These 10 tips for contracting with foreign vendors and international freelancers and vendors will ensure a successful working relationship.
As the liquid workforce continues to grow globally, many American businesses seek to recruit freelancers from all over the world. Scouting international contractors appeals to employers since it increases the pool of qualified candidates. Most overseas freelancers provide the same skills as domestic freelancers at a more affordable price, which can save your business a lot of money.
However, when you work with freelancers overseas, you have to deal with time zone differences, language restrictions, cultural differences, and differences in business norms and expectations. Moreover, when hiring foreign talent, it is vital to understand the potential legal risks. You may face an international lawsuit if you are not careful.
Here are our tips to avoid obstacles that may arise when working with international freelancers and vendors.
1. Carefully vet your foreign freelancers to make sure you hire the best fit.
Finding an international freelancer who is qualified for your project is relatively easy – all thanks to the internet. However, the real challenge lies in selecting a freelancer who is the right fit for your team and the project at hand. Hiring the wrong person can lead to potential legal issues, poor work performance, and costly mistakes.
Vetting is crucial for finding the right international contractor. You will likely find that it is harder to get to know a potential candidate when interviewing them via video chat — compared to a traditional in-person interview. To find out whether your candidate has the skills required to execute their tasks successfully, you will need to review more than just their resume. Be sure to request client testimonials, samples of past work, and online portfolios.
Before committing to a foreign freelancer and signing a contract agreement, consider a paid trial project to ensure that they have the necessary skills to carry out the project, communicate well, and work effectively with your team. A trial project will give you an idea of how they will perform the real project before signing an official contract. Moreover, it will give the overseas contractor a chance to make sure your team and project scope is a good fit.
2. Check local laws to make sure you are hiring a freelancer (and not an overseas employee).
What is the difference between a freelancer and an employee? Freelancers are self-employed individuals who do contract work for multiple clients. They can set their rates and choose when, where, and how they will perform their work. On the other hand, employees are constrained to execute work in a specific fashion that their employer decides. Although employees are unable to choose their salary, they are given benefits (such as health insurance), unlike freelancers. It is essential to make sure upfront that you are hiring a freelancer rather than an employee to avoid future liabilities.
In the United States, you could face a variety of fines from the Labor Department or IRS if you misclassify an employee as a freelancer. Certain states can also impose additional penalties and charges, so it’s important to stay ahead of any potential legal issues when hiring freelancers. Hiring foreign contractors can be riskier since countries outside the US may have different laws that define the requirements of a contractor. A freelancer in one country may not fit the criteria of a freelancer in another country. When hiring new international freelancers, you should double-check that they do not qualify as employees according to both US laws and the worker’s local laws.
It can be riskier for US companies to hire international freelancers since they may face more liability and penalties under foreign laws. If a foreign worker files a lawsuit to obtain employee status, the company will face a variety of obstacles. Hiring a reputable lawyer outside the US can be difficult if you do not have any connections, especially if there is a language barrier. As well, international lawsuits will take up many hours of your time and result in thousands of dollars in legal fees. The local courts may also be biased towards the freelancer.
Hiring a local legal counsel before engaging in projects can reduce your risks. The council will analyze your work relationship to ensure it complies with local laws.
3. Respect time zone differences and cultural disparities.
Since you will likely be working in a different time zone from your international contractors, it is essential to pay attention to time differences and remain as flexible as possible when scheduling meetings. This might require you to come to work early or stay late to accommodate your overseas freelancer’s normal working hours — or that your contract explicitly states the working hours during which you expect your foreign contractors to be responsive. If there is a significant time difference, you cannot expect them to immediately respond to your email.
You should also respect any cultural disparities that may affect your relationship with the worker. Cultural customs can influence their working hours, the manner in how they communicate, and their work ethic. You should also acknowledge their national holidays and other cultural traditions.
4. Create a written contract with your international freelancers and foreign vendors to avoid miscommunication.
When hiring a foreign freelancer, writing a well-drafted contract is essential to prevent miscommunication that may arise due to language or cultural differences. It can also help avoid discord by ensuring you and the freelancer are on the same page about your expectations for their services and salary.
Your contract should also include dispute resolution clauses in case you become embroiled in a lawsuit. Choosing governing law and venue provisions ahead of time will determine which laws will be used to examine the written agreement in court. As well, you will need to take into consideration laws from all countries involved.
It is also crucial to indicate in the contract that the freelancer is an independent contractor who has the freedom to choose how they perform their work. Make sure that their responsibilities stated in the agreement fit the criteria of a contractor, not an employee, according to both US laws and the foreign freelancer’s local laws. Liquid supports Work Orders (WOs) / Statements of Work (SOWs) in foreign currencies or in USD and also supports invoicing in foreign currencies or in USD.
5. Be aware of the language barrier and potential differences in business norms when working with overseas freelancers and vendors.
In addition to the written contract, be sure you take into consideration the language barriers and business norms. Don’t take for granted that your overseas freelancers will understand the general cultural principles or business practices behind your business model. Depending on your industry, you may also need to define industry-specific terms for your foreign freelancer. While this takes additional time to set the engagement up for success, it is well worth it.
6. Require foreign freelancers and international vendors to submit IRS Form W-8.
When hiring an international freelancer or vendor, you should have them fill out an IRS Form W-8BEN or W-8BEN-E to verify their foreign status. Form W-8BEN should be completed by an individual, while Form-8BEN-E is for entities. It is essential to have your foreign contractor send you a W-8 because you will rely on the form to determine tax reporting and withholding. When you use a platform made to work with international vendors, such as Liquid, you will have the ability to request W-8 forms from your international vendors automatically.
