Payroll management for employees and contractors

International teams are an integral part of life these days, and not just in large corporations. SMEs are becoming increasingly global, 50% of them do more business internationally nowadays than they did in 2021.

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International payments are tricky enough by themselves, but when a company also employs both employees and contractors, things can get seriously complicated. In this article, we’ll look at the nuances of payroll management for each type and how to choose the best payroll solution.

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Employees vs. contractors

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Before diving into payroll arcana, let’s review the basics: what are the differences between an employee and a contractor?

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In 2024, the U.S. issued new regulations governing whether someone is an employee or contractor under the FLSA. However, individual U.S. states may have their own criteria. For example, in California, Massachusetts, New Jersey, Vermont, Illinois, and New York, workers are considered contractors only if these conditions are met:

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1. Their work isn’t directly supervised by the employer.
2. Their work isn’t related to the company’s core business and is performed away from its premises.
3. Most of their work has no connection to the customer.

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Foreign countries have their own criteria for classifying workers.

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As you see, labor law can vary from jurisdiction to jurisdiction, which creates risk. When hiring global talent, companies need to be very careful in order to avoid penalties.

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Now let’s look at how payroll differs for these worker classifications.

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Employee payroll management

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Contracts

Contracts are typically long-term. They specify payment terms, the rules each side promises to comply with, employee duties, and so on.

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Payroll 

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• The employee is paid a fixed amount on a regular basis, plus bonuses, benefits, and vacation pay.
• The company withholds and remits federal and local taxes. At the end of the year, the employee receives a W-2 form showing all payments and withholdings.
• With employees, the payroll process is consistent and predictable. The schedule is generally the same across the entire company, so payments and accounting take place at regular intervals. 
• If those responsible for contracts and payroll are familiar with the labor legislation and keep abreast of changes, the risk of mistakes is minimal.

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Contractor payroll management

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Contracts

Contracts are generally fixed-term. They specify which services the contractor must provide and in what timeframe, the fee, payment terms, and which country's legislation governs the contract.

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Payroll

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The employer pays the remuneration specified in the contract, while the contractor is responsible for reporting and paying taxes on it.

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• The contract might specify payment up front, upon completion, or in stages.
• At the end of the year, the company provides the contractor with a 1099 form listing all payments.

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Note that each contractor the company works with may have different terms and conditions. This makes payroll and accounting more complicated than for employees.

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The country where the employer is based and the contractor’s tax status can affect reporting and classification requirements. Companies need to pay especially close attention to this. For example, when working with contractors from the EU, U.S. companies need to comply with GDPR regulations for processing personal data. Doing so might require special consultations or the hiring of a GDPR expert.

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If your company’s contractors perform the same kinds of services and are concentrated in one country, your in-house staff may be able to handle payroll and contract management without much trouble.

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But if your company has contractors working on different projects around the world, it’ll need to stay on top of all the subtleties of each jurisdiction. In that case, you can avoid overburdening employees by using payroll outsourcing or at least payroll management software.

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Should I hire employees or contractors?

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To help you decide, we've made a checklist. Check off each statement that’s true for your company, then sum up the columns.

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Payroll management software: Who needs it and when

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As long as things aren’t too complicated, one accountant using Excel can cope. But as the company grows and develops in international markets, the more difficult managing payroll will get. At this point, specialized payroll software can help.

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What payroll software does

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Most services allow you at a minimum to make payments and comply with the labor and tax laws of different countries. More advanced platforms, called payroll management systems, have complex capabilities such as integration with management and accounting systems.

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Why use payroll software

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• It reduces the human factor and the risk of delayed payments, employee misclassification, and compliance violations. 
• All documentation is stored in one place, so it’s easy to find for internal accounting or auditing. You can also quickly get reports and analytics for any period. 
• It’s easy to see your expenses on salaries and contractors, as well as the effect of currency conversion and transfer methods.
• If you encounter difficulties with payments, you can immediately get help from the platform’s online support team.

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Case study. A company from Los Angeles has to send a payment to Belgium. Even if the sender does it first thing in the morning, the recipient's workday will already be over, and the transfer will take place only the day after. Payroll software helps in cases like this, scheduling and executing payments in order to comply with legislation and avoid delays and penalties.

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When deciding whether to use such services, keep these things in mind:

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• These services are paid, and the cost should be budgeted right away. This is especially important if the project is one-off and seasonal.
• It will take some time to train your team to use the payroll system.
• Your team needs to include experts in payroll security who can help in case of technical failures.
• No matter what, the company should keep up with changes in the law.

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