Should contractors be paid up front?

Contractors don’t often get paid up front, but some ask for retainer fees. Retainer fees secure your projects on the contractor’s calendar. They also protect contractors from nonpayment and last-minute cancellations. However, you usually shouldn’t pay a contractor 100% in full up front. Consider how payment structures affect your budget long-term when deciding how to pay contractors.

How do I give a contractor the necessary tax forms?

Tax reporting obligations differ across regions. You don't always provide the forms to contractors yourself. Here are examples of a few requirements: U.S.: You must file Form 1099-NEC or 1099-MISC with the IRS for contractors you have paid USD 600 or more annually. Provide copies of these tax forms to your contractors. EU: Standards vary by member state. Some member states require contractors to file Value Added Tax(VAT) returns where they do business. U.K.: Self-employed contractors typically file a Self-Assessment Tax Return to the HMRC. Canada: You must issue T4A forms to contractors you've paid over CAD 500 in a year, while contractors may need to register for Goods and Services Tax (GST) or Harmonized Sales Tax (HST). Check with local tax authorities or a compliance specialist to determine which forms apply to your contractor relationships in each country.

Can I pay a contractor per hour?

Yes, you can pay a contractor per hour. The payment structure depends on the type of work they provide. Time-based services, like consultations, usually require hourly rates.

How do I protect my business when paying a global contractor?

Legal issues easily arise when disregarding contractor regulations. To pay overseas contractors while protecting your business, create clear contracts that align with local laws. Use trusted and secure payment platforms that provide documentation to fulfill tax obligations.

What is the safest way to pay a contractor?

The safest way to pay a contractor is to use trusted, compliant platforms that protect you from worker misclassification. The best software to pay 1099 workers is G-P Contractor. Our Contractor offering supports payments in over 190 markets and can assess your contracts for compliance gaps. Our simple invoice management solution speeds up your payment process to minutes. Reduce your compliance risk while enjoying lower fees across 130+ currencies.

How to Pay Contractors Globally: Best Practices

Key takeaways

Main challenges of paying contractors: Paying contractors without performing due diligence can lead to worker misclassification, violation of local labor laws, and surprise fees.
What to consider when paying contractors: To pay independent contractors properly, you must know your tax obligations, how many contractors you can work with based on your budget, and the payment terms, including rates and schedules.
Best practices for paying contractors: Establish a clear contractor relationship through compliant services agreements. Use G-P Contractor™ to create contracts and pay contractors across 195 markets in minutes, not hours.

Strong contractor relationships are built on trust. And nothing breaks trust faster than inaccurate or delayed payments. On a global scale, the stakes are even higher. Each country has its own tax and reporting standards. But there are certain practices that can help ensure smooth contractor payments.

Here are a few considerations for paying independent contractors.

Top 3 challenges of paying contractors

Independent contractors are self-employed professionals. Unlike employees, contractors have more control and independence over the working relationship. Local governments have specific criteria for what this relationship should look like. Some even have tests to determine whether you have a contractor or an employer-employee relationship.

Creating globally compliant contracts can help you avoid litigation and hefty penalties.

1. Worker misclassification

Worker misclassification is when you treat an employee like a contractor. This results in legal violations and fines, while impacting your company's reputation. More importantly, misclassification strips the worker from protections like benefits and minimum wage compensation. Contractors are responsible for their own taxes, so you could also end up owing back taxes for misclassified employees.

Some countries offer resources to determine worker classification. In the U.K., you can use the Check Employment Status for Tax tool. This tool also lets you know if contract changes alter the worker’s employment status.

Other countries don’t have specific tools, making the determination more difficult. Your agreements should clearly define the working relationship, scope of work, payment terms, and confidentiality agreements to ensure compliance.

With G-P Contractor, you can instantly check contracts for worker misclassification and get actionable guidance to protect your business from costly fines.

2. Varying labor laws

Labor laws impact your tax obligations and worker relationships. In countries like India, courts look beyond written contracts and examine the true nature of the working relationship to determine misclassification.

3. Unpredictable budget

Fluctuating exchange rates and transfer fees can put a major dent in your budget. To pay international contractors without sacrificing your budget, consider mid-market and guaranteed rates. A mid-market rate is the midpoint between the buying and selling rates for a currency. A guaranteed rate is a rate locked in for a specific time.

