Brianna Blaney

How to Pay Foreign Freelancers?

In a globalized business world, it’s not uncommon for companies and teams to hire and work with freelancers. There’s also a strong probability that some of these freelancers are international i.e., they live and work out of a foreign country. 

 According to World Bank Data,  46.4% of all workers worldwide are self-employed. The total number of global freelancers is estimated to be 1.57 billion out of a workforce of 3.38 billion.

When paying foreign freelancers, unexpected costs, exchange rates, and heavy transfer fees significantly lower the payment value. Even if a business covers the extra fees, it can all add up fast. In addition, there are also foreign compliance requirements when you hire international freelancers, including managing different languages and currencies.

However, these challenges shouldn't keep you from reaping the benefits of working with top talent from around the world. When it comes to compensating foreign freelancers, there are a variety of payment methods, payout structures, and pricing tiers to consider. Since there isn’t one standard way to measure performance, finding the right foreign freelancer and figuring out how to pay them can get complex.

In this article, we’ll look at the challenges faced when hiring from this talent pool of international freelancers, best practices, and the ideal payment methods for freelancer payments in an international market.

4 Challenges Faced When Paying Foreign Freelancers

Here are some of the more common challenges faced when hiring global freelancers:

#1) Payment Terms and Schedules

Let’s face it, if you are working with someone who is 12 hours ahead in time, aligning your schedules is going to be challenging—but not impossible! It simply takes a little patience and planning ahead. 

You may have to attend a 7 a.m. meeting or 7 p.m., so some flexibility also goes a long way here. Every foreign freelancer will have their own ideas of a contract, payment terms, and schedule. This must all be accommodated if the business relationship is to work.

You should also be aware that working with foreign freelancers can cause delays in processing with some payment methods. Transaction fees will have high variability. This can negatively affect the working relationship that you’ve negotiated., So it’s critical to discuss all payment options prior to signing a contract.

#2) Tax Compliance and Reporting

Taxes and labor laws become more complicated when you source overseas remote work. 

In reality,an U.S. company has no obligation to pay, report, or withhold taxes for international freelancers or comply with their local laws and regulations. That being said, failing to adhere to local policies may result in potential legal complications and financial penalties.

It should also be noted, it is up to you to perform due diligence and ensure work is not completed within the country, by a foreign entity. In this instance, there are different IRS policies and taxes you must consider.

#3) Multi-Currency Challenges

When working with an foreign freelancers, one extra detail you need to agree on is the currency. It is typically specified in the freelancer contract, and then later on the invoice. 

Most vendors prefer to be paid in their local currency. However, there may be times you need to pay in your own currency, or the vendor would prefer a foreign currency (like USD) because they’re working in a foreign country. 

Many online payment systems are set up to convert automatically, so currency exchange isn’t as big of an issue as it once was. However, not all payment platforms might offer the best currency conversion options.

#4) Reporting Issues

Most locations have country-specific document requirements, like contracts and invoices; and the laws will differ everywhere. 

For example, Indonesian freelancers must process all documents in their local language, and invoices from an Indian freelancer cannot be used as payroll expenses in the United States. 

Navigating these reporting quirks can cost a business money and resources. Companies spend a lot of time researching what they can and can’t do for each country.

Additionally, there are double tax and residency regulations. 

For example, while U.S. freelancers pay income tax, a foreign contractor might have tax residency. This gets complicated when the freelancer lives in one country, but is working in another, and the countries do not have dual residency laws

These laws change rather frequently, and someone must be around to monitor these changes.

4 Best Practices for Paying International Freelancers

When paying international freelancers, there are a few things you should keep in mind. Here are some best practices to consider:

#1) Discuss and Finalize Payment Terms in Advance

Unlike a full-time employee, there are several different ways to pay a foreign freelancer. These are:

  • Upfront Payment - This is what experienced freelancers expect. However, this is a higher risk since you are making payment before delivery of the product/service.

  • Payment After Project Delivery - This is reserved for newer freelancers and is a less risky option. However, more experienced freelancers are less likely to work without something upfront.

  • Project Milestone Payments - This is the most popular method. Both parties agree on milestone payments and when goals are met, payments are released.

  • Hourly Rates - The freelancer gets paid hourly. Time trackers online are used to ensure accuracy.

  • Third-party Platforms - A third-party platform (like Upwork) collects payments for both entities, and then pays out accordingly.

#2) Setup Clear Freelancer Agreements

The type of contract you want to make with international freelancers is called a Master Service Agreement (MSA). This is a contract reached between two parties in which they agree to most of the terms that will govern future transactions. 

