How to Pay International Contractors in 2025 (Compliantly and On Time)

Paying international contractors sounds simple until you try it yourself. At first, it feels like sending any other payment: pick a payment method, enter the amount, and hit send, without worrying about labor law liabilities, misclassification, or compliance red flags.

But the moment you start working with people in different countries, you run into a web of realities: 

• Currency conversions that eat into earnings
• Banking systems that move at different speeds, and
• Compliance rules that seem to change without warning

We’ve seen this play out in companies of all sizes. 

A founder in California sends money to a designer in Poland and wonders why it takes four days and costs 6% in fees. 

A growing SaaS team hires developers across three continents and suddenly realizes “just using PayPal” doesn’t address tax documentation or classification requirements. 

These are the day-to-day friction points that, left unmanaged, chip away at trust and efficiency.

In this article, we’ll walk through a practical, repeatable way to pay foreign contractors without the headaches. We’ll focus on B2B cross-border realities and not consumer remittances, and share benchmarks, cost considerations, and compliance steps you can actually implement. 

Before You Pay, Separate the Three Compliance Lanes

When people search for how to pay international contractors, they often mix up three distinct compliance requirements. That’s where confusion and costly mistakes happen. Treat them as separate lanes in the same process that you need to clear before the first invoice gets paid.

1. Classification

Under the U.S. Department of Labor’s 2024 rule and fact sheet, classification depends on factors like independence, control, and the nature of the work. 

Enforcement varies widely by jurisdiction, which is why many companies compare Employer of Record vs Staffing Agency models before hiring abroad. A wrong call here can lead to back taxes, benefits claims, and even contract disputes.

Case in point: In June 2023, the U.S. Department of Labor ordered a Florida-based support provider to pay $250,000 in back wages for misclassifying workers as contractors instead of employees. The investigation cited excessive control and lack of independence—two major misclassification triggers.

In the U.S., two frameworks dominate classification decisions:

• The “economic reality” test under the Fair Labor Standards Act (FLSA), which evaluates factors like financial dependence, control, and permanency of the relationship.
  
• The ABC Test, used in many states (like California), which assumes a worker is an employee unless all three conditions are met:
  • A. The worker is free from control and direction.
  • B. The work is outside the usual course of the hiring company’s business.
  • C. The worker runs an independently established business.

If any one of these fails, you’re looking at an employee, not a contractor, under state law.

Misapplying these frameworks or relying on one country’s test while hiring globally can expose you to serious legal, financial, and operational risks. Always align your classification logic with the local rules, not just what’s familiar.

2. Tax & Documentation

Once classification is sorted, your next step is handling tax paperwork correctly. Requirements vary based on where the contractor is located:

Scenario	What to Collect / Issue
Non-U.S. Contractor	– W-8BEN (for individuals)- W-8BEN-E (for entities)	Certifies foreign tax residency to avoid U.S. withholding taxes
U.S.-Sourced Work	– 1099-NEC, if payment crosses IRS reporting thresholds	Required for IRS reporting if services are sourced from the U.S.
All Contractors	– Retain all forms for the full statutory period	Protects you during audits; serves as proof of tax and classification compliance

Tip: Forms like W-8BEN and 1099-NEC are compliance safeguards. Keep them organized and accessible.

3. Payments & FX

Once compliance is in order, move to the actual transfer. 

For B2B international payments to foreign contractors, the global average cost is about 1.6% per transaction (FXC Intelligence, 2024), but the cost varies by payment corridor. Paying into Brazil, for example, often costs more than paying into the UK, due to higher FX spreads, stricter regulations, and additional bank fees.

💡 Be cautious with comparisons: consumer remittance tools like Wise or Western Union often advertise lower rates, but they don’t meet B2B compliance standards for tax documentation, recordkeeping, or audit trails.

For tips on streamlining all three lanes in one workflow, read top 5 hacks to hiring & managing talent abroad.

Step-by-Step Process to Pay International Contractors

Once you’ve separated classification, tax documentation, and payment logistics into their own lanes, the rest comes down to execution. 

The difference between a compliant one-off payment and a smooth long-term setup is whether you can follow the same steps every time: without missing forms, misclassifying work, or overpaying on FX. 

