Paying workers over the internet?

I am a business attorney and not a tax advisor. I have, however, been in the position of researching and advising many clients on this point. So, with the caveat that you should not rely on my tax advice, but rather consult at tax professional, I can offer you the following:

Electronic payment systems and software is a fairly developed space. There are many options and you will want to look at several to see what fits your needs best in terms of minimums, fees, payment type (MC, Visa, wire transfers, etc.) Popular software as a service providers are www.authorize.net, www.paypal.com, www.paysimple.com.

Also, take a look at the TechCrunch article about the online payment wars among service providers at http://techcrunch.com/2009/07/23/the-online-payment-wars-continue-paypal-officially-announces-flexible-api/.

Your primary concern is you own obligations to the IRS if you are US-based. You are required to maintain meticulous records of payments to contractors including verification of personal information for US citizens. You will require a 1099 completed by the contractor.

For foreign independent contractors, called nonresident aliens:

Services performed in the US - You need to have them fill out a Form W-8BEN and you will have to withhold tax liability (for work derived from US-source income) unless they provide you with an exemption in IRS Form 8233 that is based on tax treaties the US has with various countries. Otherwise, the withholding is 30% normally. MAKE SURE YOU CONTACT A TAX EXPERT ON THIS POINT.

Services NOT performed in the US - there are no reporting or withholding requirements other than your usual tax disclosure in the US.

The only other pitfall that comes to mind is the export controls on products, goods or services that could be classified as having 'dual use'. That might include any outsourcing activity to a restricted nation of software, information, data or other information that "could" result in the development of military weapons (check the Department of State website for details).

I hope this helps and isn't more confusing than having no information at all!

The last startup I worked for used SurePayroll for salaries, 401K, W-2s, and other tax forms.

I'll only answer the Gotchas part of your question: I recently used Wire transfers and PayPal to pay two overseas vendors. Paypal was deceptively simple to use. Unfortunately it took 5 working days and I got dinged on the exchange rate. They don't tell you what the exchange rate is during the time of the transaction, if you pick USD as the currency of choice. I was told later by someone else I should have tried to use the Payee's currency and then maybe PayPal would have been forced to disclose the exchange rate. In any case it was at least 50% more than a bank's rate.

One less understood issue is the credit card based payment via PayPal. There have been cases where vendors have been paid for services rendered and then the Customer pulls the rug with a non-performance complaint and MC/Visa void the transaction. If you face a lot of resistance from vendors on using Paypal this is probably one reason.

Wire transfers have been around forever, they are fast, costs around $20 per transaction and they disclose the exchange rate at the time of the transaction...as long as you have all the details addressed such as the account number and transfer information such as SWIFT and/or IBAN numbers. If you get any of these wrong the money sits in limbo till it gets resolved. I have about $1000 sitting somewhere between the US and Ireland as I write this because I made a mistake...

Don't use any escrow service, this industry is still in learning mode as far as I know, there's been a lot of fraud with this payment model.

I hope some of this helps...

I can't comment on legal or accounting issues, but Payoneer provide a great service for easily dispersing payment to providers worldwide over the Mastercard network.

Check them out.

One gotcha that you also have to consider: location, location, location!

Paypal isn't available everywhere and it has very strict requirements on some countries.

I find bank to bank transfer as the easiest way to pay but you have to do a bit of research to find out which banks are affiliated with one another.

Hope this helps.