How to Pay International Contractors in Portugal [2024]
Opening up hiring to a global team brings opportunities to work with a massive array of talent. With today’s technology, hiring contractors in places like Portugal is easier than ever, no matter where your international business is based. However, when it’s time to pay your workers, you must know the correct steps to comply with Portugal’s labor laws and tax laws.
Learn how to correctly classify, onboard, and pay contractors according to Portugal’s employment laws so you’re ready to go as soon as you receive your first invoice.
Step #1: Classify your workers
There are some great benefits to hiring Portuguese self-employed contractors rather than full-time employees. For example, employers are not responsible for administering employee benefits for self-employed workers or deducting taxes from contractors’ paychecks. Instead, the contractor deals with their own tax remittance and social security payments (Note: The only exception is if a contractor earns up to 80% of their revenue from you. In those instances, you are responsible for a 5% social security tax on any payments made to that contractor).
However, misclassifying workers in Portugal can come with harsh penalties, including:
- Retroactive contributions to social security and the Wage Compensation Fund
- Compliance with work accident insurance requirements
- Retroactive credits for paid holidays, Christmas and holiday allowances (statutory bonuses), meal allowances, and other benefits afforded to full-time employees
- Fines upwards of €9,000
If a Portuguese worker raises a misclassification claim, the Portuguese courts will look at the contract agreement as well as the arrangement in practice (i.e. how your contractor actually completes their work for you) to determine whether the arrangement is a sham. Below, learn more about the factors they consider.
Contractors
Employees
High level of worker control. Contractors have autonomy to determine how, when, and where they complete their work. The company can give directions only when it is required commercially, and only if the directions are reasonable.
More employer control. Employees are subject to more control and direction from their employer, who will provide guidance on how to perform the work, set work days, and may have stipulations on where the work is conducted.
Equipment and tools owned by the worker.
Equipment and tools typically provided by the company. The company may also reimburse the employee for equipment costs.
Paid for work as completed. Contractors are entitled to receive payments only when they have successfully performed services and have submitted invoices.
Receive set pay. Employees receive a salary on a regular basis, regardless of the services provided.
No entitlement to benefits. Contractors are not entitled to the same benefits and protections as employees, and they are responsible for paying their own taxes.
Entitled to benefits. Employees are entitled to employment benefits and protections, such as minimum wage, pension contributions, and vacation pay.
Non-exclusive services. Contractors can’t be contractually bound to a single company. They can provide their services to more than one client.
Exclusive services. Employees can be contractually bound to provide services to just their employer.
No disciplinary action. The company can’t take disciplinary action against contractors for misconduct, and can only terminate the agreement for breach of contract.
Disciplinary action. Employees can face disciplinary action for misconduct.
Step #2: Determine the best way to pay your contractors
After you develop your contract agreement, the next step is figuring out the best way to pay your contractor. With the rise of global workforces and remote work, employers now have more choices than ever for making international payments. Here are some options:
- Bank wires. In this case, you would open a Portuguese bank account and use that to deposit funds into your contractor’s accounts. You may also use your own bank to send a global wire transfer.
- International money orders. Money orders can be slow, as you will need to physically purchase a money order and then the contractor will need to physically deposit it. Money orders can also come with fees and bad exchange rates.
- Digital wallets or payment platforms. Not every digital payment platform is available in Portugal. For example, CashApp and Venmo are not available. You may choose to use platforms like Wise to transfer funds. However, note that exchange rates can change daily, making it difficult to predict your outgoing amounts.
- Global payroll services. In most cases, contractors aren’t included in regular payroll, as they aren’t subject to the same withholdings. Instead, contractors invoice for their services, which is then processed by accounts payable.
Step #3: Use global payroll software to process payments
As you saw in the previous step, there are many options for paying contractors in Portugal, but the fastest and simplest way is paying contractors through global payroll software.
With Rippling, you can pay contractors across the world. Here’s a preview of how Rippling’s global payroll system works:
Step #4: Calculate and file your tax forms
Employers aren't required to withhold and pay taxes for contractors in Portugal. Instead, freelancers issue what are known as green receipts (recibos verdes). After invoicing, contractors will issue a green receipt, which stands as proof of payment and which they use to declare their income for tax purposes. Self-employed individuals must use this any time they complete a service or sell a product. Be sure to always keep records of payments to contractors and any green receipts you receive.
If your company is based in the United States, have any international contractors fill out an IRS Form W-8BEN. This certifies their foreign contract status.
Effortlessly manage contractors around the world
Growing your international workforce is easy with Rippling. You can pay international contractors in Portugal and around the world all in one place.
FAQs about paying contractors in Portugal
Do you need to withhold taxes when paying contractors in Portugal?
No, you don’t need to withhold payroll taxes when paying contractors in Portugal. Contractors are required to pay their own income tax.
Does Portuguese minimum wage apply to independent contractors in Portugal?
Minimum wage laws don't apply to independent contractors in Portugal.
Do Portuguese contractors get benefits?
In most cases, you aren’t required to offer benefits or make social security contributions. The exception is if your contractor earns more than 80% of their revenue from you. In that instance, you are responsible for a 5% social security tax on any payments made to them.
Offering benefits to independent contractors may even increase the risk that the courts will consider contractors to be misclassified employees.
Can you pay contractors in Portugal in your home currency?
You have to pay Portugal-based contractors in euros (EUR) unless you’ve specifically obtained their written permission to pay them in another currency. Before initiating work, outline the currency you'll use in the contractor agreement.
Many international payment providers, like Rippling, support contractor payments in either euros or your currency.
Can you manually pay contractors in Portugal?
Yes, you may choose to run payroll yourself by using a payroll calculator and making direct deposits into employee accounts. However, while many small business owners do this as a cost-cutting effort, running payroll is time-consuming, especially for those with a growing business with a global workforce.
There are also risks to manually processing payments:
- Compliance: With manual input, there’s more room for errors and omissions. This could result in compliance issues.
- Security: Processing payroll manually brings security risks, especially if you are using spreadsheets or paper records. This increases the risk of sensitive contractor information being lost, stolen, or misused.
- Contractor experience. Manual payments can be slow and lack transparency on payment timelines. This can be frustrating for contractors trying to understand their income.
How do you turn a contractor into an employee in Portugal?
Though using independent contractors can come with flexibility and financial benefits, you may choose to bring on a contractor as a full-time employee. In Portugal, a written document is required for onboarding a contractor but isn’t technically required for hiring employees. An employment contract may simply be a verbal agreement. However, even if a contract isn’t mandatory, it’s highly recommended that you draft one to outline the role’s terms and conditions. This will clarify your employer-employee relationship and protect you should legal disputes arise.
Employees are entitled to time off for vacation and paid public holidays. Employers must make payroll tax deductions and contribute to social security funds. While Portuguese social security covers disability, sick leave, unemployment, parental leave (maternity leave and paternity leave), and more, employers must have worker’s compensation insurance in case of a workplace-related accident.
When hiring employees or converting contractors, you will also need to set up a local entity or use an employer of record (EOR), like Rippling, to onboard and run payroll. Because setting up your own entity can be complex, expensive, and time-consuming, consider outsourcing this to an EOR.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.
