Working with international contractors is often an efficient and affordable way to get work done for U.S. based businesses. Paying international contractors, however, isn't always so simple. With local laws, currency exchange rates, income tax and other tax obligations all coming into play, international borders can complicate B2B payments to overseas workers.
These complexities often leave businesses wondering about the best way to pay foreign contractors and what methods to follow to stay compliant with U.S. tax codes. Below, you'll find the most common methods that U.S. businesses can use to effectively pay international contractors (also called freelancers or vendors), along with one option you can integrate into your accounting software to make every international payment seamless.
How to pay international contractors: Different methods and what to consider
So what's the best way to pay international contractors and freelancers? The answer for your business will depend on mainly two things: the type of payment experience you want to provide your international contractors and the needs of your accounts payable (A.P.) team. You'll want to weigh the pros and cons of the following methods individually to decide which option is the best fit.
For your A.P. team, consider their day-to-day workflows. For example, some of the most common ways to pay international vendors, contractors and freelancers can be done through your bank. Still, these methods don't always offer a unified view of your entire accounts payable. In addition, payment methods that operate separately from your accounting software can make reconciling tedious for your finance teams.
For your international contractors, consider the payment experience you want them to have. For example, how long do you want them to wait for payments? Would you like them to receive notifications of their payment status? Just like domestic workers, foreign contractors appreciate multiple payment choices and processing speeds along with communication about the status of their payments.
Suggested reading: A guide to cross-border payments
All things considered, there are various ways to pay overseas contractors, including international wire transfers, international ACH, PayPal, paper checks and international money orders. Each comes with its own advantages and disadvantages concerning cost, speed and security.
Using international wire transfers to pay overseas contractors
International wire transfers are a popular way to pay overseas contractors and have been around for a long time. You can make these payments with your bank or through a wire service. International wire payments will go from your bank to your recipient's bank through the SWIFT network (Society for Worldwide Interbank Financial Telecommunication). Because international wires often use this network, they're sometimes called SWIFT transfers.
Pros of international wire transfers
- Easy to access. A majority of banks will offer wire transfers to international vendors. The transfer will deposit into your recipient's bank account.
- Secure. The SWIFT network's top priority is to keep your money safe. The chances of your money being intercepted by an outside party are super slim.
- Can be used to send large amounts of money. Check with your bank about any limits, but international wire transfers are a good option for sending large sums of money at once.
Cons of international wire transfers
- Payment speeds vary. If either the sending or receiving bank isn't directly connected to the SWIFT network, the payment will have to reach intermediary banks along the way. This adds to the processing time, meaning your foreign contractor will be waiting extra time for payment.
- Can be expensive. Paying international contractors via wire transfers can get pricey, especially if you're paying many contractors at once. You're usually charged per transaction, and that can hover around $50 depending on your bank. If your payment has to process through intermediary banks, they may take extra fees
- Your contractor might be charged. Your recipient's bank might charge them to receive the payment, which runs the risk of diluting their payment experience with your business.
Overall, international wire transfers can work well when paying international contractors because they are secure and relatively easy to access. However, your teams may have a hard time manually processing these payments with your bank at scale.
Using international ACH to pay foreign contractors
ACH transactions are a popular way to send payments to contractors in the U.S., and they can also be sent to contractors internationally. (You may know ACH transactions as direct deposit or direct payment.) When ACH payments are sent domestically, they process within the ACH (Automated Clearing House ) network. However, payments have to process through an additional foreign clearing house when sent internationally, like the Single Euro Payments Area (SEPA) in Europe, for example.
Pros of international ACH
- Low cost. According to AFP's 2022 Payments Cost Benchmarking Survey, the median cost of initiating and receiving an ACH check payment for all businesses falls between $0.26 and $0.50. The cost of an international ACH payment is similar although it may cost more depending on the service you use.
- Secure. International ACH payments are subject to Nacha regulations in addition to those of the receiving country’s clearing system.
- Cost-effective for mass payouts. The low cost of international ACH payments means it's a good option when paying hundreds or thousands of contractors at a time.
- Easy to access. Money is deposited into your recipient's bank account, making it easy for your contractor to access their payment.
Cons of international ACH
- Not always available. Not all banks offer international ACH, and it's not accepted by all countries, which could limit your choice of contractors.
- Payment speed varies. Your payment could take a little longer to get to your contractor depending on the foreign clearing house being used.
Overall, ACH payments are a great way to pay international contractors given it's available in their country. Again, keep in mind your team's experience of manually processing a high volume payments through your bank.
Using PayPal to pay international contractors
You're likely familiar with PayPal to send payments to friends and family, but businesses also use it to pay their international contractors and freelancers. It's an easy-to-use, low-barrier option, but it does get expensive if you're paying a high volume of contractors.
Pros of PayPal
- Easy to set up and use. PayPal has an intuitive interface. It's easy for contractors to create their profile and get set up for payment. They don't even need to add their bank account information — just an email address can get them up and running.
- Well-known and trusted. PayPal has a solid reputation so it's likely your contractors won't be hesitant to get paid through the platform.
