Whether you own your own business or perform odd jobs around town, knowing if you're being paid correctly and filing your taxes compliantly can be difficult without the correct information.
This process becomes even more difficult as you partner with clients outside your country of residence. Fortunately, this convenient guide will address the challenges and realities of getting paid as an independent contractor.
Continue reading to learn the challenges of international payroll, the responsibilities of independent contractors and their clients, and information regarding how independent contractors are paid.
Challenges of International Payroll
International payroll is the process of paying independent contractors and employees who live in a different country than where a business is located. While an internal HR team typically does domestic payroll processing, international payroll requires a deeper awareness of international tax and employment laws.
Challenges to international payroll include:
International payroll can be incredibly challenging for independent contractors responsible for invoicing clients and keeping track of their financial records and tax information.
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Responsibilities of Independent Contractors in the U.S.
In the United States, independent contractors are expected to remain compliant with the federal rules laid out by the Internal Revenue Service (IRS) and the Department of Labor (DOL) and the rules of the state in which they operate.
Independent contractors must file a 1099 Form that includes all of their annual earnings and file their taxes as self-employed individuals. Independent contractors will need to pay taxes to the government to account for the fact that taxes were not withheld from their paychecks.
This includes taxes like:
- Social Security
- Income tax
Self-employed individuals experience tremendous freedom in the United States regarding how they operate. Still, they will be expected to pay taxes on all personal income each year.
Responsibilities of Clients and Companies Hiring Independent Contractors
Clients and companies hiring independent contractors have a relatively easy time with this working relationship because, unlike employees for whom the business must pay and withhold taxes, all taxes are the independent contractor's responsibility.
Companies simply provide independent contractors with whom they worked during the year a 1099 Form that includes all money sent to the individual that year, who then pays taxes on this amount.
Businesses will need to take extra consideration when hiring independent contractors in countries outside the U.S., as regulations are different in each country, and businesses are expected to remain compliant with all relevant tax and employment laws.
Some countries have strict laws regarding self-employed individuals and how long companies can utilize their services, and misclassifying independent contractors may put your business at risk.
Tax Deductions for Self-Employed Individuals
One of the benefits of filing your taxes as a self-employed individual is that you are eligible for certain deductions for which company employees may not be eligible. While being employed often comes with perks like health insurance benefits and 401k contributions, self-employed individuals typically responsible for covering these expenses also get tax benefits from paying them all year long.
Although you will likely still have to pay taxes when you file each year, consider the following deductions that you may be eligible to claim as a self-employed individual:
- Self-employment tax. When individuals are employed, their taxes are withheld prior to receiving their paychecks, and part of the amount withheld includes Social Security and Medicare taxes. Employed individuals split the cost of these taxes with their employers, while independent contractors are required to pay these taxes. As a result, self-employed individuals are subject to self-employment tax deductions which convert half of the total amount paid on these taxes into a business expense.
- Health insurance. Independent contractors can often claim their health insurance premiums as a deduction to reduce the overall taxes they owe. This includes money spent on your partner's health insurance and health insurance for your dependents (under the age of 27 in the United States).
- Your home office. One of the most significant benefits of being a self-employed individual who works from home is that you can write off the expense of your home office. This may include a percentage of your utilities like electricity and internet usage, rent or mortgage payments, property taxes, and more.
- Your car or use of public transit. If getting from point A to B is a part of your work, you can deduct money spent on transportation. This includes gas expenses, car maintenance, ride-sharing apps like Lyft and Uber, public transit, and more.
- Retirement contributions. Self-employed individuals are solely responsible for saving money in their retirement accounts (IRA). Significant deductions can be taken for retirement contributions.
- Business expenses. Record-keeping is essential to independent contractors, as all business expenses can be deducted from your taxes at the end of each year. This can include money spent on:
- Necessary supplies (laptops, office supplies, photography equipment, etc.)
- Business meals (e.g., client dinners, meetings, etc.)
- Business Insurance
How To Invoice a Client
Invoicing clients is an essential component of self-employment, and sending invoices has many nuances that may take time for you to perfect. In addition, independent contractor payment can become awkward or difficult if you don't set expectations ahead of time, so be sure to have a system in place when invoicing clients.
The easiest way to consistently ensure you're paid promptly is by creating an invoicing template you send to all clients. This form should include the following:
- Your business name, as well as the name of the client
- The date the invoice was sent
- Payment terms and due date
Before providing services, indicate to clients whether you expect to be paid immediately, within 30 days, or any other payment window. This information and any other relevant payment information should be included in your invoice.
- Services rendered
- Amount due for services
- An invoice number
Upon completion of a project or services, deliver the invoice in person, via mail, or email to your client, along with a brief thank you and your contact information if they have any further questions regarding payment.
A Guide to Payment Methods
Being an independent contractor allows significant freedom, and one area in which you can set your parameters is how you want to be paid. Although you will need to be flexible with what works for your clients, many businesses will defer to your preferred method of payment.
Most businesses have a standard method for paying invoices, so if you have a preference for how you wish to be paid, you should communicate this to your client before providing any services and reiterate this information on the invoice you provide.
Consider the following payment methods if you're considering how to get paid as a contractor.
A paper check is one of the most common methods with which independent contractors choose to be paid, and most businesses are set up to accommodate this request.
In the internet age, many independent contractors find being paid electronically is easier to manage and provides access to funds more quickly. If you choose to be paid via direct deposit, you will simply need to provide clients with your personal or business bank account information.
However, keep in mind that you will not be able to be paid via direct deposit in any foreign currency, so if you work with international clients, you will need to opt for a different payment method.
Online Payment Systems
Online payment systems like PayPal are commonly used for paying independent contractors. Self-employed individuals will typically be required to register a tax identification number (TIN) if they receive more than $600 via PayPal for services rendered.
This often makes it easy to keep track of payments when checking on invoices and filing taxes.
Depending on your services, you may use a freelancing site like Upwork, which requires you to be paid through the freelancing platform. However, some clients may prefer to operate outside these sites, as they are typically required to pay additional fees.
Wire transfers are a common way for clients to pay freelancers, particularly when clients and self-employed individuals live in different countries.
Using a wire transfer, your client can securely deposit funds into your account electronically, but it can take up to a few business days to complete.
Although some flexibility with clients is required when discussing independent contractor pay, using the same payment method is recommended to keep track of payments for business and tax purposes more readily.
How Skuad Can Help You Grow Your International Business
International payroll is a highly complex process, and learning the ins and outs of being paid as an independent contractor by local and international clients can be challenging and time-consuming.
If you have questions about how contractors are paid, how to file taxes as an independent contractor, or how to operate compliantly as an independent contractor, Skuad can help.
Our team of experts is available to provide round-the-clock service regarding employment and self-employment in more than 160 countries.