Insights into global expansion & employee retention

Published: June 6, 2022

Payments to Foreign Contractors for Services: 4 Mistakes to Avoid

Hiring international contractors is undeniably exciting: beyond gaining entry to the needs of consumers abroad, venturing off the beaten path to build your team has the power to breathe new life into your workforce.

Hiring international contractors is undeniably exciting: beyond gaining entry to the needs of consumers abroad, venturing off the beaten path to build your team has the power to breathe new life into your workforce.

But every odyssey has its obstacle, and wading overseas tends to come with a slew of new legal considerations that can make learning how to pay international employees for services a complicated and risky endeavor.

Fortunately, having an awareness of the challenges many businesses face is the best way of eschewing the legal and material penalties that can injure businesses growing global. Below, we detail 4 of the pitfalls you may encounter when compensating foreign contractors and how to avoid payroll errors.

#1. Missing the mark during onboarding

Hiring a US-based contractor is relatively straightforward compared to hiring a foreign independent contractor. To hire in the U.S., complete a 1099 form and hop aboard. But when your business recruits a labor force through the remote interview process from more than one country, setting your workers up to receive compliant payments starts with onboarding. 

Namely, they have to fill out a W-8BEN.

A W-8BEN form, or a certificate of foreign status, is how the IRS confirms your new hire is eligible for lower tax withholding rates—traditionally, around 30% of their earnings. This form will reflect:

  • The name of your international contractor
  • Their country of residence
  • Their taxpayer ID number (TIN)
  • The business entity from which they’re receiving their income

While it’s incumbent on you to have your foreign contractors complete a W-8BEN, it’s their responsibility to submit them. 

If you haven’t yet established trust with your overseas contractors, be sure to cement their status as contractors in your agreement with them. This way, you can avoid penalties and cover your bases even if they fail to hold up their end of the bargain when it comes time to report their income in their home country.

#2. Failing to meet tax reporting requirements

Just as your foreign contractor must submit their own W-8BEN form to clear them for employment, there are two critical documents you’ll need to submit to keep your company in the IRS’s good graces:

  • Form 1042
  • Form 1042-S

Both of these forms describe the amount of taxes withheld from your foreign contractors’ earnings from your business and are considered necessary for complying with US tax laws.

In addition to filling out both of these reports accurately, your business is responsible for adhering to the following 3 terms in your work with a foreign contractor:

  1. Your foreign contractor may not earn more than $3,000 from your business in a single tax year.
  1. Your foreign contractor must have an established location (complete with an address) where they do business in their home country.
  1. Your foreign contractor may spend no more than 90 days in the US throughout their contract with your firm.

If you abrogate these conditions, your business will be responsible for both reporting these breaches and withholding income from your foreign hire. 

#3. Presuming equivalence of foreign employee classifications

The bitter truth about the global marketplace is that some things just get lost in translation. One of those things is what it legally means to be a contractor from nation to nation.

Many countries have a unique set of terms designed to protect workers in various work settings. Furthermore, certain types of work may only be legally performed by an employee, rather than an independent contractor. 

Depending on where your foreign contractor resides, the classification of their employment status may be affected by:

  • How a contractor is trained for their position
  • Whether the contractor uses tools provided by their business
  • How vital a contractor’s work is to a business’s functions
  • How much supervision a contractor receives from a business
  • How much a company stands to gain or lose in relation to their contractor’s labor

Correctly classifying domestic employees can feel like a familiar process, but successfully classifying foreign contractors can incur penalties if executed incorrectly. 

To avoid them, your firm may be best off recruiting a professional to vet your contractor’s contract and ensure it squares with the employment laws and definitions in their country of residence before making an independent contractor payment. 

#4. Not being apprised of a specific country’s tax laws

If you’ve adequately finalized your tax documents and employee classifications, there are 4 typical methods for paying international contractors:

  • Bank-to-bank wire transfers
  • International money orders
  • Digital services like PayPal
  • Paper checks

However, every individual country follows its own rules about how transnational workers are entitled to receive money. The method you select must conform to the regulations stipulated by their home government to remain compliant. 

Even further, your payments must be commensurate with the local tax codes of their country or state of residence. Because individual tax codes can be dense to interpret—and are constantly in flux—it’s in every global company’s interest to consult a professional payroll international payment service like Playroll before ferrying funds overseas. 

Glide Into Global Hiring With Playroll

While thrilling, making foreign hires comes with a host of practical exigencies—payroll being one of them—that can hamstring businesses’ internal operations while attempting to stay up to snuff with domestic and foreign tax codes.

For some, a payroll management system can seem like a snore—but at Playroll, pay is how we roll. 

We’re a VAT IT-powered company devoted to using our globally-inflected experience to help resolve barriers to pushing business overseas. Contact us today to learn more about how we can streamline your payroll solutions professional services, reenergize your business and start bringing new contractors on board from abroad. If you have to expand abroad, we also have some employer of record services you can take advantage of.

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