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The ultimate guide to managing global payroll for contractors

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The ultimate guide to managing global payroll for contractors

Managing contractors greatly differs from the way we manage employees across the globe. In today’s scenario, more and more businesses are choosing to hire international contractors and for great reason. Companies can target international contractors with specialized skills, saving onboarding time and money. 

To pay international contractors, you’ll need to be aware of employment rules and regulations of countries, misclassification risks and ensure compliant payments. This guide will help you learn how to manage independent contractor payroll efficiently.

What is an independent contractor?

An independent contractor is a self-employed individual or business entity that provides services to clients or companies under a contract. Independent contractors are not considered employees and typically work on a project-by-project basis or for a specific period.

Unlike employees, independent contractors have more control over their work and typically use their tools and equipment to complete the job. They are responsible for paying their taxes and benefits and do not receive employee benefits such as health insurance or paid time off.

If a worker meets all three criteria below, they are likely considered an independent contractor:

  • They perform services outside of the company's place of business. This could mean working from home or elsewhere in the community.
  • They provide the tools and equipment necessary to perform their work. This includes software and other technology needed to complete assignments (e.g., laptops).
  • They have control over when and where they work. They should be able to take breaks whenever needed without asking permission first.

There are advantages and disadvantages when it comes to hiring independent contractors. One of the cons is being subjected to misclassification risks. Accurately classifying your employees and contractors is crucial to keep you safe from unwanted lawsuits and penalties.

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What are the different ways to pay contractors?

Here are some of the ways you can process contractor payments:

  • Bank transfer: This is when the payment is directly transferred from the employer's bank account to the contractor's bank account. This is a secure and convenient method of payment
  • Online payment platforms: There are many online payment platforms available, such as PayPal, Stripe, and Venmo, that can be used to pay contractors. These platforms typically charge a small fee for the transaction
  • Check: This is a traditional method of payment where the employer writes a check to the contractor. The contractor can then cash the check or deposit it into their bank account
  • Wire transfer: This is a method of payment where the payment is sent electronically from one bank account to another. This method is typically used for larger payments and may be subject to a fee
  • Cash: This is a method of payment where the employer gives the contractor cash. This method is typically used for smaller payments and is not recommended for security reasons.
  • Partnering with Skuad: Skuad’s global payroll platform lets you seamlessly manage and automate contractor payroll, ensuring prompt and accurate payments. Skuad enables you to stay compliant and eliminates risks when working with overseas contractors across the globe.

Risks associated with misclassifying contractors

Employee misclassification occurs when a business classifies a worker as an independent contractor for tax and legal purposes, but they are, in actuality, an employee. Whether a company accidentally or intentionally misclassifies a worker as an independent contractor, they might face severe penalties and lawsuits, damaging their employer brand.

Misclassifying contractors can have several repercussions, both for the contractor and the hiring company.  The penalties for misclassification for a contractor the IRS has laid down are as follows:

  • If you fail to withhold and pay employment taxes on wages paid to an employee, you may be subject to a penalty equal to these unpaid amounts. The penalty is charged for each month or part of a month that you underpay employment taxes during the calendar year.
  • Suppose you willfully fail to withhold or pay employment taxes. In that case, the penalty is 100% of the amount not withheld or paid (determined without any information about whether or not such failure is due to reasonable cause).
  • Tax penalties for misclassifying employees as independent contractors are steep. If you're audited by the IRS and your company has misclassified workers, you could face fines of up to $1,100 per misclassified worker for each year that you've done it.
  • If your company is found to have misclassified workers, it could  be sued by employees who were improperly classified as independent contractors

Do foreign contractors have to pay taxes in the US?

Yes, your international contractors must pay taxes in the country in which they reside and work. Although such payroll deductions for contractors are extremely rare, you may be required to withhold taxes such as income tax, social security payments, or national pension fund contributions. To stay compliant, ensure that your contractors are filing their mandatory taxes in compliance with their country’s employment laws.

The Internal Revenue Service (IRS) defines a non-resident alien as someone who is not a US citizen and does not reside in the US for tax purposes. If the work done by foreign contractors for you is done outside the United States:

  • You are not required to report payments paid to contractors to the IRS.
  • You do not need to withhold any U.S. tax from payments made to them.
  • You must ensure that they fill out the  IRS W-8 BEN-E form as proof of their residency to exempt them from withholding U.S. taxes.

While managing contractor payments and tax obligations in different countries can be strenuous, an EOR platform like Skuad can help you pay international contractors without the hassle. From filing mandatory tax forms to generating payslips, Skuad automates everything for you.

Best Practices to seamlessly process contractor payroll

Managing international contractor payroll can be challenging, but here are some best practices that can help:

Have an independent contractor agreement in place 

Ensure that you have an independent contractor agreement with each of your contractors. This will help you avoid issues with the IRS or other government agencies. You can find sample separate contractor agreements online, but make sure that the one you use complies with your country's laws and regulations.

Choose a reliable payroll service provider

Choose a contractor payroll service provider that has experience in managing international payroll. They should be familiar with the laws and regulations of the countries you operate in and be able to provide the necessary support. A contractor payroll service for independent contractors takes care of:

  • Processing payments.
  • Keeping track of employee hours worked.
  • Calculating and issuing payments.

Partner with an Employer of Record (EOR)

An Employer of Record (EOR) is an external entity that helps companies hire, pay and manage their international contractors. The EOR assumes all legal and administrative responsibilities associated with employment, including contractor payroll solutions.

When a company hires a contractor, they often need to set up payroll processing, which can be time-consuming and complex. The EOR will handle tasks such as calculating and processing payroll taxes, preparing and distributing paychecks, and ensuring compliance with local, state, and federal regulations. By outsourcing these tasks to an EOR, the company can save time and reduce the risk of errors or penalties associated with payroll processing.

Overall, an EOR can be a valuable partner for companies that work with contractors and need assistance with payroll processing. It can simplify the payroll process, reduce administrative burdens, and ensure compliance with legal requirements.

Partner with Skuad to manage contractor payments without the hassle

Skuad’s Global HR and payroll platform automates contractor payroll and ensures prompt and compliant payments to contractors, no matter where they live. Process payments in 100+ currencies, without worrying about misclassification risks or non-compliance. 

To get started, book a demo!

Frequently Asked Questions

How do you manage international payroll?

Here are some different ways to manage international payroll:

  • Payroll Software
  • Hire an International Payroll Provider/PEO
  • Use an Employer of Record
  • Establish a Local Entity

Is there a global payroll provider?

Skuad’s automated interface makes it seamless to manage employee and contractor payroll. Skuad is a Global HR and payroll platform that enables companies to hire, pay and manage the workforce in 160+ countries. It allows you to pay talent in their currency of choice, everything in compliance with local employment laws.

How does global payroll work?

Global payroll is a unified process that evaluates employee wages, withholds taxes, administers benefits and bonuses, and processes payments to employees and contractors all over the world in accordance with their local employment laws.

How does payroll work for remote employees?

When you pay remote employees and contractors, you must withhold payroll taxes from their paychecks, just as you do for in-house employees. However, you must follow all tax laws and regulations in the country/state/city where the employee resides.

About the author

Nathan Williams is a Global Payroll Specialist and Finance Consultant. With a background in banking and finance, he is passionate about modern tech practices in payroll management and using global payroll platforms for global payments.

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