International Contractor vs. Employee: Differences, Pros, & Cons

An international contractor vs. employee is a critical consideration when hiring someone for your business needs. International (or global) contractors provide services from a different country and are typically hired and paid temporarily, typically on a per-project basis. On the other hand, employees work for a company day-to-day for an extended period.

Understanding the differences between the two can help you make the right choice for your operational needs, get the best outcome for your business, and avoid making costly legal and tax-related mistakes. Keep reading to find out more.

Key Takeaways

• International contractors are self-employed professionals or business entities who provide services in countries outside their own.
• Employees are company workers who are on a payroll, have scheduled work hours, and are usually directly managed by employers or supervisors.
• Hiring international contractors is usually more cost-effective, making it good for startups and smaller businesses.
• Employees are typically more expensive and challenging to hire but are invested in the business and more productive in the long run.

What Is an International Contractor?

An international contractor (also referred to as a global contractor) is a self-employed individual or business based in one country while providing services in another. They are independent contractors and professionals who aren’t on the company’s payroll and often work with multiple clients.

However, there’s global payroll compliance for foreign workers to consider. Otherwise, you can run into complex international legal disputes.

International contractors are self-managing and responsible for self-employment taxes, as well as their own benefits and work schedule. Businesses typically hire them for short-term projects or periodically when their services are required, but there is no need for direct ongoing employment.

When businesses hire international contractors, they typically create a contractual agreement that defines the scope of work, deadlines, payment, benefits, and other necessary aspects. All parties must follow the terms outlined in the contract to ensure a healthy working relationship and compliance with relevant local and international laws.

In most cases, hiring an international contractor means they’ll do remote work (even though they are typically not subject to U.S. labor laws for remote workers). As such, this is a solid move if your business needs services such as IT and software development, graphic design, marketing, copywriting, virtual assistance, etc.

As international contractors aren’t on the company’s payroll, there are fewer (if any) tax obligations on the employer’s end. Depending on the country, businesses that employ independent contractors either don’t need to withhold any taxes or withhold some payroll taxes. Plus, they generally don’t need to submit 1099 forms for international contractors (although U.S. based companies should submit 1099 forms for domestic independent contractors).

As a result, hiring international contractors when applicable can be a flexible and cost-effective solution. It also expands the talent pool as employers can look for international contractors on the global market and find the one with the exact specialized skills and experience they need.

What Is an Employee?

An employee is someone who is formally hired by an employer. They typically work under direct supervision and ongoing guidance, have regular working hours, and are on the company’s payroll.

Unlike international contractors, employees are entitled to various legal perks, rights, and benefits. They are clearly defined and classified by U.S. labor laws, and employers have concrete obligations toward them.

In addition to having set work hours, employees also use company-provided tools and resources to do the job. They are directly managed and usually perform tasks based on specific instructions. Employee salary is regulated and influenced by various elements, like minimum wage and overtime work.

On top of a full-time work arrangement, employees can also work part-time or temporarily. Employee compensation packages can reflect this arrangement, as full-time employees typically receive greater benefits than part-time or temporary workers. Regardless, employers still have more obligations toward them compared to international contractors.

When businesses hire employees, they must withhold taxes, such as Social Security, Medicare, and federal income taxes. Based on the compensation package, they also pay in full or contribute to other benefits, such as retirement plans, unemployment insurance, protection in case of workplace injuries, etc.

In most cases, employees work exclusively for the employer. They need to follow company policies and maintain consistent work quality over time. In exchange, they get more favorable job security benefits than international contractors through regular salary, legal protection, and stable and consistent work arrangements.

5 Key Differences Between International Contractors and Employees

The best way to understand the subject of international contractor vs. employee is to compare the two. Here are the five key differences:

#1. Classification

Employees are a part of the company’s workforce from a legal standpoint, while international contractors aren’t. As such, employees enjoy multiple benefits based on labor laws, including job protection, monetary and non-monetary compensation, etc.

#2. Control over work

Employers typically have direct control over the work of their employees. They set work hours and locations, provide the necessary training, equipment, and resources, and establish policies. International contractors use their own tools and schedules as long as they meet contractual obligations.

#3. Pay

Employees are paid for the time worked. They are on the company’s payroll (e.g., on a monthly or bimonthly payroll) and receive regular paychecks. International employees are paid upon providing the service or completing the project.

#4. Tax obligations

Employers are required to withhold income taxes from employee paychecks. This includes federal income tax, as well as Social Security and Medicare taxes. On the other hand, international contractors are, in most cases, in charge of their taxes (e.g., they can be subject to international freelancer tax laws).

#5. Perks and benefits

Employees receive various benefits from their employers based on the compensation package. This can include everything from health insurance and performance bonuses to retirement fund contributions. International contractors do not receive these benefits and must take care of their insurance, retirement plans, etc.

Here’s a concise table summary of the most important international contractor vs. employee differences:

Pros and Cons of Hiring an International Contractor

Now that you know the differences between international contractors and employees, let’s explore the pros and cons of hiring them.

Let’s start with the benefits of hiring contractors from the global market:

• Cost savings. Paying international contractors as opposed to employees typically saves money on expenses like payroll taxes, health insurance, and other benefits. Contractors usually set a fixed rate or billable hours that you pay and let them take care of their taxes and other expenses.

• Flexibility. International contractors can be contacted for work when their services are needed. Unlike employees who are often kept on the payroll all the time, international contractors come with no long-term commitments.

