How to Pay International Contractors: 6 Methods Explained

Knowing how to pay international contractors gives you access to a global talent pool with distinct skills, expertise, and perspective, which is a growing trend among businesses. Choosing the payment method involves a consideration of several different factors, including tax compliance, payment terms, exchange rates, and more.

In this article, we’ll highlight some of the most popular international payment methods, show you the differences in tax requirements, discuss setting the right payment terms, and discuss record-keeping. Without further ado, let’s get started!

Key Takeaways

• Learning how to pay international contractors and understanding relevant tax laws allows you to hire talent from a global marketplace.
• Independent contractors are self-employed individuals or entities who are typically in charge of their own taxes and expenses.
• Some of the most common methods of paying international contractors include wire transfers, PayPal, cryptocurrencies, international checks, payment platforms like Payoneer and Wise, and MoneyGram.
• You don’t need to issue Form 1099 to international contractors, but you should collect Form W-8BEN or Form W-8BEN-E from them.

What Is an Independent Contractor?

An independent contractor is a self-employed professional or business that provides services to multiple clients. They aren’t on a company payroll but instead are hired (typically on a per-project basis) and provide services under contracts.

Businesses usually work with independent contractors when they need specialized skills and knowledge for limited periods. This allows them to get the service they need without long-term commitment and often much faster and cheaper than if they were to hire employees.

Since they aren’t on a company payroll, independent contractors are responsible for their self-employment taxes, and employers don’t give them Form W-2. This significantly reduces company expenses compared to withholding taxes and providing various other benefits to employees.

Independent contractors do various jobs, with many of them gravitating toward fields like consulting, design, IT, etc. With the responsibility of having to pay their own taxes and manage business expenses, they gain autonomy and flexibility.

Independent Contractor vs. Employee

Here are some of the key differences between independent contractors and employees:

• Autonomy. Independent contractors work for themselves, set their own schedules, and use their own tools. Employees follow company policies, typically have set working hours, and use company-provided equipment.

• Salaries. Independent contractors are paid per project while employees are on a payroll.

• Tax obligations. Independent contractors are responsible for their taxes, while employees have their taxes withheld by employers.

• Forms. Independent contractors receive Form 1099, which helps them file taxes, while employees receive Form W-2, which is a wage and tax statement.

6 Ways of Paying International Contractors

Let’s explore different methods of paying international contractors to help you better understand how each of them works and what their benefits and drawbacks are.

#1. Wire Transfers

Wire transfers are an established, direct, and secure way of making payments overseas. This is one of the most common methods of paying contractors abroad, and it goes through banks or financial institutions.

The sender transfers funds by providing the recipient’s details, such as the SWIFT code (BIC) and IBAN. The money moves electronically and typically ends in the payee’s account within several business days.

Here are some of the key benefits of wire transfers:

• Widely accepted and secure method
• Funds are deposited directly into the recipient’s account

Here are some of the drawbacks:

• International transfers can incur high fees
• Payment processing can take multiple days

Wire transfers are typically used by businesses and individuals who want to make large payments. This is the perfect method if you value security and reliability and don’t mind having to pay higher fees on transactions or waiting for a few days until they are processed.

#2. PayPal

PayPal is one of the most popular online payment systems used by individuals and companies globally. It allows international contractors to receive payments quickly and effortlessly just by using their email addresses.

After the payer sends the amount, the transfer is processed in real-time, and funds are moved almost instantly. After that, the recipient can use these funds with their PayPal account or transfer them to their bank account, which can take one to three days.

Here are the key benefits of using PayPal to pay international contractors:

• Fast and effortless digital transactions
• No need for intricate banking details—it can be used with just an email

Some of the drawbacks include:

• Higher transaction and currency conversion fees for contractors compared to some other methods
• Limited access in some countries

Due to its characteristics, PayPal is frequently used by small and medium-sized businesses, remote workers, and freelancers who often receive moderate payments.

#3. Cryptocurrency

Cryptocurrency uses cryptography and blockchain technology to enable borderless transactions. Users can send coins and tokens like Bitcoin, Ethereum, USDT, and USDC from one digital wallet to another with or without middlemen.

Transfer fees and processing times vary based on the cryptocurrency. The fees are typically much lower than with other payment methods, while processing times can range anywhere from seconds to hours (or even days for specific cryptocurrencies, especially during periods of network congestion).

