Guide to Hiring International Contractors + Form W-8 BEN
As remote workforces are growing, more small business owners are recognizing the many benefits of hiring international contractors. After all, widening your talent pool globally can give you access to unique skills or expertise, cost savings, flexibility and scalability, time zone coverage, and cultural and linguistic diversity.
However, many considerations must be made before doing so to ensure you remain compliant with both U.S. labor and tax laws and those of the other country. For example, while you must file Form 1099-NEC for any contractors you hire in the U.S., you’ll have to file Form W-8 BEN for any overseas contractors you hire (more on this crucial step below).
Let’s break down the employer’s financial and tax responsibilities when working with independent contractors around the world.
1. Determine the Contractor’s Country
When hiring independent contractors abroad, you’ll need to comply with both U.S. laws and the laws of the contractor’s country. Every country has various regulations regarding worker classification (i.e., contractor vs. employee), taxes (for both your business and the individual), and payments/payroll.
For one thing, misclassifying employees vs. contractors could leave you responsible for unpaid taxes, penalties, and a percentage of the employee’s wages, to name a few. You must also ensure your international contractor agreements are legally compliant in the U.S. and the contractor’s country.
2. Collect Form W-8 BEN
When you hire a contractor in another country, you don’t have to pay taxes on them—as long as you report them properly. That means you need to issue Form W-8 BEN for each foreign contractor, which:
Certifies their non-U.S. status for tax purposes with the IRS
Verifies their country of residence
Confirms that they are not withholding U.S. taxes
Ensures they pay taxes to their country of residence
Officially named the “Certificate of Foreign Status of Beneficial Worker for United States Tax Withholding and Reporting (Individuals),” the W-8 BEN is essentially the W-9 for international workers.
Non-resident aliens must pay a 30% income tax on gross income received from a U.S.-based employer. However, the international contractor may be eligible for reduced or exempt withholding rates on certain types of income if there is a treaty between the U.S. and their country of residence. This is another reason the W-8 BEN is important.
When do contractors have to fill out Form W-8 BEN?
First, remember that it is YOUR responsibility as the employer to collect Form W-8 BEN from every international contractor you hire. You must issue this form before the contractor begins work. This goes for any worker who is:
A non-resident alien (i.e., not a citizen or resident of the U.S.)
Not a green card holder
The beneficial owner of the income
Without completing Form W-8 BEN, the contractor will be subject to the 30% income tax, which you’ll have to withhold. If you don’t, you could face serious consequences and fines for improper compensation and withholdings. You could even be found in violation of the independent contractor agreement, leading to legal issues.
How does a foreign contractor complete the W-8 BEN?
As you hire contractors abroad and have them fill out the W-8 BEN, they might have questions about the process. It’s vital you understand the form and check it for accuracy. Workers will need to:
Enter the information required on the form, including their:
Full name
Country of citizenship
Permanent residence address
Mailing address (if different from their residence)
Individual Taxpayer Identification Number (ITIN) or Social Security Number (SSN) (for contractors seeking reduced taxes based on a tax treaty)
Foreign Tax Identifying Number (TIN) issued by their employee’s jurisdiction of residence; if the country doesn’t provide TINs, the contractor can simply check the box under 6b.
The reference number if the withholding agent (you) needs referencing account information to meet regulations
The contractor’s date of birth
The foreign country under whose tax laws the employee claims benefit
Withholding rates (if applicable)
Sign and date the form.
Return the form to the employer.
A foreign contractor without a green card will not have a SSN, but they can apply for an ITIN. The ITIN will be issued regardless of the individual’s immigration status to comply with U.S. tax laws.
Pro tip: Know the tax year of the contractor’s country of residence, as this affects when you have to report their annual earnings.
3. Establish a Compliant Payment System
Paying foreign contractors can also be more complex, but you have a few options. Choose a payment method that is convenient for both parties and complies with regulations. Common methods include bank transfers, wire transfers, and electronic payment platforms. Ensure the payment method is secure and compliant with local banking laws.
Don’t forget to factor in transaction and foreign exchange fees associated with each method. There are contractor payment solutions designed specifically for this purpose, which allow you to easily send funds through various payment methods, such as those above and third-party platforms like PayPal or Stripe. They also offer currency conversion and include the foreign exchange fees in your payments.
You may be able to choose whether you pay the contractor in USD or their currency. However, certain countries require that contractors be paid in their currency.
Regardless of where your foreign contractor is located and what payment system you use, be sure to keep detailed records of all compensation to them. Document the amount, date, payment method and purpose of the payment. Proper independent contractor documentation helps with tax reporting and compliance.
Remain Compliant when Hiring International Contractors
When you decide to outsource certain tasks and projects to international contractors, it can open up your business to fresh perspectives and expertise, improve efficiency, and elevate the services and products you put out. But it can also introduce complications and compliance risks without sufficient processes and procedures in place.
One of the most important takeaways: Don’t skip Form W-8 BEN!
If you need guidance on financial and tax implications of hiring foreign contractors, contact your tax and accounting professional along with your legal counsel to ensure everything is done by the book. As long as you take the proper steps from Day 1, you can enjoy a beneficial, prosperous relationship with a diverse team of contractors around the globe.
For specific questions related to your company, book an intro call with JLS Accounting today to learn how we can help!