Paying someone abroad for work takes four decisions: whether they are really a contractor, which tax form to collect, how to move the money and in which currency. A wrong answer on the first can bring back taxes and penalties in the worker's country, and careless answers on the last two can cost several percent of every invoice. This guide takes each decision in turn for a US business, then prices a month of payments to three contractors in three countries.
Is the person a contractor or an employee?
The worker's own country decides, using its own tests, and a contract that says independent contractor doesn't settle the question.
Most countries look past the label to how the work actually happens. Canada's tax agency, for example, weighs who controls the work, who supplies the tools, whether the worker can hire helpers, who carries financial risk and whether the worker can profit from managing the job well, and it looks at the working relationship in practice rather than what the parties intended. In the EU, a 2024 directive requires member states, by December 2, 2026, to presume employment for people working through digital labour platforms when the facts show direction and control.
Signs that tend to point toward employment:
- You set the hours, approve time off or forbid work for other clients.
- The person works only for you, full time, with no end date.
- They use your equipment, email domain and internal tools and appear in your org chart.
- You pay a fixed monthly sum whatever the output, with no invoices.
- They manage your staff or present themselves as your employee.
If a contractor is reclassified, the bill can include the employer social contributions and payroll taxes that should have been paid, mandatory benefits such as paid leave, interest and penalties. A second risk is corporate tax. Under the dependent-agent rule in most tax treaties, modeled on Article 5 of the OECD Model Tax Convention, a person who habitually concludes contracts for your company in their country can create a permanent establishment there, making part of your profit taxable locally. Sales roles carry this risk most.
Which tax forms do you need for a foreign contractor?
Collect Form W-8BEN from an individual, or Form W-8BEN-E from a company, before the first payment, and keep it on file.
The form certifies that the contractor is not a US person. It doesn't go to the IRS; it stays in your records. A W-8BEN generally remains valid until the last day of the third calendar year after the year it is signed (IRS, as of Nov 1, 2026). A change in circumstances, such as a move to the US, ends it sooner, and the contractor must tell you within 30 days.
What you report depends on who the contractor is and where the work is physically done:
| Contractor | Where the work is done | US withholding | Information return |
|---|---|---|---|
| Nonresident individual or foreign company | Entirely outside the US | None | None: no Form 1099-NEC or 1042-S |
| Nonresident individual | Partly or wholly in the US | 30% on pay for the US days, unless a treaty exemption is claimed on Form 8233 | Form 1042-S for the US-source part |
| US citizen or green card holder living abroad | Anywhere | None, with a valid Form W-9 on file | Form 1099-NEC once payments reach the threshold |
| A payee who won't provide a W-8 or W-9 | Anywhere | May be presumed a US person and face 24% backup withholding | Form 1099-NEC |
Pay for services is sourced where the work is physically performed. A contractor in Manila who never sets foot in the US earns foreign-source income, which the IRS says is not subject to US withholding and need not be reported on Form 1042-S. Form 1099-NEC doesn't apply either, because it reports payments to US persons.
The picture changes if the contractor works from the US, even briefly. Pay for the days worked here is US-source income. The IRS allocates it by days, you generally withhold 30% and report it on Form 1042-S, and the contractor claims any treaty exemption on Form 8233 rather than a W-8BEN. Forms 1042-S for payments made in 2026 are due March 15, 2027.
US citizens and green card holders are US persons wherever they live. Collect Form W-9 from them instead, and file Form 1099-NEC once your payments reach the threshold: $2,000 for payments made in 2026, up from $600 (IRS, as of Nov 2, 2026). If any payee won't give you a valid form, you may have to apply backup withholding at 24% and report it on Form 945.
How can you pay contractors abroad?
Most US businesses use one of five methods, and the real cost of each is the fee plus the gap between the rate you get and the mid-market rate.
| Method | How it works | Main cost drivers | Watch for |
|---|---|---|---|
| Bank wire (SWIFT) | Your bank sends the money, often through one or more correspondent banks | Outgoing fee, intermediary deductions, the bank's exchange-rate markup | Deductions that leave the contractor short of the invoice |
| Business transfer service | The provider takes dollars from your account and pays out locally from its own accounts abroad | A per-payment fee and an exchange-rate margin that varies by currency | Margins that rise for less common currencies |
| Contractor payment or payroll platform | A platform collects invoices and tax forms and pays everyone in one batch | Monthly fees per contractor plus exchange-rate margins | Fees that add up for small, infrequent invoices |
| Dollars to a dollar account | You send dollars; the contractor's bank or wallet holds or converts them | Your sending fee, then the contractor's receiving and conversion costs | Costs you don't see but the contractor prices in |
| Stablecoins | You send a dollar stablecoin to the contractor's wallet | Spreads when buying and selling, plus network fees | Local rules on cashing out; see stablecoin transfers |
Wires come with three charge options, chosen when the wire is sent, that decide whether you or the contractor absorbs intermediary fees; our guide to international wire transfer fees explains them.
Business payments also sit outside the CFPB's Remittance Rule, which covers only transfers sent for personal, family or household purposes. You don't get its disclosures, its 30-minute cancellation right or its error procedures, so read the provider's own terms on errors and recalls. Our guide to remittance transfer rights shows what consumers get instead.
Should you pay in dollars or the contractor's currency?
Paying in the contractor's currency puts the conversion, and the exchange-rate risk, on your side; paying in dollars hands both to the contractor.
