Hiring Foreign Independent Contractors: Indonesian Tax and Status

Hiring foreign independent contractors for work in Indonesia works well when the person genuinely runs their own work: they agree a service with you, invoice a fee for it and decide how the work gets done.

Indonesian law does not go by what the contract is called. It defines employment by three elements, work, wages and orders, so a relationship with all three is employment in the law’s terms, whatever the paperwork says.

When the honest answer is “employee”, there is a simple route that does not need a company of your own in Indonesia. This article covers how to tell the two apart, how a contractor is paid and taxed, and what changes if the person should be an employee.

Hiring foreign independent contractors: contractor or employee

The Manpower Law defines an employment relationship (hubungan kerja) as one between an employer and a worker, based on an employment agreement, with the elements of work, wages and orders (UU 13/2003, Article 1(15)). Government Regulation (PP) 35/2021 repeats the definition word for word in Article 1(1).

An employment agreement can be written or oral (UU 13/2003, Article 51(1)), so the lack of a signed employment contract does not settle the question.

How the three elements usually look in each arrangement

	Genuine contractor	Employment relationship
Work	A defined service or result, agreed in a contract for services	Work done for the employer, under an agreement that may be unwritten
Pay	A fee, invoiced for what was delivered	Wages, paid by the employer for the work
Orders	The contractor decides how and when the work is done	The employer directs the work

The table shows how each arrangement typically looks; the law itself states only the three elements. Checklists often quoted online (stock options, benefits, a single client, owning your own equipment) are not tests set out in Indonesian law. Of those points, only one maps onto the Indonesian definition: whether someone else directs the work, which is the element of orders.

When a contractor arrangement fits

A contractor suits a defined piece of work with a clear result: a project, specialist advice, a design or a translation. The contractor quotes for it, delivers it and invoices for it, and is free to work for other clients alongside you. Two points keep that arrangement straightforward.

• The language of the agreement. An agreement with an Indonesian citizen has to be in Bahasa Indonesia. Where a foreign party is involved, it is also written in that party’s language or in English (Presidential Regulation (Perpres) 63/2019, Article 26(1) and (2)).
• How long the work runs in Indonesia. Services a foreign company’s people provide in Indonesia for more than 60 days in any 12 months can create a taxable presence (Income Tax Law, Article 2(5)(m)). The test is explained in permanent establishment in Indonesia.

How to pay independent contractors in Indonesia

When a company in Indonesia pays an individual a fee for services, it withholds income tax from the payment (PMK 168/2023, in force 1 January 2024, Article 2(2)(d)). Which tax applies depends on where the contractor is resident for tax.

Tax withheld from an individual contractor's fee

	Resident in Indonesia	Resident abroad
Tax	PPh 21, income tax under Article 21	PPh 26, income tax under Article 26
Taxed on	50% of the gross fee	The gross fee
Rate	The progressive income tax rates	20%, final, or the rate in a tax treaty
Source	PMK 168/2023, Articles 12(3) and 16(3)	PMK 168/2023, Article 14(1); Income Tax Law, Article 26(1)

For PPh 21, a resident contractor counts as a non-employee (Bukan Pegawai). The regulation’s list runs from consultants, lawyers and translators to providers of services in any field (PMK 168/2023, Article 3(2)). The rate bands are set out in PPh 21 effective rates.

Whether the agreed fee is gross or net of that tax is a matter for the contract, and the guide to withholding tax on services sets out the options, along with the rules for paying companies rather than individuals.

These rules are written for a payer in Indonesia. A company that pays a contractor from abroad, with nothing of its own in Indonesia, should have its position looked at before the first payment.

If the person should be an employee

Because the law defines employment by work, wages and orders, a relationship with all three brings an employer’s obligations with it.

• Social security. The employer registers itself and its workers with BPJS (Badan Penyelenggara Jaminan Sosial, the state social security bodies), collects the employee’s share of contributions and pays both (UU 24/2011, Articles 15(1) and 19(1) and (2)). A foreigner who works in Indonesia for at least six months is a member too (Article 14).
• Income tax. PPh 21 is withheld from the person’s pay as an employee rather than as a non-employee (PMK 168/2023, Article 3(1)).
• The agreement. The person works under an employment agreement, with the protections the Manpower Law gives employees.

Treating a worker as a freelancer when the work is employment is a common payroll mistake, and it is easiest to avoid by starting on the right footing.

If you have a company in Indonesia

You employ the person directly. MAM’s payroll service runs the monthly gross-to-net calculation, BPJS contributions, PPh 21 withholding and filing, and payslips, and can take over an existing payroll at any point in the year.

If you do not

An employer of record (EOR) lets you employ the person without a company here. MAM becomes the legal employer, and you direct the work day to day.

• The agreement and registration. We prepare the employment agreement and register the person with BPJS Health and BPJS Manpower.
• Payroll. We run payroll with BPJS and PPh 21 each month.
• Timing. A local hire can usually start within a week; an expatriate takes longer, because the work permit comes first.
• Team size. There is no minimum number of employees.

Through EOR, the foreign client does not employ anyone in Indonesia itself. MAM is the legal employer, and we look at each client’s activities in Indonesia so the arrangement stays that way. If you later set up your own company, your staff transfer to it, and the new employment agreement recognises their previous service. EOR or your own PT PMA weighs the two routes.

What this means for you

• A defined piece of work, done the contractor’s own way and invoiced as a fee: a contractor agreement fits. Put it in Bahasa Indonesia where an Indonesian citizen signs, and withhold the right tax from each payment.
• Ongoing work that you direct, in return for pay: all three elements are there. Employ the person through your own payroll, or through an employer of record while you have no company in Indonesia.