How to Pay Contractors in the Philippines as a Foreign Company

With the popularity of outsourcing remote work, many foreign companies have opted to hire freelancers or build remote teams in the Philippines. Filipino contractors provide high levels of skills and strong English proficiency in jobs such as IT, customer service, digital marketing, data entry, and more. 

However, hiring remote workers means you need to understand payroll management compliance in the country. This includes employee contract classification, payment frequency, and employer and employee obligations. As an employer, it is your legal obligation to pay your Filipino employees according to the agreed salary and frequency. 

This article offers a comprehensive guide on how you can pay your Filipino employees legally. We will cover what are your payroll obligations, what are the best payment methods to send salaries from overseas, and best practices to manage payroll. 

Understanding Payroll Management for Freelancers in the Philippines

Part of hiring remote talent in the Philippines is understanding the difference between independent contractors (freelancers) vs regular employees. Department of Labor and Employment (DOLE) Department Order No. 174 provides guidelines emphasizing the contractor’s entrepreneurial independence, which shields foreign companies from employee-related liabilities when properly applied. 

This means, independent contractors are responsible for filing their income taxes as well as social security contributions. They may also be subject to Value-Added Tax (VAT) if their earnings exceed thresholds (PHP 3 million or ~USD 53,600), or percentage tax for small-scale contractors. This is the exact opposite for regular employees where you are responsible for withholding tax to the Bureau of Internal Revenue (BIR), as well as providing contributions to SSS, PhilHealth, and Pag-IBIG. 

Creditable Withholding Tax (CWT) on Professional Fees

If you don’t have a physical or legal presence in the Philippines, you have no obligation to withhold payroll taxes or social security. However, the BIR often requires a foreign company (even if non-resident) to withhold a percentage of payment as a Creditable Withholding Tax (CWT) on professional fees. The standard CWT rate is typically 10% or 15% (depending on the amount of gross income).

If the services (the activity) are performed in the Philippines, the income is generally considered Philippine-sourced and subject to CWT, regardless of where the payment is disbursed.  If you choose to comply with CWT, you must issue a Certificate of Creditable Tax Withheld (BIR Form 2307) to the contractor. This certificate serves as a tax credit that they can use to offset their own annual income tax liability.

Common Payment Methods for Foreign Companies

There are plenty of ways you can pay your remote employees in the Philippines. Choosing the most cost-efficient method depends on transaction volume, timing, and cost. Some contractors may prefer specific payment methods depending on availability. 

International Wire Transfers (SWIFT)

This is the traditional, bank-to-bank method that transfers funds directly from your foreign account. It is often preferred for larger, recurring payments due to reliability and direct bank account deposit. Wire transfers are secure and widely accepted globally, allowing payments in Philippine Pesos (PHP) or foreign currencies. 

However, it is the most expensive and slowest option (1-5 business days) for recurring contractor payments. Both the sending and receiving banks often levy fees, and the exchange rate typically includes a significant hidden markup, decreasing the net amount the contractor receives.  For example, Philippine banks typically charge PHP 600 to PHP 1,000 per incoming SWIFT transfer, plus local taxes. Foreign banks add wire transfer fees and possibly foreign exchange markups.

Digital Money Transfer Platforms 

These are platforms built for international remittances that specialise in small to medium-sized payments. It is easy to use and often has a built-in currency conversion with competitive exchange rates but charges a percentage-based fee depending on the remitted amount. Many freelancers in the Philippines often opt for these transfer platforms due to ease of withdrawal whether to transfer to their bank accounts, cash pick-up, or transfer to their e-wallets (e.g. GCash or PayMaya). 

Here are some of the most common platforms used by many Filipino freelancers:

• Wise (formerly TransferWise): Highly regarded for its commitment to the mid-market exchange rate. Fees are low and clearly stated upfront, making it ideal for cost-conscious, recurring payments. Wise can also be linked with major local bank accounts.
• PayPal: considered as one of the oldest and widely used payment platforms for freelancers in the Philippines. PayPal can also be linked with major banks as well as having favorable exchange rates.
• Payoneer: Specializes in global business payments. It allows the contractor to receive funds into a USD-denominated account, giving them control over when to convert to Philippine Peso (PHP). Payoneer is excellent for bulk payments to multiple contractors.