 You may also want to write up a Statement of Work (SOW) to clearly define the project including tasks, deliverables, timelines, and expectations.

The contract should be written in concise and clear language and contain the following details:

  • Description of work and services - This is the project scope with the start date, deadline, and payment rates.

  • Payment terms - Are you putting a deposit down? Paying hourly or a fixed rate?

  • Ownership rights and licenses - Who owns what? This is where you establish copyrights and IP (intellectual property).

  • Terms and termination - This is the termination clause and right to end the contract.

  • Non-disclosure agreement - This covers privacy for both parties and ensures mutual confidentiality.

  • Changes and revisions - This is important for freelancers and outlines how many revisions can be included.

  • Indemnity clause - This covers what happens in the event one party breaches the contract.

Any other general clauses can be added for additional items like protections, legal disclaimers, and statements. Both parties should sign and date this document before any work begins.

#3) Ensure Tax Compliance

Working with foreign contractors can be a tax nightmare if you aren’t prepared, and using the proper tools. 

U.S. companies must collect form W-8BEN from all foreign contractors who live and perform work outside of the United States.

The W-8 BEN-E will include pertinent information about the contractor like their address and TIN (Tax ID Number), if applicable. This will allow a company to verify that the worker does indeed live and work outside of the United States. 

Misclassification of freelancers can lead to heavy penalties.

One solution to onboarding foreign freelancers is to use a self-service supplier portal to collect all essential VAT and local tax ID information. The system will know what types of forms your business needs to request, and then have the contractor fill them out accordingly. 

This type of system is idealy for small businesses that lack the resources to oversee hundreds of different tax documents for international payments.

#4) Choose the Most Favorable Payment Method

After you clearly define payment terms, you also want to be in agreement aboutthe payment method. How you pay freelancers can greatly affect the amount they end up with at the end of the day. 

This may be something you also want to agree upon in the contract. Suitable payment methods can include everything from money transfers to ACH, credit cards, online payment platforms, and more. We’ll discuss more about these payment methods in the next section.

6 Methods for Paying International and Foreign Freelancers

Here are six of the most common ways that companies (both small and big) use to pay foreign or international freelancers. 

#1) Wire Transfers

International wire transfers are generally very safe and are a common way to pay foreign freelancers a large sum. This service allows you to send money from your bank account to a freelancer’s bank account. 

There is typically a rate of USD 30 to USD 50 per transaction, and an exchange rate marked up by 5% to 6%. Banks overseas may also charge additional fees for processing. Bank transfers take anywhere from 2-5 days to arrive.

For international transfers, you’ll need the following information:

  • An IBAN and BIC/SWIFT code for freelancers in Europe

  • A transit number for freelancers in Canada

  • A BSB, account number, and BIC/SWIFT code for Australian contractors

  • The bank’s state branch and code for Indian freelancers

The Pros of Wire Transfers

  • Secure and easy to access

  • Can be used to send a large sum of money

The Cons of Wire Transfers

  • Transfer service fees are much higher than other options

  • Subject to additional hidden fees by a foreign bank

#2) ACH

Business owners find ACH transactions as some of the more affordable ways to pay international contractors. 

Otherwise known as “direct deposit,” when ACH is sent internationally, not only do payments run through the Automated Clearing House network, but they also must process through an additional foreign entity. One example is the Single Euro Payments Area (SEPA) in Europe.

ACH is like sending an electronic check to a foreign freelancer’s bank account. Funds move directly from your bank account to the recipient. No third party ever touches or holds money. Funds typically take 3-5 business days to clear.

Setting up ACH is easy. The foreign contractor needs to fill out an ACH authorization form with all of their bank information. It includes account number, bank name, account type, transaction type, and various other details depending on the country.

The Pros of ACH

  • Secure and subject to NACHA regulations

  • Cost-effective for mass payouts

The Cons of ACH

  • Not always available in foreign freelancer’s country

  • Payment speed varies depending on where funds sent

#3) Invoice Payments (Credit Cards)

Credit and debit card payments are as simple as it gets. Some independent contractors may use payment systems like QuickBooks or Payoneer to process credit card payments. As long as the payment solution allows for credit cards, this should be a viable method. It’s often one of the most simple method to pay someone, since most business owners are familiar with making online payments.