A contractor paid in dollars usually receives whatever their own bank's conversion delivers after its fees, and many price that cost into their rates. Paying in local currency lets you pick a provider with a small markup and lets the contractor invoice a fixed amount, but your dollar cost then moves with the exchange rate. Each percentage point of markup costs 1% of the payment, whichever side bears it. The table applies two markups to Philippine peso payments at the latest mid-market rate.
| You send | At the mid-market rate | With a 0.5% markup | With a 3% markup |
|---|---|---|---|
| $1,500 | ₱95,556 | ₱95,078 | ₱92,689 |
| $3,000 | ₱191,111 | ₱190,156 | ₱185,378 |
| $5,000 | ₱318,519 | ₱316,926 | ₱308,963 |
Check any quote against the mid-market rate in our currency converter, or on the dollar to rupee page for contractors in India. Our guide to exchange-rate markups shows how to turn a quoted rate into a percentage.
Put the currency in the contract. One middle path is to invoice in the contractor's currency and review the rate once or twice a year, accepting that your cost drifts in between. If foreign-currency costs are a large part of your budget, our guide to currency risk for small businesses covers forwards and other hedges.
What does it cost to pay three contractors abroad each month?
With the illustrative fees below, bank wires cost about 5% of the monthly invoices, against about 1% through a low-margin transfer service.
Worked example: Paying $8,000 a month to contractors in India, Mexico and the Philippines
A US startup pays a developer in India $4,000, a designer in Mexico $2,500 and a support specialist in the Philippines $1,500 each month, converted into local currency. The fees and markups are assumptions for illustration, not quotes. Costs are counted whoever ends up bearing them, the way the World Bank prices transfers.
| Contractor | Invoice | Bank wire: $45 fee, 3% markup, $15 intermediary deduction | Transfer service: $4 fee, 0.8% markup |
|---|---|---|---|
| India | $4,000 | $45 + $120 + $15 = $180 | $4 + $32 = $36 |
| Mexico | $2,500 | $45 + $75 + $15 = $135 | $4 + $20 = $24 |
| Philippines | $1,500 | $45 + $45 + $15 = $105 | $4 + $12 = $16 |
| Monthly total | $8,000 | $420, or 5.25% | $76, or 0.95% |
| Yearly total | $96,000 | $5,040 | $912 |
- Markup cost = invoice × markup, for example $4,000 × 3% = $120
- Moving all three contractors to the transfer service saves $344 a month, or $4,128 a year
- Flat fees hit the smallest invoice hardest: by wire, $105 is 7.0% of the $1,500 payment
- Unless the wire is sent with all charges paid by you, the $15 intermediary deduction comes out of what the contractor receives
If you top up payments so each contractor receives the full invoice value, these costs land on you; if you don't, they land on the contractor, who will tend to raise their rates. Either way the cheaper route saves real money once payments recur every month.
What should you check before the first payment?
Screen the contractor against US sanctions lists, confirm their bank details through a second channel and make sure the paperwork matches the working arrangement.
- Sanctions. US persons may not deal with anyone on OFAC's sanctions lists and, generally, with anyone in a region under comprehensive sanctions, which OFAC lists as Cuba, Iran, North Korea and the Crimea, Donetsk and Luhansk regions of Ukraine. Syria's comprehensive program ended on July 1, 2025, though sanctions on listed people remain. Providers will freeze or reject a payment that matches a list.
- Bank details. Take them from the contractor's signed onboarding form, then confirm them by phone or video call. Treat any later change that arrives by email as suspect until confirmed the same way; it is the opening move of business email compromise.
- Name match. Pay an account in the contractor's own name or their company's name, as shown on the contract and the tax form.
- Where the work happens. Ask the contractor to tell you before any working trip to the US, because those days change the withholding rules.
Records to keep for every contractor
Keep a written contract, an invoice for every payment, proof of each transfer and the contractor's tax form, so you can show what you paid and why.
The contractor file
- A contract covering deliverables, fees, currency, payment timing, who bears transfer fees, assignment of intellectual property, confidentiality, termination and the governing law
- The W-8BEN, W-8BEN-E or W-9, with the date you received it and a reminder to renew it
- An invoice for each payment in the contractor's or their company's name, with their address and the period covered
- The transfer confirmation showing the amount sent, the exchange rate, the fees and the reference number
- The dollar value of each payment on the day you paid it, for your books
- The sanctions screening result for the contractor's name and country
- Any days the contractor worked inside the US
Pay only against an invoice and only to details already in this file. A clean file is also your best evidence that the relationship is a business-to-business one if a tax authority ever asks.
When does an employer of record make more sense?
An employer of record suits a long-term, full-time role you direct closely, where contractor status would be hard to defend.
An employer of record, or EOR, is a company that already has a legal entity in the worker's country. It becomes the worker's legal employer: it signs a local employment contract, runs payroll, withholds income tax, pays social contributions and provides statutory benefits such as paid leave. You direct the day-to-day work, and each month the EOR invoices you for the salary, the employer costs and its own fee. Setting up your own subsidiary gives full control instead, but brings local registration, accounting and payroll duties of your own.
| Contractor | Employer of record | Your own local entity | |
|---|---|---|---|
| Legal employer | None; the worker runs a business | The EOR | Your subsidiary |
| Monthly cost | The invoice plus transfer costs | Salary, employer contributions and the EOR fee | Salary, contributions and the cost of running the entity |
| Who carries employment-law duties | The worker, if the arrangement is genuine | The EOR, as legal employer | Your subsidiary |
| Fits best | Project or part-time work for several clients | One or a few employees in a country | A team large enough to justify an entity |
Before signing with an EOR, ask how it handles termination, which local law may restrict, and confirm that work product and intellectual property pass to your company, since the employment contract sits between the EOR and the worker. For the basics of moving money abroad, from comparing quotes to reading a disclosure, start with our guide to international money transfers.