How to Do Payroll for Remote Contractors in Pakistan

Pakistani companies — especially IT services and consulting — increasingly run on a mix of salaried staff and remote contractors. Paying a contractor is not the same as paying an employee. Different WHT section, no EOBI, different paperwork, often foreign currency. Get the categorisation wrong and you face FBR notices later. Here is how to do contractor payroll cleanly.

The fundamental distinction

Contractor (also called independent contractor or freelancer) — works for you but is not an employee. They invoice you for services rendered. You withhold tax under section 153 (or other applicable WHT section). They are responsible for their own EOBI, social security, and tax filing.

Employee — works for you under a contract of service. Tax withheld under section 149. Employer contributes EOBI and provincial SS where applicable. Payroll, leave, attendance — all standard.

The legal test (often debated in courts) looks at control, integration, who provides equipment, whether the work is for the company's main business, etc. Misclassification can lead to back-EOBI demands and tax recovery.

The contractor payment cycle

1. Contractor invoices you

Each pay cycle, the contractor submits an invoice for the agreed amount (or computed from hours, milestones, or output). The invoice should include their NTN, sales tax number (if registered), and clear service description.

2. You verify deliverables

Was the work delivered? At the agreed quality? On time? The project manager signs off on the invoice before finance pays.

3. You withhold tax

For services rendered by a contractor, section 153(1)(b) applies — WHT on services payments. The rate depends on whether the contractor is on the Active Taxpayers List (ATL) or not. ATL contractors get the lower rate; non-ATL contractors get a higher rate. Verify ATL status before each payment.

4. You pay net of tax

Contractor receives the gross amount minus WHT. WHT amount goes to FBR with the regular monthly deposit.

5. You file in monthly statement

WHT under section 153 is reported separately from section 149 (salary). The monthly statement goes through IRIS portal.

6. You issue WHT certificate

At year-end, the contractor receives a WHT certificate showing tax withheld during the year. They use it when filing their own annual return.

Foreign-currency contractor payments

For contractors paid in foreign currency (USD, AED, EUR), additional considerations:

• State Bank rules on outward remittance for services
• Form M or Form E filings (depending on transaction)
• Cap on remittance amount per transaction or month
• Documentation requirements for FBR / SBP

Most Pakistani companies route these through a bank facility for outward service remittance. Your HR/payroll software should track contractor invoices, payments, and WHT — but the actual bank remittance is a separate process via your bank.

Common contractor-payroll mistakes

• Classifying employees as contractors to avoid EOBI / employment obligations (illegal)
• Using section 149 WHT for contractors (wrong section)
• Not checking ATL status — applying ATL rate to a non-ATL contractor
• Mixing contractor payments into the salary payroll without separation
• Not issuing WHT certificates at year-end
• Missing State Bank documentation for foreign remittance

What HR/payroll software should support for contractors

• Separate contractor records (distinct from employee records)
• Invoice tracking — invoice received, verified, approved, paid
• Section-153 WHT calculation with ATL / non-ATL differentiation
• Separate monthly filing data for contractor payments
• Year-end WHT certificate generation per contractor
• Multi-currency support for foreign contractor payments

The Zaffre HRM fit

Zaffre HRM handles employee + contractor payroll in the same platform with distinct workflows — section 149 for employees, section 153 for contractors, separate WHT certificates, multi-currency for foreign payments. Book a demo to see contractor-payroll workflows.

Caveat

Contractor classification has legal implications. This article is general guidance, not legal advice. Consult a labour-law or tax practitioner for specific cases.