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June 13, 2022

The Best Way to Pay International Contractors

As your business expands its global footprint and begins to hire workers based in different countries, the question of how to pay international contractors may become a more pressing one. This is especially true in the post-pandemic world, where the growing prevalence of remote work has made many companies more comfortable with looking abroad for talent.

But getting comfortable with hiring foreign contractors is one thing—paying them is another thing entirely. The good news is that paying foreign independent contractors is generally easier than hiring and paying full-time employees based abroad. Still, there are some complexities you may need to navigate in terms of compliance and tax obligations.

In this article, we’ll review the best ways to pay international contractors so that they get their money quickly and you don’t get bogged down in the details. We’ll also review some things you’ll want to consider before onboarding international contractors, including how to set up payments and invoicing so it works smoothly for all parties involved.

What is an international contractor?

The first step to understanding how to pay an international contractor is knowing what defines an international contractor.

In general, independent contractors are self-employed workers who offer professional services on an independent basis. These “professional services” may entail the completion of a specific project or a defined period of work, but an important distinction between an independent contractor and an employee is that the former typically has more freedom to stipulate how and when they work. Another important distinction is that independent contractors are generally responsible for paying self-employment taxes and typically don’t receive company benefits, such as paid time off, subsidized healthcare, and training.

An international contractor, as you may have guessed, is an independent contractor who’s based in a different country than the business for which he or she completes work. Every country has its own employment laws and regulations, so the exact definition of a contractor may vary depending on the country.

In general, it’s a good idea to understand not only the labor laws that define a contractor in your country, but also the laws that define a contractor in the country where your contractor is based. Sometimes these laws can be a bit hazy. In the U.S., the IRS stipulates that a person is generally an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” But exceptions may be possible.

How to pay international contractors: 5 payment methods

Before onboarding an international contractor, you probably want to know what paying them will look like. This is fair!

Understanding your options doesn’t just provide more clarity for your business—it also ensures that your contractors are paid on time and stay happy.

On this front, we have some good news: payments for foreign contractors don’t need to be super-complicated. If you choose the right method for your business, they can even be a breeze. Let’s review five methods you may want to consider.

1. Use the SWIFT network to send an international wire transfer

The Society for Worldwide Interbank Financial Telecommunication, also known as SWIFT, is a financial messaging network that’s widely used for international payments. You can use the SWIFT network to send an international wire transfer to the bank account of a contractor who’s based in a different country. You’ll need to provide the SWIFT code / BIC of the contractor’s bank or financial institution, along with other details about the contractor and receiving bank—such as the bank’s name, address, and the specific account number.

Using SWIFT to send an international wire transfer has some potential advantages and disadvantages. Let’s break down a few:

Pros of paying contractors via international wire transfer

  • Security and reliability. The SWIFT network covers over 11,000 financial institutions across more than 200 countries. It’s a widely adopted international payments standard that’s generally considered secure and reliable—though it may be difficult to recover funds if there’s an error in the bank or account information.
  • Potentially high transfer limits. Most banks and financial institutions set their own limits on how much money can be included in an international wire transfer, but this number tends to be quite high. This is why some businesses favor wire transfers to pay invoices for larger amounts.

Cons of paying contractors via international wire transfer

  • Some of the highest transaction fees of all transfer types. Your financial institution may charge a wire transfer fee for helping to facilitate a SWIFT payment—and the receiving bank may charge a fee, too. These can stack up in a hurry, and they tend to be higher than the fees associated with any other transfer type.
  • Potentially high exchange rates. Because international transfers involve payment processing in different currencies, you may need to pay foreign currency conversion fees.
  • It’s not super-fast. While domestic wires can be quite fast, international wires can take several days to process for cross-border payments.
  • Not the best option for record-keeping. Some of the other options we’ll cover below allow you to upload and track contractor invoices on one platform. Wire transfers generally aren’t the best for this.

Levro can help you save with free international wires and transparent fees that are up to 10 times lower than those at some banks and financial institutions. Apply for an account today.

2. Use an online or app-based payment solution

Online and app-based payment solutions, such as PayPal, Wise, and Xoom, are popular ways to pay foreign contractors. These services can have some benefits over international wire transfers and other payment methods, and companies such as PayPal have a wide global reach.

Speed and ease of use are the primary points of attraction here, though these online payment and money transfer services may not be the best choice for every business. Let’s look at some pros and cons:

Pros of paying contractors via an online payment solution (e.g. PayPal)

  • Convenience and ease of use. These relatively modern payment solutions can be quite easy and intuitive to use, and they generally don’t require the same amount of effort and information as a wire transfer or other payment method might.
  • Speed. Because there are fewer steps and checkpoints for cross-border payments than with the SWIFT network, paying a contractor via a service such as PayPal or Wise can be fast—almost instantaneous, in some cases. Contractors tend to like that!
  • Potentially lower fees than with SWIFT payments. International wire transfers can get pricey fast, but online payment solutions often allow you to avoid high upfront fees when sending money abroad.

Cons of paying contractors via an online payment solution (e.g. PayPal)

  • Percentage-based fees may not offer the best deal. Services such as PayPal may charge a percentage-based fee for sending or receiving money internationally for goods and services. Transaction fees vary depending on the service you use, but they’re definitely worth checking and comparing.
  • Exchange rate mileage may vary. On top of any fees, you’ll want to consider what exchange rate you’re getting. Generally speaking, a good rate to use as a comparison benchmark is the mid-market exchange rate.
  • Contractors may need a special account. In some cases, you won’t be able to pay a contractor with an online payment service unless they have an account with that service.

