Mongolia is a great place to hire contractors for businesses looking toward Asia’s frontier markets. It has a GDP of over $23.79 billion and consistent growth hovering at around 5.5%. Furthermore, the country has changed from a pastoral economy into a resource-driven success story.

It’s home to around 3.5 million people, over half of whom are under 30 years old. Hence, Mongolia offers a young and increasingly tech-savvy working-age population. Note that the official language is Mongolian, but it is striving toward a more globalized future.

The World Bank’s Ease of Doing Business Index ranks Mongolia 81st out of 190 economies. That’s because there are challenges that need to be overcome, but businesses looking to take a leap can come out on top. We’ll share the best practices for hiring contractors in Mongolia and how a Contractor of Record can help.

The Benefits of Doing Business in Mongolia

  • Growing tech and services sector since the country is moving beyond its mining roots. You’ll find that Ulaanbaatar is fostering a budding startup and IT services scene. Additionally, the government and private sector are investing in digital infrastructure. That’s creating a new generation of software developers, digital marketers, and IT specialists available for contract work.
  • Rich natural resource economy because of the immense mining sector. You’ll find that it creates high demand for supporting services in engineering, environmental science, logistics, and compliance. Furthermore, specialized contractors with expertise in these areas can command premium rates and find consistent project work.
  • Cost-competitive talent pool compared to many Western and East Asian markets. Overall, highly skilled professionals in Mongolia often offer very competitive rates. This allows international companies to build cost-effective teams for software development, design, translation, and back-office operations.
  • Government incentives for key sectors in Mongolia offer various benefits. That’s particularly true in sectors like technology and export-oriented manufacturing. Hiring local contractors can be an effective way to tap into these sectors while leveraging their on-the-ground knowledge.
  • Cultural heritage of entrepreneurship due to a history of nomadic self-reliance. This translates well into a modern culture of entrepreneurship and independent work. Therefore, many professionals are naturally inclined toward the contractor model.

What Are Independent Contractors in Mongolia?

In Mongolia, an independent contractor is a self-employed professional or a legal entity that provides specific services to a client under a contract for services. Here are some of their key traits:

  • They operate their own business
  • Control how the work is performed
  • Use their own tools and equipment
  • Are free to work for multiple clients
Furthermore, they are responsible for registering with the Mongolian tax authority and calculating their own income tax. and managing their business expenses. This arrangement provides maximum flexibility for both the hiring company and the contractor. Overall, you’ll find that it is an increasingly popular model for project-based work.

Differences Between Employees and Independent Contractors in Mongolia

Here’s a table sharing the biggest differences between employees and independent contractors:

Key Aspect
Employee
Independent Contractor
Control & Direction
Employer-controlled work hours, methods, and location.
Contractor-controlled; autonomy over how and when work is completed.
Financial & Benefits
Regular salary/wage, and employer pays benefits & withholds taxes.
Invoices for services, responsible for own taxes, insurance, and benefits.
Legal Relationship
Ongoing, governed by Labor Law with termination protections.
Project-based, defined by commercial contract for specific scope/duration.
Tools & Equipment
Provided by the employer.
Provided by the contractor.
Tax Withholding
Employer withholds and remits income tax and social insurance.
No employer withholding; contractor handles all tax filings and payments.

Now let’s cover each of the differences in more detail to help you avoid potential misclassification problems when hiring Mongolian contractors.

Control & Direction

An employee in Mongolia operates under the direct supervision of an employer. That’s who dictates not only what work is to be done, but precisely how, when, and where it is performed. This includes set working hours, mandated break times, and adherence to internal company policies.

An independent contractor is hired to achieve a specific result, not to follow a prescribed process. Hence, they retain autonomy over their methods, schedule, and often their workplace. This difference in operational freedom is a primary factor Mongolian authorities use to distinguish between the two relationships.

Financial & Benefits

Employees receive a regular salary or wage and are entitled to several benefits. Top examples include:

  • Sick leave
  • Severance pay
  • Paid annual leave (minimum 15 days)

Note that all are funded by the employer’s social insurance contributions. The employer also bears the cost of payroll taxes.

However, an independent contractor operates as their own business. They issue invoices for completed work or milestones, receive payment against those invoices, and are personally responsible for funding their own benefits. For instance, health insurance and retirement savings.

Finally, they absorb their own overheads and have no entitlement to paid leave from the hiring company.

