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Hiring international contractors may seem like the fastest way to build a global team. However, there are some key things you must consider.
Let’s look at five questions you should ask to determine whether hiring international contractors is the best path for your company.
Question #1: What is an international contractor?
An international contractor is usually a person that’s hired on a short-term, project basis. They generally have a portfolio of their own clients and provide services to different companies.
Question #2: How are international contractors different than employees?
- International tax and legal advisors generally ask the following questions to determine if individuals qualify as employees or contractors.
- Do they work full-time for one company?
- Do they take management direction from that company?
- Do they have any other clients?
- Do they receive employee benefits? Vacation days, stock options, allowances, health insurance, etc.
Local authorities may determine that an individual hired as a contractor actually falls under their definition of an employee — this is known as worker misclassification.
Question #3: What is worker misclassification?
Workers must meet specific criteria to be classified as contractors — keep in mind that these norms may vary from country to country. Companies must understand this to avoid significant risks and liabilities.
In China, for example, the government considers any worker who contributes to an organization’s business, or who is subject to a company’s rules or policies, an employee.
If local authorities determine that your contractor falls under the legal description of an employee, you may be subject to penalties for taxes, benefits, and interests on any sums paid to the worker.
Question #4: What are the possible consequences of worker misclassification?
Many companies hire international contractors to serve the purpose of employees to save money on employer costs. The reality is that local authorities have procedures in place to identify worker misclassification.
Brazil closely monitors payments that are sent from offshore companies to individuals, and tax authorities automatically flag them for investigation. Outgoing payments from Brazilian clients to overseas suppliers are also tracked.
If a discrepancy between the employer’s payments and the contractor’s responsibilities is discovered, some fines may apply to the parties involved.
Terminations and payroll taxes
If you must terminate an international contractor, it could end up costing you. An employer is required to pay employer payroll taxes. If a tax assessment is made, and your contractor is reclassified as an employee, the sums paid to the employee are typically treated as net income. Employee income tax and payroll tax are assessed on top of that.
The assessment can go back several years, including interest and penalties. It can include income tax rates of around 30 percent and payroll taxes, which may vary greatly according to region — from about 10 to 20 percent in Asia and up to 40 percent in some European countries. Additionally, with interest and penalties considered, the total assessment can reach around USD 250,000.
The consequences don’t end with payroll taxes — misclassifying employees as contractors can prompt potential corporate tax issues.
If tax authorities realize the company has hired illegally in‐country, they may then determine that the company’s activities have triggered permanent establishment, or nexus, and that they should have been following corporate law and paying local corporate taxes all along.
Question #5: How can you avoid international worker misclassification?
- To avoid worker misclassification, companies should consider the following:
Determine if you need workers for a seasonal project or to fill a full-time position.
- Keep in mind that if a contractor is working full-time for your company, they should potentially be classified as an employee.
- Consult local legal experts about what constitutes a contractor in your country of interest.
Manage all your hiring needs in one single platform
Is an international contractor the best option for your company? If so, let G-P Contractor be your trusted partner. As an extension of Globalization Partners’ Global Employment Platform™, G-P Contractor enables companies to hire and pay contractors in 187 countries. Whether you’re hiring employees or contractors, we streamline the process with a single solution for your global workforce.
What is the best path for your company?
Contact our team today for guidance on whether hiring full-time employees or contractors is the ideal solution for your company – we’re here to help.
THIS INFORMATION IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. You should always consult with and rely on your own legal and/or tax advisor(s). Globalization Partners does not provide legal or tax advice and the information is not tailored to the specific situations of your company or your workforce. Globalization Partners makes no representations or warranties concerning the accuracy, completeness or timeliness of this information. Globalization Partners shall have no liability arising out of, or in connection with, the information, including any loss caused by use of, or reliance on, the information.