However, these platforms are subject to payout and transfer limits which would require multiple transactions for large payments. While the typical 1% to 3% transaction fee is minimal for small or medium transactions, it can scale significantly for larger and multiple payouts.

Traditional Money Transfer Services

Traditional money transfer services like Western Union and MoneyGram offer useful payment options for Filipino contractors who may lack bank accounts or reside in remote areas with limited banking infrastructure. These services allow contractors to collect payments in cash at widespread agent locations, offering convenience where digital or bank transfers are impractical.

However, these services generally come with higher fees compared to digital payment platforms. Fees often include a fixed charge plus a percentage of the transfer amount, varying by sending country, payment method (cash, bank transfer, credit card), and payout location. For example, Western Union fees typically range from a few dollars to over $100 depending on transfer size and destination with exchange rate markups of 1%-5%. 

Due to these higher costs, traditional money transfers are less optimal for frequent or large payments. The logistics of directing contractors to pick up cash also add complexity and security risks compared to electronic payments. Additionally, lack of formal payment records can also complicate audit trails and compliance.

How to Manage Payroll More Effectively as a Foreign Company in the Philippines

Managing Currency Exchange and Transaction Fees

Before you hire a freelancer, you should always define and agree on the payment currency. You can either pay in Philippine Peso (PHP) or foreign currency (often USD). However, there will always be differences in exchange rates. 

1. Payment in USD: The contractor bears the risk of adverse currency fluctuations when they convert the USD to PHP. This is often preferred by contractors who want to preserve the value of their earnings.
2. Payment in PHP: As the employer, you bear the risk and must ensure the equivalent PHP amount is remitted regardless of FX movement.

If paying in a foreign currency, agree on the exchange rate source (e.g., the rate used by the chosen payment platform at the time of transfer) to prevent disputes. Always aim for mid-market rates where possible.

Compliance and Record-Keeping Best Practices

Accurate record-keeping is vital to demonstrate compliance and simplify future audits. A robust audit trail is essential for compliance in both the contractor’s home country and the Philippines. Here are some areas you should maintain accurate record-keeping:

• Contract and Scope: Maintain signed copies of all Service Agreements and Statements of Work.
• Invoices: Require contractors to submit professional invoices (and the legally mandated BIR Official Receipts) itemizing services rendered. The invoice must match the payment amount.
• Proof of Payment: Retain transaction records from the payment platform, showing the date, amount sent, amount received (in both currencies), and transaction ID.
• BIR Forms: If CWT is withheld, ensure the contractor is provided with the BIR Form 2307 promptly, as they need it for their annual tax filing.

Maintaining sound records also strengthens contractor trust and facilitates smoother annual tax reconciliations.​ It also helps to have these records as evidence in case there are payroll disputes or discrepancies. 

Managing Payroll with an Employer of Record (EOR)

If you want to streamline your payroll for remote workers in the Philippines, you can engage with an Employer of Record (EOR). An EOR is a third-party company that legally hires your employees on your behalf. This is ideal if you want to hire an entire team of contractors or simply want to streamline your payroll and minimize risk. 

Here’s how they can help manage payroll for your remote employees:

• Handle all payments, currency conversions, and remittance locally.
• Manage compliant contract templates and documentation.
• Assume responsibility for CWT withholding and remittance on your behalf.
• Provide a legally verified classification status for the worker.

RecruitGo allows you to hire freelancers in the Philippines more efficiently from recruitment, onboarding, record-keeping, and compliance. Our EOR service enables you to manage payroll effectively by managing the administrative and compliance processes. 

Learn more about how we can streamline your global expansion to the Philippines by filling out the form below!