This is where a simple, repeatable, and auditable workflow for how to pay international contractors becomes essential.

Step 1: Classify Your Contractors Correctly

Before you send a single payment, confirm they meet the legal definition of an independent contractor in your jurisdiction and theirs. 

In the U.S., the Department of Labor applies the long-standing economic reality test under the Fair Labor Standards Act—a multifactor analysis looking at control over work, opportunity for profit or loss, investment in tools, permanency of the relationship, integration into the business, and the level of skill and initiative. 

Other countries apply similar tests but may weigh factors differently.

Misclassification can result in back taxes, benefits liability, and fines. For example, California imposes penalties of $5,000–$15,000 per violation under Labor Code 226.8. Reassess classification at the start of each engagement and whenever the scope of work or level of control changes.

 In most jurisdictions:

• Employees → Covered by local labor laws, entitled to statutory benefits, and subject to payroll taxes.
• Independent contractors → Paid per contract, handle their own taxes, and are not entitled to employee benefits.

The tricky part is the gray zone. For example, if a contractor works fixed hours, uses your equipment, and only serves your company, some countries may legally consider them an employee, regardless of what your contract says.

How to stay compliant:

• Research and follow the local classification rules in each contractor’s country as definitions differ.
• Spell out the relationship clearly in the contract: scope, deliverables, and payment terms.
• Avoid controlling day-to-day work in a way that makes the role resemble employment.

Step 2: Collect the Right Tax and Documentation Forms

Once classification is confirmed, gather the tax and identity documentation required for payments to foreign contractors. In the U.S., this typically means:

• W-8BEN (for individuals) or W-8BEN-E (for entities) – Certifies foreign status and claim of tax treaty benefits to reduce or eliminate U.S. withholding tax (IRS instructions).
  
• Form 1099-NEC – Issued only if the contractor meets U.S. trade/business nexus requirements; most non-U.S. contractors do not receive this unless work is performed in the U.S. (IRS guidance).

Retention rules matter: the IRS recommends keeping these forms for at least three years after the last payment. 

Outside the U.S., each country will have its own tax ID and documentation requirements — for example, Canada requires a T4A-NR for payments to non-resident contractors, and the UK may require proof of self-employment or VAT registration.

Always verify whether you have withholding obligations in the contractor’s country. Some nations require local tax remittance even if the payer is foreign.

📌 Related: Why Hire Remote Workers

Step 3: Set Up a Payment and FX Process That Minimizes Costs

Once classification and tax compliance are sorted, you need a payment setup that’s fast, trackable, and cost-efficient for cross-border B2B transactions. 

Consumer remittance tools like Western Union or MoneyGram are built for personal transfers. They can breach business reporting rules, carry higher FX spreads, and lack proper audit trails.

For contractors, choose purpose-built B2B payment services such as Wise Business, Payoneer, or your bank’s cross-border facility. These options integrate with accounting systems and provide stronger compliance tracking.

But the transaction fees vary by method, corridor, and currency volatility, so it pays to compare:

Method	Typical Speed	Documentation Burden	B2B Cost Band	FX Notes	Works Well For…
SWIFT Bank Transfer	2–5 business days	High	$15–$50 + 1–3% FX	FX often at poor bank markup	Large, infrequent transfers requiring compliance audit
Wise (Business)	Seconds–2 business days	Low	~0.4–1%	Uses mid-market rate, very transparent	Recurring B2B payouts where cost and clarity matter
PayPal (Business)	Instant–2 business days	Medium	~4–6%	High FX spread plus transaction fees	Urgent, single payments where user convenience is key
Local Bank Rails	Same day–3 days	Medium–High	~1–2%	Local FX rates often better	Paying contractors country-by-country or in same currency
Specialist B2B FX Firms	1–2 business days	Low–Medium	0.5–1%	Competitive, volume-based FX rates	High-volume B2B payouts needing speed and low fees

💬 Community voice: On Reddit, contractors often recommend Wise for fair FX rates and upfront fees. PayPal, on the other hand, gets frequent criticism for hidden FX spreads that can cut 5% from payouts.

