How to Hire Independent Contractors Abroad in 8 Steps (2024)

Hiring independent contractors abroad can be a great way to access global talent, increase your business’s flexibility, and reduce costs associated with hiring full-time employees.

But it's no easy task – especially with all the legal and tax requirements that come with it. This article will outline four steps for hiring international contractors overseas and how Wise can help cut costs on global payments.

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If you're looking to make the most of the global talent pool, here are some steps to help you hire foreign independent contractors:

Steps to hiring an independent contractor 👇

Step 1: Find out who is considered to be an independent contractor Step 2: Understand the benefits of hiring international contractors Step 3: Find out the labor laws in the contractor’s country Step 4: Determine if your business has to report to the IRS or withhold tax on payments made to independent contractors Step 5: Have foreign contractors complete IRS Form W-8BEN Step 6: Prepare a well-defined contractor agreement that meets legal requirements of all countries involved Step 7: Look into taxes for your foreign independent contractors Common mistakes when hiring independent contractors Step 8: Start paying foreign independent contractors

Step 1: Understand what an independent contractor is

An independent contractor is an individual or business that provides services to another company without having a formal employer-employee relationship. They’re typically paid for their work on a project basis, rather than receiving regular wages from one employer.

For example, a web designer may work with a company to design their website, but they aren’t considered an employee – they’re an independent contractor. And if you’re an American company hiring a contractor based in the UK, they would be responsible for their own taxes and benefits per UK laws.

In other words, an independent contractor is self-employed and not subject to the same legal requirements as an employee. When it comes to taxes, health insurance, and other benefits, the independent contractor is responsible for ensuring they comply with local laws.

While the definition of an independent contractor may vary from country to country, there are a few ways you can differentiate them from employees:

• Can work for multiple companies at one time
• Non-essential, i.e., your business can go on without this person
• Not always available when you need them to be
• Don’t work the same amount as an employee (typically) and often work irregular hours depending on your agreement
• Are subject to less control and direction from the hiring company
• Only paid for the cost of labor
• More flexible with the possibility to tend contracts as needed
• Paid for specific projects or tasks

Step 2: Understand the benefits of hiring international contractors

While hiring internationally can be difficult, there's got to be a reason why it's becoming increasingly popular. Some benefits of hiring international contractors include:

• Access to a global talent pool – You can access a larger pool of talent and skills that you wouldn’t otherwise be able to find in your local area. It's almost like having a global recruitment agency at your fingertips.
• Increased flexibility – Independent contractors don’t require long-term employment contracts, making them an ideal resource for businesses that are looking for short-term projects or need to quickly adjust their workforce.
• Cost savings – Businesses save on costs associated with setting up a physical office or renting a workspace. And what’s more – they avoid the costs of having to pay for health insurance, paid time off, and other benefits associated with full-time employees in their local area.
• Enhanced diversity – Working with people from different backgrounds can lead to a more creative and innovative work environment.
• Easier collaboration – With the right tools and processes in place, it’s easier than ever to collaborate with contractors based in different countries or time zones.

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Step 3: Find out the labor laws in the contractor’s country

The laws vary from country to country, so hiring international contractors won’t be the same in the US as it is in India. Your contractor should be 100% compliant with local legislation. You should also check the tax implications of hiring foreign independent contractors in your own jurisdiction, as there may be extra requirements or restrictions.

1. China

Since you’re likely not looking to expand your business into China, you won’t need to go through the grueling entity registration process. But, there are certain requirements when hiring an independent contractor.

No matter the circumstance, all employment relationships have to have a written contract to be legal in China¹. As long as the contractor complies with Chinese laws and regulations, you’re good to go. There are three types of employment contracts:

• Fixed-term labor contracts: The contract has a specific time frame and ends when that period is up.
• Open-ended contracts: This type of contract can be ended at any time, but the contract has to end with mutual agreement.
• Project-based contracts: These cover a short-term assignment with a certain end date.

All of these contracts have to satisfy statutory benefits and paid leave requirements of China.

2. India

Hiring international contractors in India is relatively straightforward. Just like in the US, there are different types of contractors, including fixed-term, gig, temporary, and platform workers. Gig and platform workers are what would be referred to as “freelancers” in the US, and these types of contractors are not subject to many of the same labor laws that traditional employees are.

Newly passed labor codes in India have officially defined these workers as they have become staples of the economy². Gig workers are traditional freelancers, while platform workers refer to positions like Uber drivers or delivery agents, for example.

As long as the contractor:

• Is between 16 and 60 years old
• Hasn’t worked less than 90 days in the 12 years prior
• Submitted a self-declaration to the Central Government

They are able to be hired as an independent contractor.

