How to Pay International Contractors: 5 Factors to Consider

How to pay international contractors 🏦

Amount: How much should I pay international contractors? 🤔

Where they live, which can dictate local taxation rates, market rates, and their local cost of living. You may choose to adjust compensation based on location or set location-agnostic rates that are competitive in many different markets. 
What currency you’ll pay contractors — USD or their local currency? If the latter, currency exchange rates can affect how much you should offer
Your company’s budget for the job
Whether you’ll compensate for materials

Timing: When should I pay contractors? ⏲️

Pros: Ensures that your contractors are paid on time and shows that you trust them. These factors can motivate them to do their best work, or perform above and beyond your expectations.
Cons: You’ll have to assume the risk in case a deliverable doesn’t get submitted, or isn’t up to your standards.

Pros: You can hold payment until the final project results meet your expectations.
Cons: The contractor will have to assume the risk that their pay could be delayed or withheld due to discrepancies in expectations.

Tax liabilities: What tax laws do I need to comply with? 🧾

The contractor lives in and performs the work in a country outside of the US
The contractor doesn’t have a US visa or citizenship
Your company doesn’t have a legal presence in the contractor’s country, i.e., a foreign subsidiary
They’re properly classified as contractors, not employees (more on this later)

Advise contractors that you’re not responsible for withholding and paying taxes on their behalf. Self-employed individuals are liable for reporting and paying income taxes in their home country. 
Request IRS Form W-8BEN or W-8BEN-E from each contractor located outside the US before they perform work for you. These forms ask your workers to certify that they are, in fact, foreign contractors and therefore, not liable for US taxes on any payments made. 
Document these payment terms in writing to keep you and your contractors aligned on payment expectations. It also helps prevent or mitigate potential disputes. Hot tip: Put your payment terms in the independent contractor agreements you draft and sign when hiring contractors.

Classification: Am I classifying my workers correctly? 📋

How long you’ve been working together
How much control you have over the work they do, including how, when, and where they do it
Whether the worker is allowed to freelance for other companies in addition to yours
Whether or not the worker receives benefits like paid time off
Who is responsible for paying taxes to the government — the company or the worker?

Payment method: What’s the best way to pay international contractors? 💸

Speed: How quickly your contractors receive payments after you send the funds
Costs and fees: How much you’ll owe in transaction fees for using international payment services
Ease of use: How easy it is for you to send payments and for contractors to receive them
Security: How well the payment method protects you and your contractors’ financial information and ensures that the money reaches its final destination safely
Scalability: How easily you can scale to pay many contractors in many different countries without investing too much extra time or money. Look for features like automation, mass payouts, etc. 
Compliance: Whether the payment method helps keep you compliant with various labor laws and tax codes

Pilot

Pros:

Saves time: Let Pilot handle the complex logistics of making international payments. Schedule recurring payments with set-it-and-forget-it ease, and free up your HR and accounting teams to focus on more strategic financial initiatives.
Manage costs: Outsourcing is usually much more cost-effective than hiring internal staff to implement, maintain and manage payroll full-time. Our transparent pricing also makes it easier to budget for international payroll.
Stay compliant: Researching and understanding all the relevant tax and labor laws in every contractor’s country is a total pain. Not to mention time-consuming! Pilot helps you stay audit-proof by collecting all the right tax forms and minimizing the risk of payroll errors, tax penalties, and missed deadlines. 
Reduce payment delays: Oftentimes, paying international contractors yourself can lead to unpredictable delays as your transactions get left in limbo between banks. Pilot leverages its established connections to banks in foreign countries to pay your workers exactly on time — every time. 
Secure: It takes a lot of trust to let a third-party provider handle all the confidential information needed to pay someone — their full legal name, their address, tax ID number (like an SSN or ITIN), their bank account number, just to name a few things. Thankfully, Pilot is SOC 2 compliant and has state-of-the-art, multi-layered security processes to ensure your payments reach your contractors safely every time. Your funds never touch Pilot’s corporate accounts, remaining yours until your contractors receive them. We follow strict compliance standards and security protocols to protect you and your team’s sensitive data at all times. 