The Pros of Using Invoice Payments

  • Payment processing is quick

  • A basic and simple way to pay

The Cons of Using Invoice Payments

  • May not want to give out credit card details to new partners

  • Payment not secured before work starts

#4) Freelance Marketplaces (UpWork)

Online marketplaces like Upwork secure payments for foreign freelancers via wire transfer, direct deposit, and PayPal. All hourly projects are billed weekly, and contracts can also be opened with a fixed rate or a deposit (held in escrow). 

It’s easy for business owners to set up an account using a credit card or bank information, and you can also hire talent directly through the platform, so it’s essentially a one-stop shop.

This is also an incredibly secure method. Freelancers are only paid in full once the work is reviewed and approved.  

The Pros of Using Upwork

  • Upwork’s Payment Protection program adds an extra level of security

  • Can request a refund through Upwork much like a vendor

The Cons of Using Upwork

  • Platform charges a large fee for new relationships

  • There is less confidentiality with a third party involved

#5) PayPal

PayPal is an easy option for paying international freelancers because it does most of the currency conversion for you, working with USD, EUR, MXN, AUD, CAD, GBP, and more. 

Freelancers also have the option for instant withdrawal (with an extra fee), as long as they have their own PayPal account.

The PayPal mass pay option for freelancers is called Payouts. This feature enables a business to send money to multiple freelancers at the same time. 

Fees for PayPal vary depending on where you are sending money, but international mass payments start at 2% of all transactions. However, the 2% fee is not to exceed the maximum fee cap for each currency.

The Pros of Using PayPal

  • Small learning curve with simple setup and onboarding

  • PayPal is a well-known and trusted brand since the 1990s

The Cons of Using PayPal

  • The speed is slower than other payment platforms

  • It can be a popular target for phishing and fraud

#6) Lumanu

Lumanu is an online payment solution that simplifies the entire payment process and goes far beyond paying your contractors. 

As a business grows and adds more talent to its workforce, the need to automate freelancer payments becomes more apparent. Lumanu is a solution that makes paying international contractors stress-free. From efficient onboarding to multiple payment methods, handling tax forms, and more, it’s specifically built for the gig economy.

With Lumanu, you also have instant access to working capital (EarlyPay) and the ability to pay freelancers at mid-market exchange rates. 

The platform integrates directly with an existing AP/AR system, where you can send invoices, streamline workflows, and manage all freelancer payouts in a single spot.

Lumanu's pricing starts with a free plan, with zero processing fees. The Business Lite plan is $99/month and the Business Pro plan is $299/month.

The Pros of Using Lumanu

  • Freelancers have the option to receive funds instantly with EarlyPay

  • Automated freelancer onboarding that covers tax liabilities

Final Thoughts: Paying International Freelancers

There are many benefits of working with international freelancers – cost savings, diversifying your workforce, filling skill gaps, enhanced collaboration, and so on.

However, onboarding, managing, and payingforeign freelancers can be a daunting task. It can also make you vulnerable to potential fraud and tax compliance issues. Once you have established a strong freelancer contract and established solid payment terms, choosing the right payment system will improve your overall processes.

That’s where Lumanu comes in. The solution offers a variety of advantages for a business that hires international freelancers, such as:

  • Automated onboarding process

  • Collecting appropriate tax forms

  • Mass payment in a single step

  • Access to working capital

  • Instant payment reminders

PMG Worldwide is a full-service talent management firm that hires foreign freelancers from all over the globe. To date, they’ve paid hundreds of creators using Lumanu features like Push Payments, Payment Splitting, and EarlyPay. This has given them a significant advantage when working with top talent and is much like having their own dedicated accountant.

Ready to try Lumanu for yourself? Schedule a free demo to get started today!


Brianna Blaney

© 2024 Lumanu, Inc. All Rights Reserved.

Lumanu, Inc. is a financial technology company and not a bank. Lumanu accounts are provided by i3 Bank, Member FDIC.

© 2024 Lumanu, Inc. All Rights Reserved.

Lumanu, Inc. is a financial technology company and not a bank. Lumanu accounts are provided by i3 Bank, Member FDIC.

© 2024 Lumanu, Inc. All Rights Reserved.

Lumanu, Inc. is a financial technology company and not a bank. Lumanu accounts are provided by i3 Bank, Member FDIC.

© 2024 Lumanu, Inc. All Rights Reserved.

Lumanu, Inc. is a financial technology company and not a bank. Lumanu accounts are provided by i3 Bank, Member FDIC.

© 2024 Lumanu, Inc. All Rights Reserved.

Lumanu, Inc. is a financial technology company and not a bank. Lumanu accounts are provided by i3 Bank, Member FDIC.