In working with all of my various efforts I’m running across several problems that I’m sure others have faced as well. I would like to put these problems out there, and while I do not have an absolute solution for all of them, I would like to put out what we have figured out so far. I’m open to suggestions and perhaps this will help someone else.
The first problem is international payroll. Keep in mind that this is all focused on small business. The way that a large public corporation would fix these are far different.
Let’s say you have a company. You have 2-3 employees in the US and 5-6 contractors working outside the US. The contractors bill on an basis that varies in amount from month to month. None of them want to be “W-2 employees”, they like being contractor.
How do you pay them?
There are two problems here:
1) Currency
2) Method of payment
The currency is an issue for several reasons. Each side wants different things and to shift the risk to the other. From the standpoint of the business owner in the US (or any home country) they likely want to be billed in and pay the contractors in USD. This is easy.
However if a contractor works 10 hours at $10/hour, then they are to be paid $100USD right? The problem comes in with conversion rates. If you live in the US, then $100 is always $100 (ignoring inflation for the moment, which generally doesn’t occur quickly enough to matter in this example). If you live in Canada and you haven’t sent in an invoice to get paid for 3 months, then $100USD might be worth 5% less to you in that 3 months. You’re getting paid 5% less for the same work, just due to varying conversion rates.
Of course it can go both ways. It doesn’t sound like that much money, but if you consider the fact that the USD vs the Euro/Pound/CND/etc has sunk much more than 5% recently, and that the amounts of money a skilled contractor/consultant might bill is much more than $100, it quickly becomes an issue.
One solution, if you are trying to make your contractors happy (or have contractors that demand it and you need them) is to have them invoice in their local currency. You lose out on this, but give them some stability. One problem here still comes in, is for your accounting. Many basic bookkeeping services like Quickbooks only support a since currency.
Example: Marco in Europe invoices you 100 Euros for his services. You convert that to 160USD (using wholesale rates from online) so that you can put it in Quickbooks and project costs and cashflow and bill the client. Marco’s invoices are due for payment in 15 days (Net 15). You get paid by the client and go to pay Marco via wire 15 days later. You call the bank to wire him the money. You hit a few problems here. First of all on a small scale, the conversion from xe.com or using the rates in the newspaper is not the rates you get from the bank. You might have to pay $175USD to purchase 100 Euros (assume and ignore the fact that wires cost money for the moment, as that’s another issue that I’m going to cover too). This is true even if you had done it the day that his invoice came in. Anyone that’s traveled can tell you that conversion generally costs something, as the banks take a margin. Due to this, you have to revise your invoices in your bookkeeping software. That’s no fun, and requires a lot of monkeying around in the end, although it sounds simple.
The second problem comes in here that the rates have changed in the 15 days! You can no longer get the same rate. The USD might have sunk even more, and it might be more like $180 to buy 100 Euros. Now you have to revise your books AGAIN!
So on either end, someone’s having to take a hit in the conversion, and someone is likely to lose money here. Even if you didn’t want to be in the market of currency speculation, at least one party must take the burden of it. 5% margin might be your profit. Think: if payroll is your main expense (lets say you’re a consulting company) then that’s going to be a HUGE hit on your books at the end of the year. If you are a consultant and the company puts the burden on you, then you’re going to get hit hard as well. It makes the difference between you taking that vacation and you not.
My possible solutions include:
- Attempting to shift the burden to the other party
- Purchasing the currency in question every 3-6 months in a large amount, and keep that in another account that you can pay out of. This locks you into a rate and you know your cost
- Setting an agreement that your rates with your contractors are locked in every 3-6 months. You agree that 2 USD = 1 pound for the next 6 months, regardless of what happens in the market. You are both speculating on your currency then, but it is not certain which side will be on top.
None of these are perfect. I’m open to solutions.
The second thing I would like to address is how to pay the international contractors.
There’s a few ways to pay:
- They can bill your credit card
- You can send a check (in USD or other currency)
- Wire transfer
- Paypal
- Suitcase of cash
Each of them has their problems. I do not know which I feel best about. Sending a check is the simplest, but the contractors do not like it as clearing an international check takes several weeks. It’s nice however, since a check costs you basically nothing.
A wire is great, and everyone wants to get a wire. But most banks charge $35-45USD to initiate a wire. That’s not bad at all if you are sending more than $2000, but if you’re sending $200, it’s horrid.
Paypay is great too. You generally don’t have all of the problems with it that people do with using it for eBay (for which I prefer postal money orders, since screwing with them is federal fraud, whereas paypal fraud is ignored). The fees however are high and based on a percentage. If you’re sending someone $25,000USD then 2.9% or whatever kills you.
Some contractors and companies can bill your credit card, and that’s great for you. You can’t expect everyone to do that however, and they pay the fee. Best for you, but you can’t expect it… so it’s not a solid solution.
Suitcases of cash look somewhat suspect at the border. Even moreso if you return with another suitcase full of cocaine- theirfore I can’t recommend it (unless you are buying the said suitcase of cocaine).
We generally go with the idea that if it’s a small amount then use paypal or check, a large amount use a wire. Still it’s less than perfect and keeping track of wires without good wire tools (like they have at investment banks) is a pain too.
