Last updated: April 22nd, 2024
Paying overseas contractors can quickly become expensive and complicated if you don’t assess your options and investigate the hows and whys in granular detail.
If you’re considering hiring an overseas employee or currently employing foreign workers, you’ll need to think about payment providers, legal and tax obligations, superannuation requirements, and the pros and cons of doing so.
And if you still think PayPal is the best payment provider… think again.
What To Consider When Hiring Overseas Contractors.
If you’re new to hiring foreign independent contractors, it’s important to know the differences when hiring domestic employees.
| An independent contractor typically: | A domestic employee typically: |
|---|---|
| Takes on commercial risks and responsibility for their work. | Faces no commercial or financial risk for their work. |
| Supplies their own equipment to carry out their duties. | Is provided equipment and resources by their employer. |
| Decides the hours they work and when. | Works well-defined hours. |
| In some cases, they can subcontract to a third party. | Cannot delegate duties to third parties. |
Dealing With Taxes For Overseas Contractors And Employees.
You’ll be pleased to know that foreign contractors are responsible for managing their own tax obligations, so in most cases, you won’t have to withhold tax from their payments.
You only need to withhold taxes from payments made to overseas contractors if they’re royalties, unfranked dividends, or interest payments.
When hiring employees (not independent contractors), a firm must adhere to pay-as-you-go (PAYG) withholding obligations.
(Related: Best Accounting Software For Aussie Small Businesses).
Legal Considerations When Hiring Overseas Contractors.
First, it’s a good idea to set up a contract with the independent contractor (the clue’s kind of in the name).
This way, you can proceed confidently with a framework of what’s expected.
Important!
It’s not a legal requirement to have a contract in place, but not having one could cause you a host of problems if a dispute arises.
In the contract, consider be sure to include the following:
- Payment terms.
- Key responsibilities and working hours required.
- The scope and deliverables of the project.
- Confidentiality when handling sensitive company information.
- Ownership of intellectual property created during the project.
Expert Tip.
You can download free and customisable contractor agreement templates on websites like Rocket Lawyer and Law Depot. Sometimes, they charge a few extra dollars if you need complex clauses added.
How To Declare A Worker As A Contractor.
You’ll need to use ATO as a guide to declare your overseas worker as a contractor.
The ATO will inform you on how to make report payments and file tax forms, and it will tell you if you have any specific responsibilities for withholding tax.
Important!
You’ll be declaring contractors’ fees and expenses in your tax forms at the end of the tax year, so it’s critical that you maintain accurate records.
Do I Pay Superannuation To International Workers?
Your superannuation obligations, or lack thereof, depend on whether a worker is an employee or contractor and whether they’re an Australian resident.
1. Independent Contractors.
Independent contractors are responsible for managing their own superannuation, which means you don’t have to pay super contributions.
There’s another saving!
2. Australian Employees Working Overseas.
If you’re paying an Australian employee who’s working overseas, you’ll need to pay super contributions.
The bilateral agreements stipulate that the Australian business is only required to pay contributions in the employee’s home country.
Be Wary Of International Transfer Fees.
The likelihood is that you’ve been stung by international money transfer fees at some point. Travelling abroad tends to catch many of us out.
Important!
Whilst you might have a PayPal account for your everyday e-commerce shopping, it’s about the worst money transfer provider you can use when paying overseas contractors from Australia.
Later in this article, I’ll compare the main payment providers, but first, let’s look at the types of fees you’ll incur.
- Transaction fees: A fee charged for processing each transaction.
- Exchange rate fees: Generally the highest fee, the exchange rate fee is applied when you convert currencies.
- Receiving fees: Some payment providers like PayPal charge merchant fees. Talk about greed!
- Withdrawal fees: A fee that is charged when an account holder withdraws to their main bank account.
- Other account fees: Some payment providers charge monthly subscriptions, account inactivity fees, and account setup fees.
Time Tracking Software Can Save You Time.
Overseas contractors who work by the hour often need to record their time using time-tracking applications like TimeDoctor and Clockify.
Pricing tends to be around $5-10 per month per user for TimeDoctor.
Top Tip!
These time-tracking applications can be integrated with a bank account or payment provider that automatically pays the contractors at predetermined periods, which is ideal for paying your foreign employees on time and managing your finances.
How To Send Money Overseas.
So you’ve reached the point where it’s time to pay your overseas independent contractor, and now it’s time to consider the best way to transfer the funds.
Maybe you think using your existing online bank account is a good option, but you’ll likely be hit with high fees for international money transfers. Instead, you need to look at specialist providers.
Which International Payment Providers Have The Lowest Fees?
Not all payment providers make their fees transparent, probably because they know savvy customers can easily compare their products to other competitors.
They’re also very sketchy with their monthly subscription costs, and you have to schedule a meeting with their sales team to get a quote. Who’s even got time for that?