Pro tips for cost and speed:

• Open currency accounts in key markets to pay contractors in their local currency. This reduces their conversion costs and speeds up settlements.
  
• For high-volume or multi-country payouts, use API-based payment providers or global payroll platforms that can automate bulk transfers, handle multiple currencies, and consolidate compliance reporting.

Disclaimer: All data, including rates, timelines, and regulatory references, is based on publicly available provider information, government resources, and community-reported experiences as of 2024. Actual requirements, costs, and processing times may vary by jurisdiction, payment corridor, and transaction volume. Always verify with the relevant provider or official source before acting.

Step 4: Agree on a Payment Schedule That Works for Both Sides

Your payment schedule sets expectations, builds trust, and keeps cash flow predictable for both you and your contractors. The right choice depends on the nature of work, project length, and local norms.

Common schedules for contractor payment options include:

Schedule Type	Best For	Considerations
Hourly	Time-bound services like design, consulting, or development	Requires accurate time tracking; may trigger local labor scrutiny if hours resemble employee schedules
Per Project	Clearly scoped deliverables with defined timelines	Works best when milestones are well documented; avoid scope creep
Retainer	Ongoing services like content writing, marketing, or support	Provides income stability for the contractor and resource predictability for you
Upfront	One-off, short-term projects or high-trust relationships	Increases contractor confidence but carries delivery risk for the payer

💡 Pro tip: Confirm in writing when payments are due (e.g., net 15, net 30), which currency will be used, and whether late fees apply. Align this with your invoicing process to make auditing easier later.

Step 5: Document Every Payment for Audit and Tax Purposes

After sending payments to foreign contractors, back them with a clear paper trail. Missing documentation can trigger tax disputes, slow down future payments, or create compliance gaps during audits.

For most jurisdictions, keep:

• Signed contracts – Define payment terms, scope of work, and worker classification.
• Contractor invoices – Meet local requirements (e.g., VAT number in the EU, GST in Canada).
• Proof of payment – Bank statements, payment platform receipts, or SWIFT confirmations.
• Tax forms – W-8BEN or W-8BEN-E for non-U.S. contractors, 1099-NEC if applicable.

Retention timelines vary: The IRS generally requires 3 years, while some countries mandate up to 7 years. When in doubt, follow the longest applicable period.

💡 Pro tip: Store everything in one system (e.g., your accounting or HRIS platform) so contracts, invoices, payments, and tax forms are linked to each contractor’s profile. This simplifies audits and prevents duplicate payments.

📌 Related reading: How to Hire International Employees

Step 6: Review and Optimize Your Process Regularly

Once you’ve set up a compliant, repeatable payment process, don’t treat it as “set and forget.” Laws, FX rates, and platform fees change often — and so do your contractors’ needs.

Key actions:

• Quarterly compliance checks: Review local classification laws, tax form requirements, and reporting thresholds in each contractor’s country.
• Fee audits: Compare your current payment provider’s FX rates and fees against alternatives every 3–6 months. Even a 0.5% cost reduction can add up on high volumes.
• Contractor feedback loops: Ask contractors if they’re receiving payments on time and in the correct currency. Late or short payments can hurt retention.
• Scalability planning: If you’re expanding into new regions, test the payment flow before onboarding multiple contractors to avoid delays or compliance gaps.

Signs You Need to Review Your Payment Process vs. Signs It’s Working Well

Needs Review	Working Well
Increasing late or failed payments	Consistent on-time payments
Rising FX and transfer fees without explanation	Stable, transparent fee structures
Frequent contractor complaints about payment speed or currency	Contractors confirm smooth payments
Multiple tax or compliance flags in the last year	Passed recent audits with no major findings
Using more than three separate tools for payments, documentation, and compliance	All payment and compliance data centralized in one system

💡 Scaling tip: If you’re adding contractors across several jurisdictions quickly, consider consolidating payment and compliance management through a single platform or Employer of Record (EOR) like Tarmack. This reduces the number of tools you need to monitor and makes compliance audits faster.

Common Challenges When Paying International Contractors (and How to Fix Them)

Paying international contractors isn’t just about choosing the right payment method. Even with compliance lanes cleared, ongoing operational hurdles can cause delays, unexpected costs, and strained relationships. 

