A Guide to Hiring Independent Contractors Abroad for US Companies

Did you know? In 2022, the United States saw a significant surge in the number of independent workers, reaching about 31.9 million independent workers compared to 15.8 million in 2020. As businesses adapt to the evolving landscape of remote work, there's been a notable increase in the trend of hiring foreign independent contractors. An employer’s quest for exceptional talent is transcending geographical boundaries.

US companies often find cost savings when hiring foreign contractors, benefiting from lower labor expenses and exemptions from certain taxes like Social Security and Medicare. However, navigating the complexities of international hiring requires a keen eye for compliance, as companies must adhere to both US labor laws and the regulations of the contractor's home country. Let’s delve into this blog where we discuss how US companies can hire foreign contractors and how to navigate the complexities involved.

Who Is an Independent Contractor?

An independent contractor is a self-employed individual that provides services to another company on a project basis, without having a formal employer-employee relationship. They are paid for the cost of labor depending upon the projects undertaken, rather than receiving regular wages like an employee. Independent contractors are also responsible for paying their taxes in compliance with local laws. 

For example, a UX designer from the UK may work with a US company, only to design its website. This person is called the independent contractor and he/she would be responsible for filing his/her taxes as per UK laws. 

How Can US Companies Hire Foreign Independent Contractors?

Before hiring foreign independent contractors, it is crucial for US companies to fully comprehend their legal obligations towards the contractors as stipulated in the labor laws of the countries involved. 

Step 1: Classify the new employee correctly 

Correctly classifying workers as independent contractors versus employees is crucial to avoid legal issues and penalties. The IRS provides guidelines to determine worker classification, focusing on factors like behavioral control, financial control, and the type of relationship between the worker and the employer. Ensure your worker meets the criteria for independent contractor status.

Factors to Determine Independent Contractor Status:

• Degree of Control: Independent contractors typically have control over how and when they perform their work. 
• Tools and Equipment: Independent contractors invest in their own tools, bear business expenses, and have the potential for profit or loss.
• Contractual Agreements: Contractors typically have written contracts outlining project details, duration, and payment terms.

Step 2: Create a robust independent contractor agreement

To avoid confusion and misunderstanding, create a written contractor agreement that covers the scope of work and responsibilities of both the contractor and the company. The agreement can include the clauses given below.

Step 3: Obtain the necessary documentation

When you are hiring an independent contractor who is a non-US citizen, they need to fill out the IRS Form W-8BEN. This form certifies that the contractor is not a US citizen or resident alien, and doesn't withhold any taxes from the US government. This form prevents foreign independent contractors from being taxed twice, as contractors pay income taxes in their own country. 

For example, when an independent contractor from Canada works for a US company,  the US company may withhold 30% of the contractor’s earnings as a prepayment of US taxes if the services are performed within the United States. 

However, if the contractor conducts all services outside the United States and fulfills tax obligations to the Canadian government, they can submit the W8-BEN form to the US company to prevent double taxation and ensure full payment without any withholding.

Step 4: Tax withholding for independent contractors

Generally, businesses do not withhold taxes, such as income tax or FICA (Social Security and Medicare taxes), on payments made to independent contractors. However, businesses may be required to withhold taxes under certain circumstances, such as if the contractor fails to provide a valid taxpayer identification number (TIN). Also, withholding taxes for foreign independent contractors depends on various factors, as given below.

Domestic Contractors:

In most cases, you are not required to withhold taxes from payments made to domestic independent contractors. Instead, contractors are responsible for paying their own taxes, including income tax and self-employment tax (Social Security and Medicare taxes).

Foreign Contractors:

Withholding tax requirements for foreign contractors depend on various factors, including tax treaties between the U.S. and the contractor's country of residence. 

• No Withholding: The US has tax treaties with many countries to prevent double taxation and provide relief for taxpayers subject to tax in both their home country and the US. If a foreign contractor is from a country with which the US has a tax treaty and if the contractor provides a Form W-8BEN (Certificate of Foreign Status), you can exempt the contractor from US tax withholding.

• Withholding Required: If there is no tax treaty or if the contractor is not eligible for treaty benefits, the default withholding rate for payments to foreign contractors is 30% of the gross income, unless an exception applies.

Step 5: Setting up a payroll system that complies with IRS regulations.