3. Use a global hiring and payment tool

Aside from the more “traditional” online payment options such as PayPal and Wise, you may want to consider using a dedicated global hiring and payment tool. Some such tools, which include the likes of Deel and Gusto, are set up for a lot more than simply paying international contractors. These tools can also help with local compliance, contract management, invoice tracking, and more.

Pros of paying contractors via a global hiring and payment tool

  • Advanced compliance and legal tools. These tools often come with a full suite of offerings to make global business easier and less confusing for all parties involved.
  • Easier invoice tracking for contractors. Contractors may enjoy invoicing against projects using a tool that accounts for local compliance and makes projects easier to track.
  • Can be great for record-keeping. If you’re hiring and tracking a lot of independent contractors, a global hiring tool may make sense. These tools offer features that can help to automate or smooth out the processes for onboarding and payment.

Cons of paying contractors via a global hiring and payment tool

  • Added expenses. These types of services tend to come with a lot of helpful features. You may not need a bunch of those features—but you may have to pay for them anyway. Deel, for example, currently charges a fee of $49 per contractor per month for its service.
  • May not cover as many countries. Coverage can vary among global hiring tools, and it may not stack up to the likes of SWIFT and services such as PayPal.

4. Send an International money order

Nothing says old-school quite like an international money order. And these things are old-school for a reason—in general, there are better, faster, and more modern solutions available to global businesses. With that said, it is an option.

You can purchase an international money order in a post office (USPS) location in values up to $700. These are printed out with only the dollar amount filled in; you’ll need to fill in the recipient at the counter. On top of the dollar value of the money order, you will need to pay an issuing fee and processing fee based on the country of destination.

Pros of paying contractors via international money order

  • Some contractors may want or expect this. Depending on the country and its banking customs, an international money order may be a better (or at least a more expected) way to send money abroad. But in most cases, there are better options. The USPS provides a full list of countries that accept money orders.

Cons of paying contractors via international money order

  • Slow and manual process. Who has the time to go to the post office? The process for completing an international money order seems like it’s from another era—complete with paper and snail mail.
  • Risk of lost, stolen, or damaged orders. Though it may not be entirely common, there’s always a risk that a money order will be lost, stolen, or tampered with. And if this is the case, you may be on the hook for a processing fee to replace the lost or stolen order—even if it’s not your fault!
  • High fees. Speaking of fees, money orders come with fairly high ones. The issuing fee for a money order in the U.S. is $12.25, and the processing fee varies based on the destination country.

5. Pay foreign contractors in cryptocurrency

The rise of cryptocurrency has led to some contractors being willing to accept payment in Bitcoin, Ethereum, or popular stablecoins such as USDC and Tether.

This isn’t always technically a different method of paying than some of the methods we listed above, because some of those options already (or may in the future) offer the ability to pay in cryptocurrency. Deel, for example, supports payments in some cryptocurrencies, and other hiring and payment services may expand their crypto payment offerings in the near future as well.

In any case, crypto is quickly becoming a more attractive payment option for foreign and domestic contractors alike. This means you’ll want to weigh some of its potential pros against its potential cons:

Pros of paying contractors via cryptocurrency

  • Greater transparency in some cases. The cryptographic nature of cryptocurrency promises greater security and transparency in transactions, though much of this remains somewhat theoretical.
  • Can be faster and cheaper. Another major aspect of crypto’s appeal is the ability to transact across borders without paying high fees and exchange rates to third parties.
  • Contractors may appreciate it. Tech-savvy contractors may find crypto payments to be an exciting perk of working with your company, so offering this option can be a way to attract a wider talent pool.  

Cons of paying contractors via cryptocurrency

  • Compliance and legal stuff can be tricky. The legal dust around crypto still hasn’t settled, and relying on crypto to pay foreign contractors has its risks. On the plus side, the nature of the independent contractor/freelancer relationship could make it easier to pay these people in crypto than it would be to pay full-time employees (the Fair Labor Standards Act in the U.S. stipulates that wages must be paid “in cash or its equivalent”).  

Crypto is still speculative and can be extremely volatile. Whereas some contractors may appreciate the option of getting paid out in crypto, others may balk. It’s still a relatively speculative area of finance, and some contractors may prefer more predictability.

What to consider before onboarding an international contractor

Working with foreign contractors can be a rewarding experience—both for your business as well as for you personally. Contractors from abroad can offer differing cultural perspectives that ultimately strengthen your business and help you better understand markets outside your home country. With that said, you’ll want to carefully consider a few things before onboarding an international contractor.

First, be sure that you (or, just as likely, your legal team) has a solid framework in place for what constitutes a contractor versus a full-time employee. Knowing the boundaries that separate these two very different roles can save you from legal and compliance headaches down the line.

Secondly, take the time to understand the compliance and tax obligations of hiring and paying freelancers who live abroad. For example, if you are a company based in the U.S., you will need to use IRS Form 1042 and Form 1042-S to report the income and tax withheld for foreign contractors. Other countries may have similar or different requirements; it pays to take the time to know them all.

Track and manage international payments with Levro

If you’re looking to simplify your global business with a multi-currency account designed for international companies, consider giving Levro a try.

We offer a fast and affordable way to send payments to contractors and other vendors internationally—with same-day payments and 0.25% FX fees when you send your money. And with Levro’s SWIFT tracking, you can get up-to-date alerts and notifications for all your international payments.

Apply for an account today, or send an email to [email protected] to learn how Levro can help your business.

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