How to Hire Contractors in Germany From US: Clear Guide

There are many reasons to hire contractors and employees abroad. Managing costs is one of the main reasons. More than 50% of businesses cite cost reduction as very important in their decision to hire internationally.¹

Germany is a goldmine when it comes to hiring internationally. German contractors are highly skilled and most often fluent in English.

In this guide, you’ll learn how to hire contractors in Germany. You can find out what the legal considerations are as well as the best way to pay your German contractors.

Pay contractors in Germany
with Wise Business

Can I Hire a Contractor in Germany From the US?

Yes, US companies can hire contractors in Germany. In fact, you can hire contractors across the globe.

Payments to contractors are considered foreign income by the IRS. For this reason, they’re not subject to US income tax.

You also won’t need to make Medicare or social security contributions. This helps save you money.

Payments to foreign workers are also tax-deductible for US companies. This gives you a tax advantage when working with foreign contractors.

How to Hire Contractors in Germany From US

To hire contractors in Germany, you’ll want to begin by drafting a contractor agreement.

After you’ve agreed to terms, you’ll need to file certain forms to stay compliant with the IRS.

You’ll need to have your contractors file Form W-8 BEN.² This will allow the IRS to identify them and verify that they’re exempt from paying US income tax.

Foreign source income is that which is earned from activities conducted outside of the US. Foreign source income isn’t subject to US income tax.

So when you pay a contractor in Germany, their work is conducted outside of the US. That means they’ll be exempt from paying US income tax.

You’ll still need to report foreign source income. To do so, you need to file Form 1042-S and use Exemption Code 03.³ ⁴

Open a Legal Entity in German

If you work with multiple contractors in Germany, you could open a legal entity. This would make sense if you planned to onboard them later as employees.

To do this, you’ll need to open a local German bank account. You’ll need to register your company with the Handelsregister (commercial register). You'll also need to have your company checked by the German Chambers of Industry and Commerce (IHK).⁵ You’ll also want to consult local tax and legal experts to ensure you comply with regulations.

Setting up a legal entity in Germany will be more cost-effective in the long-run. It will also enable expansion into the German market, enabling you to attract top talent.

But it will take longer to set up your entity. It will also be more cost-intensive in the beginning stages. Keep in mind that you’ll also be responsible for handling all compliance issues. From taxation to statutory employee benefits, the buck stops with you.

If you only work with contractors in Germany, opening your own legal entity might not be the best option.

Use an Employer of Record

An employer of record (EOR) works as a legal entity on your behalf. It’s a third-party that employs foreign workers for you.

EOR’s handle all the compliance-related requirements. From benefits and payroll, to tax calculations, your EOR has you covered.

Your EOR, rather than your business, is legally liable for compliance issues. This provides a safety-net for your company.

They’ll take a lot of paperwork and stress off of your hands. This enables you to quickly hire employees abroad and focus on other business tasks.

If you want to outsource your HR department, working with a Professional Employer Organization (PEO) can also be helpful. Although similar, there are some key differences between a PEO and EOR.

That said, working with an EOR is only advisable if you’re working with employees abroad. If you’re only hiring contractors, an EOR is likely not going to be worth the cost.

How to Set Up a Contractor Agreement for Contractors in Germany

Setting up an agreement with your contractor is key to setting expectations. It also reduces the risk of future disputes and protects both parties.

In the contract, you’ll want to include key information such as:

• The payment amount and timeline
• Payment method
• Payment currency
• Ownership of services (intellectual property)
• Services required
• Deadlines for services to be rendered

💡 You can find free independent contractor agreements to use for your contractors in Germany.

Will My US Company Need to Register for VAT When Hiring German Contractors?

While many countries require non-residents to collect VAT, this is typically on business-to-consumer (B2C) services only.⁶ So for business-to-business (B2B) services, you might not need to collect VAT.

If your US business doesn’t have a legal presence in Germany, you won’t need to register and pay VAT.

