The real fees of paying contractors: Understanding costs and optimizing your spending

Paying contractors involves multiple fee layers that add up quickly. Understanding these costs helps you choose the right payment methods and optimize your spending without sacrificing control or audit quality.

Breaking down contractor payment fees

Contractor payment fees typically fall into three categories:

Platform fees are what payment providers charge to process a transaction. Range: $0-$5 per transfer. Usually paid by the sender (you), sometimes split with the recipient.

Foreign exchange spreads are markup on currency conversion. Range: 0.3%-3% of the amount transferred. Usually hidden in the exchange rate offered and paid by the sender.

Receiving fees are what the recipient's bank charges to deposit incoming international funds. Range: $0-$15 per deposit. Usually paid by the recipient (the contractor).

These three layers compound, especially for international payments. On a $10,000 transfer internationally, you might see $50 in platform fees plus a $300 FX spread plus the contractor paying $10 receiving fee. Total: $360 for a single payment.

Understanding foreign exchange spreads

Foreign exchange spreads are often the largest hidden cost. When you pay a contractor in a different currency, the payment provider converts your funds at a rate that includes their profit margin.

How FX spreads work: If the mid-market rate (the real rate you see on Google or XE.com) is 1.20 USD/EUR but your provider offers 1.17, you're paying a 2.5% spread. On a $10,000 payment to a contractor in euros, that's approximately $250 in hidden fees that never appears as a line item.

Comparing FX rates: Before sending a large payment, check the real mid-market rate on Google or XE.com. Then check what your payment provider is offering. The difference is your FX cost.

Example: You're paying a contractor in Poland €3,000.

• Mid-market rate: 1.10 USD/EUR = €3,000 costs $3,300 USD
• Wise rate: 1.096 USD/EUR = €3,000 costs $3,288 USD (0.4% spread)
• PayPal rate: 1.068 USD/EUR = €3,000 costs $3,204 USD... wait, that's lower. Actually: PayPal rate at 1.068 = €3,000 costs $3,204... no, let me recalculate. PayPal with 2.9% markup: €3,000 costs $3,387 USD (3% spread)

The difference between Wise and PayPal: $99 on a single $3,000 payment.

Strategic timing and batching

Consolidating payments can significantly reduce per-transaction costs:

Weekly batches reduce fixed fees by 75% compared to daily payments. Instead of paying each contractor individually, collect invoices weekly and process them together.

Monthly cycles work best for retainer-based contractors with predictable schedules. Most contractors accept monthly payment, and it simplifies your accounting.

Milestone-based batching groups payments around project milestones rather than calendar dates. This reduces unnecessary transfers and aligns payments with deliverables.

Currency batching groups all payments in the same currency together. Process all EUR payments together, then all GBP payments. This minimizes FX conversion fees.

Optimizing provider choice by region

Different payment providers excel in different regions. Using the right provider for each region significantly reduces costs:

Wise is best for European and Asian contractors, larger amounts, and transparent FX rates. Typical cost: 0.4-0.8% plus $0.50.

PayPal is best for small U.S. amounts and quick setup. Convenient but expensive. Typical cost: 2.9% + $0.30.

Payoneer is best for emerging markets, Asia, Latin America, and Africa. Supports batch payments. Typical cost: 1-2% plus $1-$3.

Bank transfers (ACH in U.S., SEPA in EU) are best for very large amounts ($50,000+). U.S. ACH is typically free or $1-3. EU SEPA is typically free.

Match provider to region: Use Wise for Europe, Payoneer for Asia and Latin America, PayPal for small U.S. payments, bank transfers for very large amounts.

Practical tactics to reduce payment costs

Match provider to region. Different providers have different strengths in different regions. Using the right provider for each contractor's location significantly reduces fees.

Batch similar currencies together. Process all EUR payments together to minimize FX conversions. Process all GBP payments together. This reduces the number of conversions and related fees.

Set minimum accumulation thresholds. For contractors you pay frequently but in small amounts, accumulate several invoices before paying. This reduces fixed fees per payment.

Negotiate contractor payment preferences. Some contractors have strong preferences for specific providers. Check if those preferences align with lower fees. Some contractors even prefer to receive in USD to avoid FX fees in their country.