Establishing a clear payment system is crucial for efficiency and security. The payment method is typically decided between the client and contractor, often involving bank transfers or international payment platforms. That's where global payroll providers like Gloroots can help you handle all the details, ensuring your contractors get paid on time and in compliance with local laws and tax requirements. Plus, they can accommodate different currency preferences, so your contractors can choose what works best for them

Checklist for US companies hiring independent contractors

US company hiring a US citizen living in the US

• Request Form W-9 from the contractor
• Issue Form 1099 NEC by Jan 31 of the following year for payments exceeding $600 in the previous year
• The company doesn’t need to withhold taxes nor pay for any benefits in the contractor’s payment. 

US company hiring a US citizen living abroad

• The IRS will consider the contractor as a US citizen and they are subject to the same US tax rules, regardless of the location.
• Request Form W9 from the contractor and issue Form 1099 NEC to the IRS for payments exceeding $600 annually
• Refer to IRS Publication 54 or consult IRS FAQs for International Individual Tax Matters for any specific tax implications.

US company hiring a foreign independent contractor living in another country

• Collect Form W-8BEN(E) from the contractor as proof of status.
• No need to report payments to the IRS as the contractor’s income is not US-sourced.
• No requirement to withhold taxes.

US company hiring a foreign independent contractor living in the US on a visa

• Determine the source of income based on where services are performed.
• If services are performed in the US, income is US-sourced. In such cases, withhold 30% tax unless a tax treaty applies or the individual becomes a resident. And, the companies should file Form 1042 (Annual Withholding Tax Return for US Source Income of Foreign Persons) by March 15 of the following year.
• Withholding of taxes doesn’t apply if a tax treaty exists between the two countries. In that case, the contractors should file Form 8233 for exemption from withholding.

Benefits of Hiring an Independent Contractor

Here are some benefits of hiring international contractors. 

• Financial benefits

By hiring independent contractors, companies can cut down on the costs associated with setting up physical offices or renting workspaces. Unlike full-time employees, contractors require no expenditure on training, workplace facilities, or benefits such as health insurance and social security. Self-employed professionals typically possess specialized skills, necessitating minimal training, and are responsible for their equipment and management. Additionally, they do not receive benefits and handle their tax obligations.

• Access to global talent

By engaging independent contractors, companies can tap into a diverse array of skills from across the globe, offering expertise that may not be locally accessible. This broadens the talent horizon and brings unique perspectives to projects, enhancing innovation and problem-solving capabilities.

• Increased flexibility

Independent contractors are ideal for companies who are looking to associate with individuals for short-term project collaborations. During off-peak periods, businesses can avoid the financial burden of retaining full-time staff, as contractors can be engaged only as needed. This flexibility allows companies to scale their workforce up or down according to demand.

• High productivity

Independent contractors are hired only for specific tasks and are expected to meet the set deadlines. Unlike traditional employees, contractors are compensated based on task completion rather than hours worked, incentivizing swift and efficient delivery. Freed from the obligations of traditional employment, such as attending regular meetings or fulfilling ongoing duties, contractors possess greater accountability and focus solely on achieving results. 83% of business leaders believe that contract workers are more productive than FTEs, according to the KRC Research report. 

Gloroots: Your Simple Solution for Global Contractor Management

At Gloroots, we understand the complexities and risks involved in hiring and managing independent contractors worldwide. That's why we've developed a comprehensive, all-in-one solution, where you can onboard contractors in just 6 Clicks!  Here's why Gloroots stands out as the premier Employer of Record (EOR) platform for your contractor onboarding and management needs.

1. Compliance and Legal Protection: At Gloroots, we ensure that the contracts strictly comply with local labor laws, mitigating risks of misclassification. Additionally, our streamlined process includes automated form collection and electronic filing with the IRS for essential documents such as W-9, W-8BEN, and 1099 forms. This guarantees smooth contractor onboarding with legally airtight agreements

2. Effortless Payroll Management: Gloroots offers multi-currency payment options with automated payroll calculations including tax withholdings and deductions. With this, we ensure precise and prompt compensation regardless of location. 

3. Transparency: Our comprehensive dashboard provides a clear view of each contractor’s onboarding status, with options to pause or resume processes, and modify details as needed. It also provides real-time insights into contractor working hours for transparent and fair compensation. This clear visibility into employment expenses enables informed decision-making. 

With Gloroots’ user-friendly platform and comprehensive features, we empower businesses to focus on growth while we handle the complexities of contractor management. Experience the ease of global contractor onboarding with Glooroots – book a demo today!