Whilst I’m willing to concede this could be an isolated instance – after all, I had a response in minutes – it’s worth looking at the fine print with a magnifying glass to ensure you won’t get stung by any hidden fees with these payment providers.
| Provider | Monthly Fee | Int’l Transaction Fee | Conversion Fee (> mid-market rate) | Fee To Recipient | Currencies Available |
|---|---|---|---|---|---|
| PayPal | N/A | 5% | 4% | 3.6%+$0.30 | 24 |
| Payonner | N/A | Free to a Payonner account or 1% | 0.5% | Free | 7 |
| Volopay | From $25/month | Swift Shared: $20; Swift Our: $40 | 0.3% | Swift Shared: $20 | 54+ |
| Airwallex | N/A | $10-30 | 0.5% | Free | 40+ |
| Wise | N/A | From 0.43% | 0.4% | Free | 40+ |
| Revolut | Free – $24.99 | Free to a Revolut account or 1% | 0.4% | Free | 40+ |
| Skrill | N/A | Up to 1% | Up to 4.99% | Free | 40+ |
Important!
The mid-market rate (sometimes referred to as the interbank or middle rate) is the midpoint between the buy and sell prices of any two currencies at any time. Some currency conversion rates deliberately exclude this to seem as though they’re cheaper!
Why PayPal Is The Worst For Paying Contractors.
Paypal is amongst the easiest, fastest, and most popular ways to pay for goods and services online, but when it comes to paying foreign contractors, it’s eyewateringly expensive.
That’s a huge chunk of your profit margin gone, just for paying someone to do their job.
While PayPal is widely adopted (with 435 million customers worldwide), and there’s also a good chance that the person you’re paying already has it, it’s a high price for convenience.
Why You Should Use International Money Transfer Services.
Though using your bank account to send payments might be more convenient, it will likely be the most expensive option. Australian business owners might want to consider using a money transfer service.
- Companies such as World First, InstaReM, TorFX, OFX, CurrencyFair, and XE allow users to transfer payments directly to the recipient’s bank account through their call centres and online services.
- Exchange providers like MoneyGram and Western Union allow the recipient to collect the money in person.
What About Multi-Currency Accounts?
You could also choose a multi-currency account that allows you to hold and pay out multiple types of currencies, so they can receive and send payments easily from international sources.
- You wouldn’t have to convert the funds to Australian dollars immediately when receiving payments from other entities.
- Instead, you could wait until the foreign exchange rates are favourable, then use the money to pay overseas contractors.
In doing so, you’re effectively cutting down on transfer and exchange fees.
Frequently Asked Questions About Paying An Overseas Contractor Overseas.
Business owners with overseas contractors usually want to know the following….
How Do I Pay An Overseas Contractor?
International transfers made through your bank can often catch you with hidden fees (transaction fees and currency conversion fees) that you’ll probably be unaware of until payment is processed.
You should look at holding an international wallet or merchant that provides lower fees – such as Payoneer, Wise, and Revolut.
What Are Some Exchange Rate Considerations When Paying An Overseas Contractor?
In addition to transaction fees and monthly subscription costs of using an international payment provider, you need to factor in exchange rate fluctuations.
For instance, if AUD 1,000 is worth USD 677 in June (an exchange rate of 0.677), and if the exchange rate drops to 0.0588 in July, your original AUD 1,000 will now only be worth USD 588 – a difference of USD 89.
How Can I Effectively Manage An Overseas Contractor?
If you’re worried about productivity levels due to the lack of visibility in managing an international operation, consider using an online collaboration tool like Trello, Monday.com, or ClickUp.
You’ll be able to manage project pipelines, automate workflows, and you can even integrate time-tracking applications that take screenshots periodically.
Are Overseas Contractors Tax-exempt?
If your Australian company hires independent contractors from abroad, you don’t generally need to withhold taxes from their payments.
It’s the responsibility of the contractor to fulfil their tax obligations in their country of residence.
What Are The Benefits Of Hiring Overseas Contractors?
When hiring overseas contractors, if managed correctly, you can unlock the following competitive advantages:
- Cost-efficiency: international contractors often charge less than local contractors; you can hire people across the world on platforms like UpWork where competition is higher and labour rates are much lower.
- Flexible working: hiring a full-time employee can be restrictive if your workweek varies from week to week. One month you may have too much work, the next too little; overseas freelancers are more flexible in their working arrangements.
- Different perspectives: true diversity is the diversity of perspectives; if your team comprises people of similar backgrounds and beliefs, how can you ever hope to challenge and change the status quo? Avoid echo chambers.
- Reduced administration: a lot of red tape and admin headache comes with hiring permanent domestic staff; you’ll have much less to worry about when it comes to payroll taxes, pensions, and other complex legal requirements.
- International insight: if you’re looking to extend your operation to a new international territory, you can leverage the skills of a native and lean on their local knowledge of customer preferences and cultural nuances.
Final Word On Paying Overseas Contractors From Australia.
When paying overseas contractors from Australia, there are fewer legal stipulations that companies must adhere to when compared to hiring domestic employees, but Australian businesses should still protect their business by implementing a legally binding contract agreement.
Avoid using PayPal or your existing banking facilities just because they’re convenient.
Before engaging overseas contractors, ensure compliance with tax payments and classifications regarding whether someone is a contractor or an actual employee.
Tommy
