By Deel, a partner of Workplaceless
Any opinions expressed within the blog are those of the author and not necessarily held by Workplaceless itself.
Hiring remote contractors has become a go-to solution for many companies. The benefits are clear- you can source your talent from across the globe, reduce company costs, and increase efficiency in general. Although this seems to be a popular trend, there are a few things you need to be aware of to stay compliant.
1. Labour laws differ, so should your contracts
When you are working with talent, many aspects need to be taken into account to ensure full compliance with (local) labor laws. Not all the information is easily accessible, so it’s worth investing time into it. Most lawyers advise you to hire local lawyers to ensure locally binding contracts. It’s crucial to understand the type of relationship you have with your service provider. One of the most common misclassifications occurs when you decide whether the person is considered an employee or an independent contractor. You could get in trouble if you do not get it right. Many rules define this (especially in the US), but the general division is as follows:
The person is considered an independent contractor or a self-employed if:
- They are a business owner or contractor who provides services to your company
- You as a company do not determine what or how the work is performed, only the result of the work
- The contractor usually has more than one source of income
Other aspects that need to be taken into account are financial (expenses reimbursed, paid tools, etc.) and type of relationship (paid vacation, health insurance, and pension plan provided by the company).
Again all aspects need to be taken into account as a whole. One aspect can clearly state that the person should be considered as an employee, but others prove the case it’s not.
2. Stay risk-free with the right tax documentation (for the US companies)
Once you define your relationship with the contractor, you might be required to fill in some forms to make it fully compliant. When working with foreign contractors or entities as a US business, you need to issue the forms called W-8BEN or W8BEN-E. They help establish that someone is a foreign individual (or an entity) and that the work is not being performed from within the US. The W8-BEN form is filed when the contractor is acting as an individual, whereas the W8BEN-E is used when the contractor has their own business.
3. Contractor taxes- Who is responsible for it?
It’s worth double checking which party- you or the contractor, is responsible for the contractor’s taxes. The independent contractor is almost always responsible for covering their taxes, especially if they are based in a different country. Sometimes, you as a US company need to withhold a percentage to cover the taxes on their behalf. The withholding rate depends on whether the US has a tax treaty with a foreign country. If they do, there might be no withholding at all. Make sure you align on this with your contractor, so you avoid causing risks and penalties.
4. Keep your accounting clean with invoices
Accounting is fundamental when it comes to a working relationship between a company and an independent contractor. Both parties should have invoices that match the money that is being transferred. The usual workflow consists of the contractor sending an invoice, and then the company processes the payment. Sometimes, the contractor needs to confirm the amount they received. This might sound like tedious work, but it’s necessary to keep the books clean. It is an excellent practice to do a check-up every quarter or so to see if you have invoices from all your contractors.
5. Choose a payment method to optimize the process
From our experience, finding the best payment method is important to avoid losing money and time for both the company and the contractor. Some countries have restrictions for specific payment methods (such as bank transfers, PayPal, etc.). Even worse, sometimes the contractors and companies are required to send additional documentation to prove the origin of the money, which adds extra time to processing. On top of that, contractors sometimes need to pay additional fees, especially with bank transfers. Not to mention the conversion rates.
Weigh in all your options carefully and make sure the payment method you choose is approved in both countries, has a smooth and easy way of processing and it won’t give you headaches every month.
6. Be smart with payment automation
Running a company means taking care of a lot of things. People management is hard enough, not to mention the administration and paperwork. If you have multiple contractors and you need to do mass pay in many currencies, you will find yourself buried in manual work. Just like investing in a good communication tool, it’s worth considering investing in a tool that automates the process mentioned above. This way, you don’t need to worry about all the time you will spend getting invoices, paying out your contractors one by one, and filling out forms for each of them.
Deel simplifies compliance (i.e., Local labor laws, Tax filing) and payments at scale for companies working with contractors. It provides the contractors locally or internationally with a reliable, seamless payment experience.