Cons:

Perceived loss of control: Letting someone else take over your payroll processing can be scary. If any payroll emergencies or concerns come up, you may need to contact your provider for assistance. With Pilot, though, you maintain complete control and visibility over contractor payments. And if you have any problems, our support team is always happy to help!

International wire transfers 

Pros:

Secure: Wire transfers are incredibly safe because no money is actually held or transferred — only instructions to pay someone a certain amount. The only people who see these instructions are authorized bank personnel. Unlike checks, nobody can get their hands on money sent in a wire transfer.
Direct payments: Contractors (and anyone, really) prefer to get paid in as few steps as possible. Wire transfers are the easiest and most convenient way for contractors to get paid since the payments go straight into their bank account for access in their local currency. 
Large sums OK: The limits for wire transfers vary (check with your bank!) but are usually relatively high. 

Cons:

Slow payment processing speeds: International wire transfers usually take a few days. Payment processing times for wire transfers vary depending on whether banks are connected to the SWIFT network and how many intermediary banks the payments need to go through. 
Expensive: Wire transfers go through multiple banks and clearinghouses, each charging its own transaction fees. You’ll never really know how much the banks will charge you for a wire transfer until it’s already completed. Plus, the fees can vary each time, even if you’re using the same banks to send the same amount. That’s not even mentioning currency exchange rates, which banks usually don't disclose. Definitely not a great option if you’re sending a large volume of payments and want to manage your costs.

International money orders

Pros:

Ease of use: Anyone can pay for and send an international money order. Many money order providers allow you to transfer funds internationally via website, app, phone, or in person. 
Faster delivery: Money transfers are usually quicker than wire transfers because the requests don’t get held up in intermediary banks. While processing times (and fees) can vary, some services offer same-day delivery (though sometimes at a cost). 
Transparency: No more guessing games; You’ll always know how much you’ll pay in fees because money order companies share their fee structures transparently, with no intermediary costs taken out.

Cons:

Costs: Even though you’ll know how much you’re paying, that amount might still be more than you’re willing to pay — and might be even higher than you’d pay sending a bank transfer. Some money order providers charge a percentage of your transfer amount, which means the more you send, the more you’ll spend.
Payment caps: Money orders often have much lower per-transfer limits than bank transfers do. For example, with Western Union, you can only send up to $3,000 from the US without verifying your identity, and after that, up to $50,000. 

E-Wallet payments

Pros:

Widely accepted: Many contractors already have e-wallet accounts or would be willing to sign up for one from a reputable platform to receive payments quickly.
Easy to use: E-wallets are convenient to sign up for and use for sending and receiving money. 
Mass payouts: In PayPal, you can quickly send up to 15,000 payments at once via API or 10,000 via batch upload.

Cons:

Delays: Payments are sent instantly, but the recipient still has to submit a separate request to withdraw the funds to their bank account.
Fees: For international transactions, PayPal charges a flat percentage of the amount sent plus a currency conversion fee. Needless to say, the nickels and dimes add up, and you and your contractors could be paying a pretty penny to send and receive money.
Contractors must have an account: Not everyone necessarily wants to get paid in a separate account, adding another step to accessing their money. Factors like unavailability in certain countries or currencies can make it impossible for affected contractors to even use these e-wallet providers. 

Paper checks

Pros:

Record keeping: Checks leave a paper trail for both contractors and employers to keep clean payment records. Employers that pay their domestic workers via checks might prefer to keep doing the same for their international contractors as well.

Cons:

Extremely slow: Because you have to physically put each check in an envelope and mail it out, you and your contractors are subject to the delays and limitations of the postal service. First, you have to carve out time to go to the post office or find a mailbox. Then, thanks to unpredictable mail delays and check clearing periods, it could take anywhere from a few days to several months for contractors to actually get paid for their work. 
Risk: Mailed checks are not secure; they can get lost in the mail or fall into the wrong hands. Anyone can open a sealed envelope and steal the bank account information, which can lead to dealing with fraud concerns. And after all that, you’ll still owe your contractor their payment.
Fees: Even when your contractor receives their check, the deposit fees and exchange rates charged by banks can seriously cut into the total amount a contractor gets in the end.

Pilot: Paying international contractors made easy 🫰