company will hire contractors on your behalf (they’ll hire the contractor as an employee). They ensure that all the local laws and regulations are followed and that your contractors aren’t considered misclassified workers. They’ll deal with any location-specific issues that arise.
The appeal of this is obvious: instead of one company understanding local issues for a handful of contractors, the employer of record figures it out for a huge number of workers at many different companies. The economies of scale help it work better for everyone.
Pilot makes the bold claim “hire anyone, anywhere.”
Beyond just a payment processor, they can act as an “employer of record,” simplifying compliance with local regulations where contractors are based. They also provide localized contracts.
An American company, they allow payment of contractors in over 240 countries.
This mature company focuses explicitly on accounts payable for the small and medium-sized business market. Due to this focus, they’re used for payables and receivables more than any other platform.
While it isn’t their explicit focus, they do allow international payments and do so in a way that integrates seamlessly with a business’s existing payment system.
Based in the U.S., they support payments to over 130 countries.
Recently founded by a pair of MIT students, this company went through the famous Y Combinator incubator and its initial version was explicitly for paying contractors.
Beyond payment, it also acts as an employer of record, simplifying the complexity of navigating foreign labor laws and taxation. Currently, it can function in this way in 45 countries.
It’s based in the U.S. It allows contractors to withdraw funds in the currency of their choice, with 2% of workers electing to receive cryptocurrency.
Used by companies like AirBnB, Amazon, and Google, Payoneer specializes in mass payouts in over 200 countries. In recent years, it’s been pushing more into the small and mid-sized business markets.
Fees are charged for sending and receiving and can reach 5% when currency exchange is involved.
They get glowing reviews from their happy customers highlighting the speed and ease of transactions. Some users complain that fees aren’t as transparent as they could be and that hacked accounts have been a security issue.
It’s based in the U.S.
A household name, PayPal was founded over 20 years ago by a group of entrepreneurs that included Elon Musk before he was launching rockets and dreaming of Mars.
Their fees are around 4%. Some people lower the fees by choosing “friends and family,” but beyond misrepresenting the payment, you lose the ability to dispute transactions if you choose this.
It can be used in over 200 countries. Its headquarter is in the U.S.
Founded in 2011, Wise works to provide the absolute best exchange rate possible. Stressing transparency, they provide full details about the transaction with no surprise fees.
It can be used in over 50 countries. It’s based in England.
Especially for technical workers, it may be tempting to pay them with cryptocurrency, something like Bitcoin or Ethereum.
While these are exciting technologies that hold promise for the future, right now they’re unlikely to be worth the trouble. Receiving payment requires a high level of technical aptitude, value fluctuations can leave one side feeling cheated after payment is made, and few regulatory resolutions are available if something goes wrong.
Beyond all this, cryptocurrency is cumbersome from an accounting perspective. If you’re ever considering doing this, definitely run it by your accounting department first!
Frequently Asked Questions
It’s natural to have many questions when you’re starting something new. We’ve had a number of questions come up so frequently that we’re answering them before you ask them.
How do I pay an independent contractor out of the country?
Most of the ways that you pay contractors within the United States can be used to pay them outside of the country. Please refer to the above article for the detailed pros and cons of each.
Do you 1099 international contractors?
No, a 1099 isn’t required for a foreign contractor who isn’t a U.S. person when services are performed outside of the U.S.
How do I report a payment to a foreign contractor?
Do overseas contractors pay taxes?
Overseas contractors are responsible for paying their own taxes. If they are not a U.S. person and don’t perform the service in the United States then no withholding is required.
How are foreign freelancers paid?
Most of the ways that you pay freelancers within the U.S. can be used to pay them outside of the country. Please refer to the above article for the detailed pros and cons of each.
What currency should I use to pay international contractors?
Whatever currency is mutually acceptable can be used for international contractors. It’s important to specify which currency will be used when making an agreement of the work to be done. In some rare cases, the currency won’t even be an official currency in either party’s country (cryptocurrency, for example).