Track and compare actual costs. Monitor your actual costs per provider and payment route. Export transaction reports monthly and calculate total fees including FX spreads. Over time, you'll see patterns about which providers and routes are most cost-effective.

Communicate clearly about fees. Decide upfront who pays platform fees and receiving fees. Be transparent in your contractor agreements: "Sending fees paid by company, receiving fees paid by contractor" or "Company pays all fees." Different arrangements work for different situations.

Cost comparison: Direct payment vs EOR

For context, here's how direct payment fees compare to EOR costs:

Direct payments via Wise: Monthly cost per contractor: $5-15. Annual cost for 10 contractors: $600-1,800. Annual savings versus EOR: $34,080-$70,080.

EOR platform: Monthly cost per contractor: $299-599. Annual cost for 10 contractors: $35,880-$71,880.

Direct payments cost a fraction of EOR fees. For 10 contractors, you save $34,000-$70,000 per year by managing payments directly instead of using an EOR.

Tracking and monitoring payment costs

Export transaction reports monthly. Every payment provider allows you to export transaction history. Get reports from each provider you use.

Calculate total costs per provider. For each payment, calculate: platform fee + FX spread (compare provider rate to mid-market rate) + any receiving fees reported by contractors.

Compare total cost of ownership. Track which provider gives you the best actual total cost, not just the lowest advertised rate. PayPal might be cheapest for small U.S. payments while Wise is cheapest for international.

Identify optimization opportunities. If you're paying many contractors in EUR, batch those payments. If you have high-volume accounts with some providers, investigate volume discounts or better FX rates.

Document your strategy. Document which providers you use for which regions/contractors and why. This helps you explain payment costs if audited.

Cost calculator approach

To model your specific scenario:

1. Identify your contractor distribution by location and currency
2. For each payment type, get actual rates from your chosen providers
3. Calculate platform fee + FX spread + receiving fee for each scenario
4. Compare total cost across providers
5. Choose the provider/route that minimizes total cost
6. Adjust as your contractor mix changes

This analysis often reveals that consolidating to fewer providers, batching by currency, or shifting to providers with better rates in key regions can save thousands annually.

Common questions about payment fees

Who typically pays fees—sender or recipient? It depends on the provider and your agreement. Wise and bank wires typically charge the sender (you). PayPal often splits fees between sender and recipient. Payoneer may charge the recipient. Clarify this in your contractor agreements to avoid confusion.

Are FX fees negotiable? For high-volume accounts, some providers offer better FX rates. Wise Business and Payoneer have volume tiers that improve rates above certain transaction amounts. PayPal's rates are generally fixed. Always compare the actual exchange rate offered against the mid-market rate to understand your true cost.

How do I accurately track total payment costs? Export transaction reports from each provider monthly. Calculate platform fees, determine FX spreads by comparing provider rates to mid-market rates, and add any receiving fees reported by contractors. Sum these for actual total cost.

Should I pass fees to contractors? It's common for companies to absorb sending fees and contractors to absorb receiving fees. Be transparent about this in your agreements: specify who pays what. Some companies gross up payments (increase the payment amount to cover the contractor's receiving fees) as a goodwill gesture—this is optional but appreciated.

What's the cheapest way to pay contractors overall? For most scenarios, Wise offers the lowest total cost due to transparent FX rates and low platform fees. For very large amounts ($50,000+), bank wires may be cheaper despite flat fees. For small U.S.-based payments under $500, PayPal's simplicity and instant delivery may justify slightly higher fees. The answer depends on your specific scenario.

The bottom line

Contractor payment fees are real costs that add up quickly. Understanding the three fee layers—platform fees, FX spreads, and receiving fees—helps you optimize your payment strategy. Use the right provider for each region, batch payments to reduce per-transaction costs, and track actual costs monthly.

For most businesses, switching from an EOR to direct payments saves $34,000-$70,000 annually for 10 contractors. The investment in understanding and optimizing payment methods pays dividends.

The key is transparency and intentionality. Understand your costs, choose providers strategically, and monitor results. Small optimizations—using Wise instead of PayPal for international payments, batching by currency, negotiating contractor preferences—compound over time into significant savings.