Also, communicate with your contractor on who will cover transfer fees. Although these fees can be small, they build up over time and impact cash flow. G-P Contractor can help you save money through lower payment rates and no surprise fees.

Top considerations for paying contractors

To ensure smooth contractor payments, budget for the following:

Taxes

Tax laws vary per country. You need a system to stay compliant. For instance, if you hire U.S.-based contractors, you need to collect the Form W-9 to get their taxpayer information — including their Social Security Number or Employer Identification Number. This lets you easily file 1099 Forms, especially 1099-NEC and 1099-MISC, which report annual contractor payments over USD 600.

Independent contractors in the U.S. are sometimes called 1099 workers due to these forms. You don’t withhold taxes to pay 1099 workers. Contractors are responsible for paying their taxes. To pay taxes as a 1099 worker, contractors must consider federal, state, and local tax laws.

In the U.K., independent contractors also file their taxes with their Unique Taxpayer Reference number. However, the country has off-payroll working rules known as IR35. If the nature of the worker’s services classifies them as an employee, IR35 applies, and the employer must deduct applicable taxes. HM Revenue and Customs (HMRC) identifies any potential worker misclassification.

Number of contractors

Contractor hourly rates typically cost more than employee hourly rates to account for the lack of benefits. Underbudgeting or overhiring can lead to late payments, and in turn, impact the contractor’s cash flow and services.

Payment methods

Whether you’re looking to pay contractors with direct deposit or other means, there are multiple payment methods available. Contractors may have their preferences, but you can suggest options that provide documentation for tax purposes. Also, consider the time it takes to send the money. Convenience often comes with higher fees.

Traditional payment methods include checks and wire transfers. Online payment platforms can help you send money easily. However, watch out for unexpected fees and slow processing times. G-P Contractor is the easiest way to pay contractors and process invoices. Choose from over 130 currencies and access lower global money transfer fees in over 190 markets.

Payment rates and frequency

Payment structures vary depending on the contractor’s type of work and contract terms. Your contractor may ask for:

Hourly rates: Time-based services, like consulting and virtual assistant services, may need an hourly rate.
Milestone payments: Larger projects that take time to complete, such as construction projects, need milestone-based payments for cash flow. These are also payments for completing project phases.
Project fees: These are flat fees for specific deliverables, where the pay is based on project completion.
Retainer fees: Retainer fees are typically for continuing work with a contractor. It’s a commitment fee that allows a contractor to reserve time in their schedule for your projects.

Clearly state the agreed payment structure, invoice timeline, and payment methods in the contract. While some contractors provide their own contracts, it’s best if you can draft your own. Whether you’re hiring one contractor or an entire team, G-P Contractor allows you to create and issue contracts in minutes.

Payment schedule

Contractors should receive their payment on the agreed-upon schedule, regardless of time differences. On-time payments build trust and keep contractors motivated in their work. G-P Contractor helps with speedier payment runs. Automated payments ensure contractors get paid on time while reducing administrative costs on your end.

Best practices for paying contractors

If you’re not sure what the best ways to pay contractors are, we’ve rounded up a few best practices:

Confirm the contractor’s status: This is typically determined by the degree of control and the nature of your working relationship. Research the contractor’s country laws and worker classification criteria. In the U.S., common law rules determine contractor classification. Meanwhile, Germany has multiple threshold tests for classifying contractors. The country also categorizes contractors as either Gewerbetreibende (contractors in the commercial industry) or Freie Berufe (liberal professionals).
Draft a services agreement: Your contract should indicate the payment structure, amount, invoicing method, and payment frequency. You can also include late fees or penalties for delayed payments or missed deadlines.

Use technology for tracking work: Using technology to track work hours and progress lets you create detailed invoices.

How to report payments of independent contractors

The right way to report contractor payments depends on the country. For instance, in the U.S., the Internal Revenue Service (IRS) is the main body responsible for taxes. You need to file the relevant 1099 Forms for contractor payments over USD 600 in a year. Contractors should give you a W-9 Form, so you have everything you need to prepare tax forms such as the 1099-NEC.

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How to pay contractors