• Access to global talent pool. There are an order of magnitude more international contractors than employers from your country. This means you can find professionals with specific talents that aren’t available locally.

• Faster hiring. Hiring and onboarding contractors is usually much faster than finding employees. You can get a contractor with a simple contract agreement instead of going through a lengthy HR process with potential employees.

Following that, here are some of the downsides to hiring a foreign independent contractor:

• Less control. Unlike with employees, you can’t directly oversee and manage contractors as they work independently and on their own schedule.

• Potential legal risks. Hiring global contractors legally can require proficiency in country-specific labor laws. While there is much less regulation than hiring employees, businesses can still face various issues, such as worker misclassification penalties.

• Limited commitment. International contractors often work with multiple clients, so they won’t always be available and can’t always dedicate their full attention to your needs.

Pros and Cons of Hiring an Employee

Hiring employees comes with additional responsibilities but results in increased commitment and stability. Here are the key benefits of hiring an employee:

• Control over work. Employees often work under the employer’s direct supervision. They follow provided plans, schedules, and policies to meet expectations, goals, and deadlines. They can implement new instructions immediately while maintaining consistent work quality.

• Long-term stability. Employees are committed to their companies much longer than contractors. They look for long-term benefits and repay that with company loyalty and reduced turnover.

• Enhanced teamwork. Collaborating on a project is much easier when all employees are from the same company. They’ll usually have exceptional communication, polished workflow, and enhanced decision-making.

• Continuous improvement. By working at a company for a longer period of time, employees gain specialized knowledge and training that allows them to excel in their role. They become increasingly efficient and productive as time goes on, effortlessly surpassing new contractors.

Of course, hiring employees isn’t without drawbacks, so here are the biggest ones:

• Cost and financial commitment. Hiring employees is typically more expensive than occasionally working with and paying overseas contractors legally. Plus, it requires long-term commitment.

• Increased responsibility. Businesses that have employees need to comply with various labor and tax laws. This requires a lot more effort, paperwork, and management compared to hiring contractors.

• Slower hiring and onboarding. Hiring an employee usually takes a lot more time than hiring a contractor. There are lengthy resume review processes, interviews, evaluations, paperwork, onboarding procedures, etc.

How to Choose Between Hiring an International Contractor and an Employee

Now that you understand the pros and the cons of hiring international contractors and employees, let’s see which factors you should consider when choosing between the two:

• Business size. If you own a small business or a startup, it’s typically more beneficial and cost-effective to hire international contractors. Their lower long-term cost and increased flexibility make it easier to scale your operations without having to commit. Large companies usually prefer employees for stability and consistent work quality.

• Workload. If you need a professional or a team for a short-term project, an international contractor is a quick and practical solution. However, if you need a workforce for ongoing projects that require deep business and company knowledge, you should hire employees who will be invested in your goals and will adapt to changing needs.

• Level of management needed. If your operations need adherence to specific protocols, scheduled work hours, and regular management, you should consider hiring employees to have better control of their output. On the other hand, international contractors are great for project-based work that allows for independent work.

• Legal risks. Hiring employees requires an in-depth knowledge of relevant labor laws, worker protection acts, IRS classification rules, and tax regulations. While most of these aren’t a consideration when hiring international contractors, employers need to approach contract agreements carefully to avoid liabilities and misclassification issues.

4 Risks of Employee Misclassification

Employee misclassification can result in serious consequences and fines that can exceed millions of dollars. Here are some of the biggest risks of employee misclassification:

#1. Tax penalties

If the IRS determines that a business has misclassified a worker, it can make it pay back all the taxes. On top of that, there will likely be significant fines that can include interest and additional penalties.

#2. Labor law violations

The Fair Labor Standards Act (FLSA) mandates matters like minimum wage and overtime pay. Misclassifying employees can lead to the violation of this act and result in the company being liable for penalties like unpaid overtime or back wages.

#3. Criminal charges

Intentionally misclassifying employees can result in criminal charges. While these are extreme cases, they can be considered fraud, leading not only to fines but to potential jail time for those who knowingly misclassified employees.

#4. Reputation damage

Misclassification can lead to additional audits and legal scrutiny. In the long run, this can negatively impact the reputation of a business, causing its relationships to deteriorate. It can lead to reduced investor confidence or client trust, causing further financial and operational damage.

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Final Thoughts

The international contractor vs. employee concern is multifaceted, significantly different than 1099 vs. W-2 worker, and approaching it requires carefully considering several different factors. Hiring employees is generally more expensive and legally challenging but good for long-term stability and company loyalty.

On the other hand, there aren’t many relevant state labor laws for independent contractors when they are international—which means there’s less legal risk—and hiring them for occasional projects is cost-effective.

International Contractor vs. Employee FAQ

#1. Do foreign contractors pay US taxes?

No, foreign contractors don’t pay US taxes in most cases, and there are no tax implications for international workers if they don’t have US citizenship. However, foreign contractors are typically required to pay taxes in their country. Moreover, US businesses hiring them can request Form W-8BEN or W-8BEN-E.

#2. How does the IRS classify workers as contractors or employees?

The IRS classifies workers as contractors or employees based on several criteria, including behavioral and financial control and relationship type. They analyze how much control employers have over the workers, whether they pay fixed salaries or per project, and so on.

#3. What are the tax obligations when hiring a foreign contractor?

There are typically no employer tax obligations when hiring a foreign contractor. In most cases, businesses do not need to withhold taxes. However, they need to follow relevant IRS requirements (e.g., use Form W-8BEN or W-8BEN-E if applicable).