Cons of PayPal
- Speed. While payments can be initiated instantly, they may not be accessible to the recipient for three to five days. PayPal payments go through the ACH network, which adds time to the processing cycle.
- Fees get expensive. PayPal's fees add up especially as you send more and more payments.
- Not built for finance teams. PayPal can't connect to your accounting software, which means your teams have to work across separate systems. The platform also isn't friendly for processing a high volume of payments to international contractors.
Overall, PayPal is an effective method to pay international contractors because it's relatively easy to use and has a good reputation. However, PayPal is not accessible to all international contractors depending on where they live. Because of the expense and disjointed workflow it creates for your teams, it may not be an ideal payment method for paying international contractors long-term.
Paying international contractors with checks
Moving money internationally with checks may be a little risky and doesn't necessarily offer a seamless payee experience, but businesses sometimes still use them when paying international contractors.
Pros of checks
- Familiar B2B payment method. Businesses often pay their domestic contractors with checks so sending them internationally doesn't offer much of a stretch in terms of how it affects existing workflows for finance teams. Your international contractor may also prefer to be paid with a check (common with more traditional industries) so it doesn't hurt to have it as an option.
Cons of checks
- Fees for your contractor. Your contractor may be charged a fee to deposit the check. There's also an exchange rate they'll have to cover, and it may be high if they're using their bank.
- Can be risky. Checks contain sensitive bank account information. The check could get lost in the mail and could end up in the wrong hands, which can leave your business susceptible to fraud.
- Long payment cycle. Sending a check internationally could leave your contractor waiting a few weeks to receive their payment.
Also, consider your budget when paying international contractors via checks: If you're sending a high volume of checks globally, the fees to send each check will add up.
Using international money orders to pay overseas contractors
International money orders are basically pre-paid checks to your contractors. They're readily available at many grocery stores and even the United States Postal Service can help you send them. Once paid for, they can be mailed anywhere.
Pros of international money orders
- Easy to use. Though money orders are a bit old-fashioned, the fact that they're relatively straightforward makes them easy to understand and accessible even in places that do not have access to a great deal of technology.
- Low barrier. Your international contractors won't need a bank account to access their payments. They can get money orders cashed fairly easily.
Cons of international money orders
- High fees. There can be substantial fees on both sides of the exchange. You'll be charged a fee when purchasing the money order and your recipient will be charged a fee when cashing the money.
- Can be slow. Since a money order is being sent over snail mail, it may take a while to reach your contractor.
- Can't send large payments. USPS caps their money orders at $700 and other providers may offer varying limits. If you need to make a big payment to an international contractor, a money order is not a good option.
On a greater scale, international money orders may not be an ideal way to pay your contractors overseas. While they may be easy to send, international money orders can get expensive. In addition, recipients often have to deal with the inconvenience of appearing in person to receive funds.
Quick tips: Remaining compliant when paying international contractors
To avoid penalties, it will take your team a little extra work to remain compliant when paying international contractors. The following tips will get you started, but we highly recommend digging deeper with legal experts.
- Determine if the worker is considered a contractor or employee in their country.Each country has different labor laws that determine whether someone can be classified as a contractor or employee. Misclassifying them could have consequences for your business.
- Have your foreign contractors complete Form W-8BEN. A W-8BEN is the equivalent to a Form W-9 in the United States. This is not to be confused with Form W-8BEN-E, which is for foreign entities. Form W-8BEN is for individuals. Learn more about Form W-8BEN here.
- Standardize a process for managing your contractor agreements. Your managers and human resources teams will need to stay informed of the risks contractors may pose to your business and adhere to clearly defined company guidelines. Create templates for contractor agreements that are vetted and revised to guarantee legal protection.
- Determine if your business has tax withholding and reporting obligations to the IRS. Many companies with payroll have to pay close attention to IRS obligations, such as tax withholding. Consulting a tax specialist or getting legal advice is the best way to avoid running into tax penalties down the line.
FAQs about how to pay an international contractor
Do you issue a 1099 to a foreign contractor?
No, you don't need to issue a 1099 form to a foreign contractor or freelancer if the service is performed outside of the United States. However, you should require any non-U.S. contractor you work with to file IRS Form W-8BEN. This form certifies the contractor's foreign status.
Do overseas contractors pay U.S. taxes?
No, overseas contractors don't pay U.S. taxes. However, the U.S. company that hires a foreign contractor or freelancer should require the contractor to file IRS Form W-8BEN. The contractor may then be subject to taxes in their home country.
Paying international contractors with Routable
Figuring out how to pay international contractors and freelancers can be a headache, but Routable can take care of the hard stuff for you. We'll tackle currency exchange and help you stay compliant with local laws, all from a single platform.
With Routable, you can easily send payments to over 220 countries and territories using SWIFT and international ACH. Routable also creates a unified view of your payables with accounting integrations to Xero, QuickBooks Online, NetSuite or Sage Intacct and grows with you as you scale to send mass payouts seamlessly.
Are you ready to discover more about what Routable has to offer? If so, set up a time to chat with our sales team below or learn about making cross-border payments via the platform here.