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3. UK

Hiring an independent contractor in the UK is quite easy to do - just be sure to note their IR35 regulations. Essentially, these regulations state that any contractor who works as if they were an employee must be treated like one for tax purposes. This means that contractors must pay almost the same income tax and National Insurance Contributions (NICs) as full-time employees do³.

Employment rights and benefits such as sick pay, holidays, and parental leave are also not available to independent contractors. In order to determine whether or not your contractor is considered an employee under the IR35 regulations, you have to conduct a Status Determination exercise. This requires a detailed analysis of the contractor’s working arrangements and written confirmation that you agree with the outcome.

4. Canada

In Canada, the rules for hiring freelance and independent contractors are much more strict than in India but still relatively straightforward⁴.

The contractor must be classified as either an employee (receives a T4 tax slip from Canadian businesses) or a self-employed individual (sole proprietor)⁵. The difference between the two is that an employee is subject to the same labor laws as any other worker in Canada, such as overtime pay and minimum wage. A self-employed individual, however, doesn’t have these protections and has to be paid via a contract outlining the scope of work and payment terms.

For sole proprietors, they likely have a 9-digit business number and a GST/HST or QST (for candidates in Quebec) number.

5. Philippines

For foreign companies hiring contractors in the Philippines, the Department of Labor and Employment (DOLE) has a set of guidelines. These guidelines concern contracting and subcontracting to help ensure that contractors aren’t in any sort of banned employment arrangements.

Independent contractors also need to be registered with the Bureau of Internal Revenue and renew their registration every two years.

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Step 4: Determine if your business has to report to the IRS or withhold tax on payments made to independent contractors

Since foreign contractors pay income taxes in their own country, US companies likely won’t need to withhold taxes from payments made to them⁶. Some countries have agreements with the US that require taxes to be withheld from certain types of payments to foreign contractors. These should be taken into consideration when hiring an international independent contractor.

If there isn’t a tax treaty, foreigners without US residency who have made US source income need to pay the same rate as American citizens (typically 30%). But, this ultimately depends on the type of income.

In cases where the contractor is an American citizen, the company may need to report and/or withhold taxes from payments made. Companies that hire foreign contractors should also be aware of the requirements for filing Form 1099-MISC with the IRS⁷.

Step 5: Have foreign contractors complete IRS Form W-8BEN

If you are hiring a foreign contractor, you will need to have them complete IRS Form W-8BEN. This form is used to certify that the contractor is not a US citizen or resident alien and are not withholding any taxes from the US government. It also helps ensure that they pay their taxes in their home country.

Step 6: Prepare a well-defined contractor agreement that meets legal requirements of all countries involved

Create a written agreement that clearly outlines the scope of work and responsibilities for both parties. You don’t want to run into any confusion or misunderstanding between you and the contractor.

The agreement should also include information on how much you are paying, payment timelines, termination clauses, non-disclosure agreements (if necessary), etc. Make sure to consult with a local lawyer in each jurisdiction involved, so you know all legal requirements are met.

Be sure to send your contract over in a widely-accepted format like PDF or Microsoft Word. The more seamless the process, the better.

If you haven’t taken a look at our free agreement templates, here’s a small table with a few examples of typical clauses in a contractor agreement.

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Clauses in a contractor agreement	Description
1️⃣ What kind of tasks or role the independent contractor is being asked to do	It’s important that you clearly define this role and also that you don’t fall into the trap of treating them as an employee.
2️⃣ The time commitment needed (e,g., part-time, per hour, flat fee per month)	How much time per week or day do you need them?
3️⃣ Payment amount	Make sure this is clearly stated, and also you account for fees charged by payment providers and online platforms, such as Upwork
4️⃣ The length of time you are looking to hire them for	How long does the project last?
5️⃣ Non-disclosure agreement/Confidentiality agreement	To protect your business and proprietary information, you should have the independent contractor sign a non-disclosure agreement and agree to keep discussions and work confidential.
6️⃣ Ownership rights	If part of the tasks (or all) are to create content or some kind of product for your business, you should have the independent contractor sign the rights of ownership to you
7️⃣ Payment and billing terms	Independent contractors may have their own payment and billing terms, so once you agree to a type of method and form of payment (e.g., bank transfer once a month, bi-monthly payments)
8️⃣ Termination clause	If either you or the independent contractor deem that it’s not the right fit, having a termination clause in place protects both of you from continuing further.

Step 7: Look into taxes for your foreign independent contractors

Read up on the tax requirements for independent contractors in the country you’re hiring them from. Some countries may require that you withhold taxes, while others may not. You should also be aware of any double taxation treaties between the two countries so that the contractor doesn’t get taxed twice on their income.

For instance, if you are hiring an independent contractor in Canada, the W-8BEN form exempts them from tax withholding. That’s all thanks to the income tax treaty between the two countries. The important thing is that you understand these nuances, so that they do not disrupt your business activities.

