The Best Ways to Pay Contractors and Freelancers in 2023

The world of work has become more complex because of the different types of employee classifications. As a result, more businesses are hiring freelancers, contractors, and employees to handle long-term or short-term projects in their organizations. In fact, the US has 70.4 million freelancers and 9.6 million self-employed professionals — and this number is still growing. But before hiring these types of talents, be sure you know how to properly pay them first.

Paying Freelancers vs. Contractors vs. Employees

Here are the differences between freelancers, contractors, and employees in terms of payment:

• Employees: Work a fixed set of hours per day or per week. They are paid a regular hourly rate or fixed salary regularly.
• Contractors: Specialize in niche services such as database administrators, web developers, and heavy equipment operators. They are usually hired for a significant period of time, spanning 3 months to one year. Their work usually involves close collaboration with the client, so working hours are decided based on the client's preferences.
• Freelancers: Self-employed individuals with no affiliation with the company. They set their own rates and usually work on a per-project basis. Most freelancers send their invoices after the project is completed. However, those working with organizations on a regular basis send a monthly invoice.

How to Pay Freelancers and Contractors

Here are the fundamentals you need to know for paying freelancers:

1. Make Sure All Necessary Documentation is Signed and Filled

Before any work begins, make sure freelancers complete standard documentation. Not only will this serve as a legal precaution, but it also ensures companies abide by federal and state requirements. Here’s a list of basic documentation to keep in mind:

• Contract and Statement of Work: A legally binding agreement that covers the context of the project, as well as the tasks and responsibilities of the freelancer.
• Form W-9 or W-8: The W-8 and W-9 forms are used by the Internal Revenue Service (IRS) to verify the name, taxpayer identification number, and address of the freelancer. A freelancer with US residency is required to fill-up the W-9 form. Meanwhile, non-US residents are required to fill out the W-8 form if they receive income from US companies.
• Nondisclosure agreement (NDA): Work that requires specific information to remain confidential typically requires freelancers to sign an NDA.
• Payment information: Make sure to get the financial information of your freelancers — such as bank account details, Paypal email, or other relevant information that your accounts payable team needs — to receive payment.

2. Define the Payment Terms in a Contract

Everyone deserves to get paid for a job well done — and the same goes for your freelancers. Make sure to clarify the payment terms for completed work. When is the deadline for the payment of invoices? How long do freelancers need to wait for payment? Can they only send invoices after the work has been completed? That way, you can avoid misunderstandings and maintain a positive relationship with freelancers, especially if you plan on working with them again in the near future.

For larger projects that span for months, you can pay based on project progress:

• Pay a small amount upfront
• Pay every time a significant milestone is completed
• Pay the rest of the amount after a project is done

3. Take Care of Your Taxes

Be aware of the taxation laws in your country when it comes to hiring freelancers. For example, US residents who perform freelance services for US companies must pay tax at a 30% rate. In addition, you should also get the freelancers' TIN to provide state tax authorities with accurate information.

4. How to Issue a 1099 Form

Independent contractors in the US are required to fill up Form 1099 to verify their non-employment income with the IRS. All businesses that hired freelancers that performed work amounting to more than $600 are required to fill out this form. Otherwise, you won’t need to issue this form yet.

Here’s the step-by-step process for issuing a 1099 form:

• Step 1: Get the required information: Get the basic information of your freelancers, such as their name, address, TIN, and amount paid during the tax year. You can get this information after freelancers have filled out the W9 form.
• Step 2: Submit copy A to the IRS: The form 1099 comes in two copies: Copy A (Form 1099-NEC)  and Copy B. The deadline for submitting copy A to the IRS is January 31. Unlike most tax forms, you need to get a physical copy of this form, then send it to the IRS.
• Step 3: Give copy B to freelancers: Next, ask freelancers to fill out copy B. Unlike Copy A, this form is available for download on the IRS website.
• Step 4: Submit form 1096: Other than the 1099 form, you also need to fill out Form 1096. This document summarizes the payment made to independent contractors.
• Step 5: Submit 1096 forms within your state: The 1096 form summarizes the payments you made to independent contractors. Much like copy A, this is an IRS requirement that must be submitted by January 31.
• Step 6: Consult a CPA: While it’s possible for small business owners to submit the 1099 form themselves, make sure to consult a CPA to ensure you remain compliant in the eyes of the law.

The Best Ways to Pay Freelancers and Contractors

At this point, you’re all set to start working with freelancers. How to start paying your freelancers? Here are some of the top freelancer payment systems to check out:

Direct Deposit

Direct deposits are a fast and efficient way to pay freelancers. It’s ideal for businesses that need to pay freelancers per month because it doesn’t deduct payments from freelancers. However, set-up for this type of transaction can cost around $50 to $200 or more. Also, it may take a few days for the freelancer to receive payment.

Checks

Checks are a convenient payment method because they don’t require deposit fees. However, it may take a longer time for freelancers to get their payment because it could be days or weeks until it arrives. And they have to wait for the check to be cleared to get their due.

Online Payment Systems and Apps

Online is one of the fastest and easiest ways to pay your freelancers is through online payment systems and apps. These tools are especially useful and cost-effective when you’re hiring freelancers based internationally.

PayPal

PayPal is one of the most popular online payment platforms. It is available in more than 200 countries/regions and supports 25 currencies, so you can pay anyone from anywhere in the world. Paypal fees can cost around 1.9% to 3.5% of each transaction, plus a fixed fee of 5 cents to 49 cents. Meanwhile, international fees will cost an additional expense based on the country. While it is an accessible solution, you’ll need to consider the transaction fees that will be deducted from your freelancers’ invoices when setting rates.

Gusto

Gusto is a payroll processing solution that lets businesses opt for automated or manual payroll. You can set up and track freelancer payments, as well as create and distribute 1099 forms for tax returns. It also sends notifications that remind freelancers to fill out the necessary documentation in their profiles.

Venmo

Venmo — owned by Paypal — is one of the most popular payment platforms, with more than 80 million users. The solution enables freelancers to set up a personal profile and business profile. This means a freelance writer could receive money from clients in their business account while their personal account remains separate. Plus, it's also possible to process in-store payments and provide customers with rewards and cashback. However, note that Venmo is only available in the United States.

QuickBooks

QuickBooks is a popular accounting software for businesses that need to pay a mix of employees, contractors, and freelancers. It has a comprehensive list of features such as business accounting, invoice and payment, tax deductions, and income monitoring. For contractors and freelancers paid per hour, Quickbooks can track time and identify bills for easy invoicing. More premium options also offer batch invoices and expenses, as well as workflow automation.

How To Pay Your Freelancers?

There are a lot of ways you can pay freelancers. However, the ideal solution would depend on your business’ preferred transaction fees or the finance team’s preferences. It would also depend on whether or not you’re hiring freelancers or contractors based in the US or internationally.

Need help figuring out how to pay your freelancers and contractors? You can check out Fiverr’s financial consulting services to figure out the best way to pay your contractors. And if you’re eager to add freelancers or contractors to your roster, head to Fiverr to find top talent for your business.

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