Here are the benefits that cryptocurrency offers when paying overseas freelancers and businesses:

• Fast borderless transactions with low fees
• No need for third-party middlemen

Now, here are some of the drawbacks:

• Price volatility can lead to big payment fluctuations
• Some countries lack crypto tax regulation
• Not all contractors are familiar with blockchain technology

Cryptocurrency is a quick, cost-efficient, and versatile payment method for tech-savvy businesses and contractors. It’s a decentralized form of transferring funds, which is a great option when there are restrictions with traditional means, like banking.

#4. International Checks

International checks—similar to domestic checks—are paper checks issued by one bank, which you can deposit in another. The international contractor must physically receive the check and deposit it in their local bank.

Here are the necessary steps to deposit or cash an international check:

• Endorse a check
• Choose a bank that accepts foreign checks to deposit it
• Verify the international check’s authenticity
• Perform the check currency exchange

Here are the benefits of using international checks as payment for contractors:

• Security of traditional banking
• Proof of payment for legal purposes

Here are the drawbacks:

• High processing times and fees
• Risk of loss, theft, and fraud

These characteristics make international checks an uncommon method of paying international contractors. They are typically used only when the recipient specifically asks for checks or when they have limited access to more convenient digital payment systems and platforms.

#5. Payment Platforms

Payment platforms like Wise and Payoneer enable digital international payments that are typically faster and cheaper than traditional wire transfers. The platforms can automatically or manually convert funds into the recipient’s local currency, or they can be converted after being transferred to bank accounts.

Some payment platforms offer physical and virtual debit cards that allow contractors to use their funds directly.

Here are the key benefits of using payment platforms:

• Low transaction fees compared to traditional banks
• Fast and reliable digital payments

And here are the drawbacks:

• Platform availability varies between countries
• There can be additional fees for using platform services

Payment platforms are preferred by international contractors who regularly receive payments in different currencies. Their versatility makes them a cost-effective solution (in countries where they are available) typically used by small businesses and freelancers.

#6. MoneyGram

MoneyGram is a U.S.-based money transfer service that operates in more than 200 countries. Businesses that pay contractors with MoneyGram can use the following payment methods to initiate the transfer via the website, app, or in person:

• Debit card
• Credit card
• Bank account
• Cash at an agent location

Here are the main benefits of using MoneyGram:

• Supported in 200+ countries and locations globally
• Allows payers to send cash and payees to pick it up

The biggest drawbacks are:

• Fees vary and can get high based on the amount transferred and the method used
• Cash pickups are only allowed at certain agent locations

Ultimately, MoneyGram is an excellent solution for cash-based economies and contractors who don’t have bank accounts. It allows for fast and secure transfers as long as transfer fees don’t get too high.

Ensure Tax Compliance When Paying International Contractors

Ensuring tax compliance when paying international contractors is essential to avoiding legal penalties and fees. Fortunately, there aren’t as many tax requirements when paying foreign contractors compared to paying domestic contractors or employees.

Firstly, while 1099 forms are typically required when paying US-based independent workers, the rules are significantly different when paying a contractor in another country overseas. Businesses are required to track all payments to comply with IRS regulations, but they are not required to submit Form 1099 for international contractors.

Instead, U.S. businesses should collect Form W-8BEN (from individual foreign taxpayers) or W-8BEN-E (from entities) when hiring international contractors. These forms are used to confirm the foreign status of a contractor, which means they act as proof that there’s been no employee misclassification.

When it comes to tax compliance for international contractors, there’s no tax withholding for work performed outside the U.S. unless otherwise defined by specific tax treaties. However, if the work has been done by an international contractor within the U.S., the business hiring the contractor will likely need to withhold 30% tax.

If the payer withholds any taxes during international contractor payments, they must submit international contractor tax Form 1042 (to report tax withheld) and Form 1042-S (to report payments made) to the IRS. There’s also Form 1042-T, which represents a one-page summary of all Forms 1042-S.

Ultimately, U.S. businesses must collect Forms W-8BEN or W-8BEN-E for record keeping and submit Form 1042 or Form 1042-S when needed for financial transparency and tax purposes. They are critical in avoiding fines and penalties during audits and potentially claim deductible expenses.

How to Set the Right Payment Terms for International Contractors

To set the right payment terms for international contractors, you should establish clear conditions that suit both parties. The goal is to prevent misunderstandings while protecting both the U.S. business and the international contractor.

Here are the key factors to consider when setting the terms for international contractor payments:

• Currency. You can pay in USD or the contractor’s local currency, keeping in mind exchange rates and conversion fees.
• Payment frequency. Typical schedules include weekly, biweekly, monthly, or per-project payments.
• Payment method. Consider your and the payee’s needs and find the solution that is the safest and most cost-effective.
• Late payment fees. International contract agreements typically have late payment fees to protect the contractor and ensure they get paid on time.

