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.
Here are the differences between freelancers, contractors, and employees in terms of payment:
Here are the fundamentals you need to know for paying freelancers:
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:
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:
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.
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:
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 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 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 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 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 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 — 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 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.
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.