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Common mistakes when hiring independent contractors

With so many differences between countries, it can be difficult to know what legal requirements need to be met when hiring an international independent contractor. To avoid potential issues, keep the following things in mind:

Know the Laws and Regulations

We’ve established that understanding the local laws and regulations is key when it comes to hiring independent contractors abroad. Depending on where you’re hiring from, there may be additional paperwork required or different processes to follow. Familiarize yourself with local labor laws and prepare for any taxes that need to be paid.

Consulting a lawyer or tax specialist might give you the peace of mind you need.

Develop a Strong Job Description

When you’re hiring independent contractors, you want to publish a clear job description that outlines the scope of the project and expected deliverables. This way, you’ll be able to recruit the right talent, and everyone will be on the same page regarding expectations.

Some things to consider include:

• What are the project requirements?
• Where will it be completed?
• How long will it take to complete?
• What is the expected rate of pay?

Creating a job description helps you and your independent contractor understand what you’re working towards. It also serves as a reference for any questions or disputes that may come up.

Not putting a contractor agreement in place

A contractor agreement is a legal document that outlines the terms of your engagement with an independent contractor. It should include information about the project, compensation, timeline, and other relevant details. Having this in place ensures that everyone’s expectations are met and there are no misunderstandings down the line.

In some countries (such as China), it's mandatory to have a written agreement in place when working with contractors – so make sure you check local laws before hiring.

If you don't have a contractor agreement, you're essentially building a house without a blueprint. This can cause issues down the line and put your business at risk.

Not screening candidates thoroughly enough

When hiring someone to work on an important project, it’s vital that they have the necessary skills and qualifications. This means checking references and verifying credentials such as education, experience, or certifications. You should also look for any reviews or feedback from their past clients to make sure they can deliver quality results. And don’t forget to check if they have any language skills that are relevant to the project.

During the process, take the time to get to know each candidate by asking questions that go beyond their qualifications. For example, what is their experience working with remote teams? What strategies do they have for staying productive while working remotely? These questions can help you determine if a candidate is the right fit for your project and team.

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Not setting proper goals or schedules

There needs to be some sort of timeline for the project. You’ll want you and your independent contractor to be both aware of when certain tasks need to be completed. It could be a weekly progress report or a check-in meeting every few weeks, or through a project management software like Asana or Trello.

When you take the time to outline each stage of completion, it’s more likely that deadlines will be met and everyone will be accountable for their part in the process.

Treating contractors as regular employees

It might be tempting to treat independent contractors as regular employees, but that could land you in legal trouble. Independent contractors are responsible for taking care of their own taxes and benefits, which means you don’t have to worry about providing them with health insurance or other employee benefits.

Also, it’s important to remember that international contractors are not subject to the same laws and regulations as regular employees. That means you can’t dictate how they work or impose performance standards on them – that’s not your job.

Not establishing a payment method

Before you start working with an independent contractor, establish a payment system early that is both efficient and secure. Look for a global payments provider such as Wise Business that offers low-cost international transfers, multi-currency accounts, and local payment options. This lets you make sure your contractors get paid on time and in full – regardless of their location.

To pay an independent contractor abroad, there are a few options available. You can choose to pay them in their local currency or in your own currency. It's important to consider the pros and cons of each option before making a decision. Additionally, be sure you understand any taxes or fees associated with each payment method.

Lowering the risks while hiring foreign contractors

Before you hire independent contractors abroad, it can prove useful to take all the necessary steps to protect yourself and your business. Choosing the right legal and tax structure is critical in order to reduce the risks associated with hiring foreign contractors.

The most common way of reducing these risks is by setting up an international payroll provider. With a global payroll system, you can ensure that workers are paid in compliance with local laws and all tax obligations are taken care of. You can also make this process easier by using a Wise to send batch payments and easily track them.

Step 8: Start paying foreign independent contractors

When it’s time to pay your contractors, Wise Business can make the process easier and more secure. Not many payroll services support payments to employees overseas, which is why companies use money transfer services like Wise Business. It's 19x cheaper than PayPal for making business payments and offers the competitive mid-market exchange rate. Transfers are typically processed in 0–2 working days and can be completed for all your international employees in one go with batch payments.

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Sources:

1. China labor laws: An overview for global employers employers
2. Gig and Platform Workers - Meaning, Significance, Legal Framework
3. Understanding off-payroll working (IR35) - GOV.UK
4. Employee or Self-employed? - Canada.ca
5. What Is a T4 Slip in Canada?
6. Independent Contractor (Self-Employed) or Employee? | Internal Revenue Service
7. The Ultimate Guide To Hiring Foreign Independent Contractor