Here’s an example of contractor invoicing with fair terms meant to protect the payer and the payee:

• Currency: USD
• Amount: $1,500 per month
• Payment Date: 5th of each month
• Method: Wire transfer
• Late Payment Fee: 2% after 10 days

How to Manage Record-Keeping for International Contractors

To manage record-keeping for international contractors, you should keep all the documents you receive and file all forms on time. This will ensure your financial transparency and legal protection, helping you avoid audits, disputes, and potential penalties.

First, collect Forms W-8BEN and W-8BEN-E. If you withheld any taxes when paying international contractors, keep in mind that you must submit Form 1042 and Form 1042-S by March 15th of the succeeding year.

On top of that, you should keep clear records of all the other payments and expenses, as well-documented history helps prevent issues, disputes, and unpaid invoices.

To simplify document creation and record-keeping, you can use an online generator like ours. While international contractors don’t need pay stubs or 1099 forms, you can still use our paystub generator or 1099 generator to create these documents for personal needs. We even offer a W-2 and invoice generator.

That way, you can keep track of who was paid, how much, and for what services, allowing you to stay organized while ensuring compliance with IRS regulations.

4 Best Practices for Paying International Contractors

Now that you know how to pay international contractors, we’ll give you four expert tips that will help you significantly improve your global payroll management.

#1. Understand Tax Laws

Understanding relevant tax laws is critical when paying international contractors, as it helps with tax reporting and financial audits.

You need to be aware of both the U.S. tax laws and the laws of the contractor’s country. As a general rule, you don’t need to issue Form 1099 to international contractors, but you need to collect Form W-8BEN or W-8BEN-E, depending on whether you’re working with a professional or an entity.

Don’t forget to verify if you need to withhold any taxes for the contractor. If you do, you’ll also need to submit Form 1042 and Form 1042-S by March 15th of the succeeding year.

#2. Don’t Forget About the Exchange Rates

The exchange rates can significantly impact payments as they can reduce the amount the payee receives. That’s why you should always clarify in advance which currency you’ll use as a business to pay the international contractor.

That way, they’ll know in advance how much they will receive once the funds are converted into their currency. Moreover, different payment methods and transfers offer different exchange rates. As such, you can look for a solution that will result in the least funds lost during the international transfer.

#3. Set Clear Payment Terms

Setting clear payment terms protects you and international contractors, ensures smooth transactions, and fosters long-lasting professional relationships.

Optimal payment terms are the ones with clearly defined critical aspects, like payment amount, frequency, late fees, and currencies. You should communicate with the contractor while setting payment terms.

For instance, you can mutually decide on the schedule (e.g., weekly, monthly, per-project, or another payment schedule). You should also clarify the penalties for late payments and what documentation is required from both parties to conduct business successfully.

#4. Keep Detailed Payment Records

You should always keep detailed records of all transactions and payments to international contractors even after you’re finished working with them. Having all documentation available is essential during audits, and it helps with tax compliance and budgeting.

You can use digital tools for effortless and accurate record-keeping. Even when some forms aren’t required (e.g., Form 1099 isn’t needed for international contractors), you can still generate them for your operations and use them to resolve disputes or IRS issues.

Make sure to store all payment and tax records in a secure space. For additional safety, you can use a cloud-based system that provides flexibility and peace of mind.

Final Thoughts

Knowing how to pay international contractors includes being familiar with different payment methods and relevant tax laws. This knowledge is critical in allowing U.S. businesses to hire talent globally and get the specialized services they require.

Consult the contractor for payment options to find the method that suits both parties. Be mindful of the key aspects, like security, cost-effectiveness, and convenience. Don’t forget to set clear payment terms that protect you and the contractor to ensure the best possible outcome and long-term, productive collaboration.

How to Pay International Contractors FAQ

#1. How do I pay an international company?

To pay an international company, you need to see what payment method the company accepts. The most common payment method for international money transfers between companies is a wire transfer, though you can also use international payment platforms, services like MoneyGram, and even cryptocurrency.

#2. Do I need to send a 1099 form to international contractors?

You don’t need to send a Form 1099 to an international contractor unless they have to pay taxes in the U.S. 1099 forms are used by contractors who pay taxes in the U.S. You may have to file Form 1099-NEC if you hire a contractor from the States.

#3. What is the safest way to make international payments?

The safest way to make international payments is by a wire transfer. These are reliable and secure methods that use the established banking infrastructure and allow businesses to transfer large amounts of money internationally.