Legal Relationship

Employees in Mongolia are protected by the Labor Law. That establishes an ongoing and often indefinite relationship. Furthermore, there are strong provisions for job security, dispute resolution, and termination procedures. The law presumes this relationship is permanent unless otherwise specified.

In contrast, a contractor’s engagement is governed by the Civil Code and the specific terms of their service agreement. You’ll find that it’s a finite and project-based relationship defined by a contract with a clear start and end date.

Tools & Equipment

Who provides the tools of the trade is a practical yet powerful indicator of status. A company will almost always supply its employees with the necessary equipment to perform their jobs. For example:

  • A laptop
  • Software licenses
  • Company vehicle
  • Specialized machinery

The employer retains ownership and responsibility for these assets.

In comparison, an independent contractor is expected to be a self-sufficient business entity. They use their own tools, technology, and equipment to complete the contracted work. The costs of acquiring and maintaining these assets are their own business expenses. It should be factored into their pricing, further reinforcing their independent status.

Tax Withholding

For an employee, the company acts as a withholding agent. Hence, they are legally obligated to deduct personal income tax (a flat 10%) and the employee’s share of social insurance contributions directly from their salary each month. The employer then remits these amounts, along with their own substantial social insurance contributions, to the tax authorities.

With an independent contractor, this entire process is flipped. The hiring company pays the gross amount stated on the contractor’s invoice and has no withholding obligations whatsoever. Furthermore, the contractor receives the full payment and is responsible for declaring that income.

They also need to calculate their tax liability and make the required payments to the General Department of Taxation themselves.

Misclassification of Independent Contractors and Its Consequences

Getting the classification wrong is a serious and costly error. If Mongolian authorities determine that a contractor is an employee, the hiring company faces severe consequences. This misclassification triggers retroactive liabilities for all unpaid employee benefits.

It includes:

  • Social security contributions (which can exceed 20% of wages)
  • Unpaid overtime
  • Mandatory paid leave
  • Severance pay

Furthermore, the company will be liable for back taxes, hefty fines and daily penalties for non-compliance.

Beyond the direct financial hit, the reputational damage can be lasting. It can lead to a loss of trust with other contractors, difficulties with future business registration, and increased scrutiny from tax and labor authorities.

You can overcome these negative setbacks by hiring PEO services in Mongolia. The service will help you hire compliantly without having to learn the details of the local laws yourself.

Benefits of Hiring Independent Contractors in Mongolia

Cost savings and budget flexibility

Since hiring contractors eliminates the fixed costs of employees. This includes mandatory social insurance contributions (pension, health, unemployment), paid annual and sick leave, and other benefits. You pay only for the work delivered, making budgets more predictable and adaptable to project flows.

Access to specialized expertise

Because contractors allow you to tap into highly specific skill sets. For instance, a mining geologist, a Mongolian-Russian legal translator, or a niche software developer. This is ideal for projects requiring knowledge that doesn’t exist internally, without the long-term commitment of a full-time hire.

Operational agility and scalability

Since you can scale your team up or down with remarkable speed in response to project demands or market changes. In fact, onboarding a contractor is often a matter of weeks instead of months. Hence, it allows you to seize opportunities or conclude projects without the complexities of employee recruitment.

Fresh perspectives and innovation

Because contractors bring diverse experiences from working with various companies and industries. You’ll find that this external viewpoint can challenge internal assumptions and introduce new best practices. It can also drive innovation and provide a valuable boost to problem-solving.

Focus on core business functions

As using contractors for specialized or peripheral tasks allows your permanent team to concentrate on the company’s core mission. This improves overall efficiency and ensures that your key employees are deployed on the highest-value activities.

Key Considerations for Hiring an Independent Contractor in Mongolia

Drafting a Solid Service Agreement

The foundation of any compliant contractor relationship in Mongolia is a written contract. This is not merely a formality, but it is your primary defense against misclassification. Note that the agreement must be framed as a contract for services, not an employment offer.

It should meticulously define the project scope, specific deliverables, timelines, and a payment schedule tied to milestones or completed work. Crucially, the contract must state that the individual is an independent contractor responsible for their own taxes and benefits.

Finally, include clauses that affirm the contractor’s freedom to work for other clients and to determine their own work methods.

Verifying Contractor Business Status

It’s essential to perform due diligence to confirm the contractor operates as an independent business. Therefore, request evidence of their registration with the Mongolian tax authorities, such as a taxpayer identification number.

Also, ask if they are registered as a sole proprietor or have their own limited liability company. A legitimate contractor will have their own business bank account and will issue formal invoices for their services.