But, your contractor in Germany will need to pay VAT on their income.

For this reason, some contractors may pre-calculate estimated VAT and include it in their contract.⁷

What Is the Difference Between Contractor and Freelancer in Germany?

Both Gewerbetreibenden (commercial traders) and Freiberufler (liberal professionals) are types of freelancers. Freiberufler tend to have a university-level education. They also usually work in a specialized role. In contrast, Gewerbetreibenden is a broader category.

Both Gewerbetreibender and Freiberufler can work as freie Mitarbeitende (contractors). Freie Mitarbeitende are those who work independently for a company. They also have a high level of control over how and when they work.

However, in some cases, a freelancer may become a feste:r Freie:r (fixed freelancer). This would be the case if parts of their contract are similar to that of an employee. Specifically, if they receive certain benefits, they may be classified this way.⁸

How to Pay Contractors in Germany From US

There are some different options when it comes to paying your contractors in Germany. Some are easier to set up, while others may incur higher fees.

Here’s an overview of the different ways to pay your contractors.

Wise Business

Wise Business is a Money Business Services (MSB) provider. You can create a Wise Business account and enjoy access to over 40 currencies all in one place.

You can pay your contractors in Germany using USD, Euros (EUR) or their preferred currency. When you convert your funds, you’ll have access to the mid-market exchange rate, saving you on hidden fees and markups.

Wise transfers are low-cost and instant at least 60% of the time. Contractors don’t need to have a Wise account to receive payments, but if they do, then it works out even cheaper.

Payment Providers

You could pay your contractor using an alternative payment provider, such as Payoneer or PayPal Business.

Payoneer supports international business, with multi-currency payments. It offers free same-currency transactions between Payoneer accounts. It’s a popular platform, meaning that your contractors may already have an account.

However, currency conversion fees run as high as 3.5%, which could be impractical for paying contractors in Germany.⁹

PayPal Business is another option for paying contractors. Its trusted name and easy to use platform make it a suitable option. However, it charges high transaction fees as well as fees on currency conversion and international transactions.¹⁰

Bank Transfer

If you want to avoid opening a new account with a payment provider, you could pay your contractor in Germany from your US bank account.

While this is a convenient option, keep in mind that it could get expensive. Banks often charge high fees for international transfers, as well as markups on their exchange rates.

Deciding on the best way to pay your independent contractor is a case of balancing convenience with fees.

Discover Wise Business: The Simple Way to Pay Contractors Abroad

A Wise Business account can make paying your German contractors simple and cheap.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in 40+ currencies. You can get major currency account details for a one-off fee to receive overseas payments like a local. You can also send money to 160+ countries.

Each time you send a payment, your funds are converted at the mid-market exchange rate, free of hidden fees. Whether it's USD, EUR or an alternative currency, you’ll be able to pay your contractor with limited fees.

Get a Wise Business account 🚀

Or read the guide on how to open a Wise Business account

You can use Wise’s batch payment tool to pay up to 1,000 contractors in one-click. That makes managing multiple contractors easy.

You can also connect Wise to QuickBooks and Xero, making for easy account reconciliations.

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Sources:

1. Why More SMBs Are Going Global: The Opportunities and Challenges of Hiring Internationally
2. About Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) | Internal Revenue Service
3. Foreign Source Income - Form 1042-S Reporting Not Required | Internal Revenue Service
4. What Is Form 1042-S and All You Need to Know About It
5. How to hire employees in Germany through an Employer of Record (EOR) [2023 Guide]
6. What U.S.-Based Businesses Must Know about Value Added Tax (VAT)
7. Working as a Contractor in Germany for a US Company
8. Freelancer, Freiberufler or freie Mitarbeitender? – Find out what the difference is | Accountable
9. Low fees and no hidden costs | Payoneer Fees
10. Fees | Merchant and Business | PayPal US

All sources checked February 2024.