Here are the most common issues and the practical fixes that keep payments smooth and compliant.

1. Inconsistent Payment Timelines

Bank cut-off times, currency-specific holidays, and intermediary reviews can cause delays, even when you’ve selected a “fast” transfer option.

So map payment corridors in advance and build internal payment schedules that are at least 2–3 days ahead of invoice due dates. Share these timelines with contractors so expectations are clear, and delays don’t damage trust.

2. Hidden Intermediary Bank Fees

With SWIFT transfers, multiple banks often handle the transaction, each taking a cut. Contractors may receive less than the invoiced amount, which can sour relationships.

Fix: Use platforms with transparent landed-amount guarantees, or negotiate SHA/OUR fee structures so your business, not the contractor, absorbs predictable charges.

3. Currency Volatility

Exchange rate swings between invoice and settlement can reduce the contractor’s final payout, especially in high-volatility markets like Argentina or Turkey.

The solution is to pay in the contractor’s local currency through a currency account or lock in forward rates with your FX provider. This keeps payouts consistent and eliminates disputes over fluctuating rates.

4. Local Banking Barriers

Some contractors can’t receive payments via popular platforms like Wise or PayPal due to local restrictions, or their country requires specific payment rails. 

Partnering with specialist B2B FX firms or local payment processors that have compliance clearance in the contractor’s country is a viable solution. Always confirm available payment options before onboarding.

5. Country-Specific Invoice Requirements

In countries like Mexico, Brazil, and Italy, invoices must include government-approved formats, tax codes, or e-invoicing through official portals. So keep a country-by-country invoice checklist and request compliant invoices upfront to avoid rework and delays.

6. Inefficient Bulk Payments

Paying each contractor manually is slow and error-prone, especially as your contractor pool grows.

Fix: Use API-based payment platforms or payroll solutions that enable multi-country bulk payouts with consolidated compliance reporting.

7. Cultural and Relationship Misalignment

Even if payments are technically correct, mismatched expectations on timing, communication, or dispute handling can damage trust. 

Thus, it’s important to understand payment norms in each region, communicate openly about timelines or changes, and maintain a point of contact for payment-related queries.

Read: Cultural Sensitivity: Do’s and Don’ts

When Your DIY International Contractor Payments Need an Upgrade

If you have a small, stable group of contractors, work only in countries you understand, and run a clear SOP for classification, documentation, and payments — you don’t need to overcomplicate it. Just review your process quarterly to catch any regulatory or market changes.

But as you expand, complexity creeps in. More countries, larger payment volumes, and varied compliance requirements increase the risk of errors, missed deadlines, and strained contractor relationships. 

That’s when moving from a DIY approach to a trusted partner can save you time, reduce risk, and ensure a smoother experience for everyone involved.

How to Recognize the Tipping Point

Look out for these signs:

• Geographic expansion: Paying in 3–4+ countries with very different banking, tax, or currency rules.
• Rising payment volume: Managing 10–15+ contractor payments per month or high-value payouts where FX margins have a bigger financial impact.
• Onboarding and benefits needs: Contractors requesting benefits, equipment stipends, or local perks that require compliant delivery.
• Audit readiness: Needing clean, standardized records for every payment, contract, and tax form to meet audit standards.

Your Upgrade Options

• Enhanced DIY: Keep payments in-house but adopt better tools, SOPs, and documentation practices.
• Hybrid approach: Manage most countries internally while outsourcing payments or compliance in high-risk or complex jurisdictions.
• Integrated platform: Use a single system to handle onboarding, payments, benefits, and compliance.
• EOR services: When contractors should be employees, an Employer of Record (EOR) like Tarmack can take over the full employment lifecycle within a compliant framework.

📌 Find out the best EOR providers

How Tarmack Keeps You Compliant (Without the Busywork)

Tarmack centralizes your contracts, tax forms, invoices, and payment proofs in one audit-ready system. You get country-specific onboarding guidance, transparent payment options, and a seamless upgrade path to EOR when you’re ready to hire talent, all without rebuilding your process from scratch.

Streamline international contractor payments with Tarmack

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