If you fail to collect a W-8 form from your international freelancer, you may open yourself up to tax liabilities if it turns out that you’ve hired a US citizen living abroad — you must collect W-9 forms from American freelancers living abroad.
Typically, international freelancers and entities who work for an American company are required to pay a 30% tax on their earned income. Form W-8 can reduce the withholding tax if the freelancer or vendor resides in a country with whom the US has an income tax treaty. Their new tax rate will be determined by a variety of factors, such as the country they are located in and their type(s) of income. Form W-8 is valid from the day it is signed to the end of the third calendar year after. If they have failed to submit a valid Form W-8BEN or W-8BEN-E, you will be responsible for withholding 30% of their earnings for taxes. However, if they provide false information on the form and do not meet the requirements of a freelancer, your company is not responsible for neglecting to satisfy tax requirements.
7. Confirm with your foreign freelancer that they will perform all work outside the US.
As a US company, you are not obligated to withhold or report taxes if your international freelancer or foreign vendor performs all work outside of the United States. However, if a foreign independent contractor performs any part of his service within the US, certain conditions should be met to avoid tax obligations.
If you are hiring a foreign freelancer currently in the US, you must find out whether they have a visa that permits working for US companies. Hiring a foreigner without a proper work permit leaves you open to fines and penalties by US Immigration and Customs Enforcement. However, Canadian and Mexican citizens can work temporarily, without a visa for providing professional services.
If you are hiring a foreign independent contractor who lives in the US, performs the service in the US, and has a visa that allows her to work in the US, you must withhold tax at the rate of 30% before compensation is made to the contractor.
That said, there are two exceptions to this rule:
If the foreign freelancer is a resident of a country with a tax treaty that allows withholding exemption, such as Canada or Mexico, the withholding amount can be reduced or eliminated. The contractor should claim this exemption by submitting IRS Form 8233 to your company after submitting the W8 form.
If a foreign freelancer stays in the US for a long time and becomes a resident by meeting a substantial presence test without a residence visa, then you must use the test to determine substantial presence. The test is quite complicated, but it can be boiled down to this — if the international contractor stays more than 31 days during the current year and more than 120 days in any preceding years, the contractor is at risk of being taxed as a US resident. If the international freelancer is considered a US resident, compensation will be withheld at the same rate as US residents (instead of 30% for non-residents).
In both of these cases, you will need to file IRS Forms 1042, 1042-S, and 1042-T (summary of 1042-S) by March, 15th of the year following the year subject to filing.
8. Communicate frequently with your foreign freelancer throughout the entire duration of the project.
Clear communication is key to having a successful project and a good relationship with your contractor. Make sure your foreign freelancer knows you are open to questions, as that allows potential miscommunication issues to be avoided before they become problematic. Be upfront about your availability and work schedule, especially if you are working in different time zones. You will also need to ask about their availability so that you can create a realistic timeline that works for both of you. Since most freelancers work for multiple clients at a time, you must keep in touch frequently with your contractor about deadlines so they will complete each task on time. You may want to request them to submit a progress report at least once a week to update you about the project’s status.
However, you mustn’t try to micromanage your foreign freelancers. While ongoing communication is necessary for a successful project, you can hurt your relationship if you exert too much control over the project. Freelancers usually prefer to have as much independence as possible, so you will need to remain flexible with when, where, and how they want to perform their work. Moreover, respecting that independence reinforces your compliance with freelancer versus employee laws. Giving foreign freelancers a little space will show that you trust them to do their job well.
9. Provide your international contractor with constructive feedback.
Make sure to give your foreign freelancer helpful feedback throughout the entire project. Let them know what they have done well and what could use improvement. This feedback helps them adopt best practices and better understand your expectations. When providing feedback, be as specific as possible so they can grasp your vision. Rather than saying something needs improvement, provide them with suggestions of ways they can change or improve their work.
Remember that you must always remain respectful, and it is important to give constructive criticism in an encouraging fashion. When providing feedback, good or bad, you should always show your freelancers appreciation for their work. A simple “thank you” will encourage them to want to provide you with their best work and will foster a stronger relationship.
10. Make timely payments to your international vendors and freelancers.
Many overseas freelancers, vendors, and suppliers rely entirely on payments from US clients to pay everyday bills and make ends meet. Make sure to pay your foreign freelancer according to the rates and timelines established in your contracts and work orders. In Liquid, all invoice payments are withdrawn from Client accounts in USD via ACH but are sent via wire transfer and can be set to ensure a fixed payout in a specific foreign currency.
Liquid supports payments to 175+ countries in USD and dozens of foreign currencies including but not limited to EUR, GBP, CAD, MXN, INR, AUD, NZD, HKD, JPY, ILS, RON, QAR, PLN, OMR, NOK, MAD, CHF, ZAR, BHD, THB, TRY, AED, SGD, SAR, KWD, HUF, GHS, DKK, CZK, and BGN.
Start working with international freelancers today.
Working with international freelancers can offer your company a new source of talent and ideas, often at a lower cost. Similarly to when working with US freelancers, your company must ensure compliance with laws and regulations related to freelancers and contractors. Following these tips will help you implement freelancer management best practices and avoid the most frequent issues when working with international freelancers.