Ideally, they should be able to demonstrate that they work with multiple clients and are not financially dependent on a single source of income. This verification process is not just about paperwork, but provides tangible evidence that the relationship is commercial in nature.

Leveraging Recruitment Agencies for Local Expertise

For companies unfamiliar with the Mongolian market, partnering with a local recruitment agency can be a strategic move. These agencies do more than just source candidates, since they provide critical market intelligence on competitive compensation rates for contractors.

Furthermore, they help vet a professional’s business registration and reputation. This is a time-consuming task that is taken off your hands. Also, they serve as a local guide, helping you avoid common pitfalls and connecting you with high-quality independent contractors.

Are you looking for a top recruitment agency that can help you find the perfect contractor? Then check out our international recruitment agency to get started. We’ll help you find the ideal candidates for pushing your project forward.

Tax Law for Contractors in Mongolia

Independent contractors in Mongolia are subject to personal income tax (PIT) on their business earnings. The PIT system is progressive, with rates that can escalate based on income brackets. It is the contractor’s sole responsibility to calculate, file, and pay this tax to the General Department of Taxation. That’s typically through quarterly advance payments and an annual final settlement.

They are also responsible for their own social insurance contributions, which cover pension and health benefits. For the hiring company, this creates a clean arrangement where your only obligation is to pay the gross invoice amount. Also, you do not withhold any taxes. However, you must keep meticulous records of all payments, as these may be needed to demonstrate the nature of the relationship if ever questioned.

How to Pay an Independent Contractor in Mongolia?

Bank Transfers

The classic method involves an international wire via the SWIFT network. While secure and direct to the contractor’s local bank account, it is often the most expensive and least transparent option.

Banks typically add big fees and apply poor exchange rates with significant markups. This can erode the contractor’s final payment. Also, transfers can be slow, taking 3-5 business days, and are prone to delays if banking details are entered incorrectly.

Furthermore, you can try the best contractor management software. This allows you to manage a team of contractors and offers features for onboarding.

Wise

Services like Wise have revolutionized international contractor payments. They use the real mid-market exchange rate with a transparent fee, ensuring the contractor receives the expected amount in Mongolian Togrog (MNT).

Furthermore, Wise Business accounts offer features like batch payments for multiple contractors, which saves immense administrative time. Funds often arrive within 1-2 days, and the platform provides clear tracking.

Payoneer

Payoneer is a popular choice in the global freelance community. Contractors can receive payments in multiple currencies and withdraw funds to a local bank account.

For businesses, it streamlines mass payments and can assist with generating necessary payment records. However, both you and the contractor should be mindful of the fee structure for currency conversions and withdrawals to ensure cost-effectiveness.

Skrill & PayPal

Digital wallets like Skrill and PayPal offer speed and convenience, especially for smaller or one-off payments. Additionally, they are user-friendly and funds can be sent almost instantly with just an email address.

The major downside is cost, since they often have the highest fees and the least favorable exchange rates of all options. Additionally, not all contractors in Mongolia may use or have easy access to withdraw funds from these platforms.

Hire Contractors in Mongolia With Our Support

Building a team in Mongolia offers access to a proud, skilled, and ambitious workforce. The independent contractor model provides the perfect system to hire talent with agility and focus. However, it can be tricky to overcome the local laws to avoid misclassification risks.

This is where the support of a global Contractor of Record (COR) like RemotePeople is handy. You’ll find that we act as your local expert and legal partner in Mongolia, ensuring every engagement is compliant from the start.

We’ll handle:

  • Contract design under local law.
  • Manage secure and timely payments in local currency.
  • Provide ongoing support to mitigate any risk of misclassification.

Do you want to try the top CoR in Mongolia? Then check out our Contractor of Record service today. We will find you the best contractors for each role to push your project forward.

Frequently Asked Questions

Yes, a foreign company with no legal entity in Mongolia can directly hire and pay independent contractors. The relationship is commercial and not employment-based.

 

The key is ensuring you have a good service contract and that the contractor is genuinely operating their own business.

No, you do not need to establish a local company to hire an independent contractor. This is a primary advantage of the contractor model. You are simply a client purchasing services from a Mongolian business.

Payment is typically made via international bank transfer or a dedicated payment platform. You will pay the gross invoice amount in the agreed currency (often USD or EUR) to the contractor's business account.

 

Furthermore, it’s the contractor's responsibility to convert funds and pay all applicable Mongolian taxes. Using services like Wise or Payoneer can optimize exchange rates and reduce transfer fees.