The Best Payment Methods for Freelancers and Contractors in 2023
Due to the various employment classifications, the workplace has grown more complicated. As a result, more companies are using workers, independent contractors, and freelancers to manage both long- and short-term initiatives within their enterprises. In fact, there are 9.6 million self-employed professionals and 70.4 million freelancers in the US, and these numbers are continually rising. But make sure you know how to pay them correctly before you hire anyone with these kinds of skills.
Paying Employees, Contractors, and Freelancers
Here are the differences in remuneration between independent contractors, employees, and freelancers:
Employees: Put in a specific number of hours each day or each week. They receive a consistent hourly rate or fixed salary.
Contractors: Contractors should specialise in specialised services like heavy equipment operators, web developers, and database administrators. They are typically recruited for a long duration, anywhere from three months to a year. Their work typically entails tight client engagement, thus the client's preferences are taken into consideration while determining working hours.
Freelancers: Independent contractors who are not connected to the business. They choose their own fees and frequently charge by the job. Most independent contractors provide their invoices after the job is finished. However, people who frequently collaborate with organisations provide a monthly invoice.
How to Pay Contractors as well as Freelancers
The foundations for paying independent contractors are as follows:
1. Verify That All Required Documentation Is Completed And Signed.
Make sure freelancers complete required paperwork before any work begins. This would not only protect businesses legally, but it will also guarantee that they follow local and national regulations. The following is a list of fundamental documents to remember:
A legally binding agreement that describes the project's environment as well as the duties and responsibilities of the freelancer is known as a contract and statement of work.
W-9 or W-8 form The Internal Revenue Service (IRS) uses the W-8 and W-9 forms to confirm the freelancer's name, taxpayer identification number, and address. A freelancer who resides in the US must complete the W-9 form. While non-US citizens who receive revenue from US businesses must complete the W-8 form.
Nondisclosure agreement (NDA): Freelancers are generally required to sign an NDA for work that calls for specific information to remain confidential.
Payment details: Get your freelancers' financial information, such as bank account information, a Paypal email address, or any other necessary facts that your accounts payable staff requires in order to pay them.
2. Specify The Terms Of Payment In A Contract
Everyone, including your freelancers, deserves to be paid for a job well done. The conditions for remuneration for completed work should be made clear. What time frame does the invoice payment deadline follow? How long must freelancers wait before receiving payment? Can they just issue bills once the job is finished? In this manner, you may prevent misunderstandings and preserve a good working relationship with independent contractors, particularly if you intend to collaborate with them again soon.
You can pay according to the progress of longer-term initiatives that take several months:
Pay a nominal sum in advance.
Every time a noteworthy achievement is made, pay
After the project is completed, pay the remaining balance.
3. Deal With Your Taxes.
When hiring freelancers, be aware of the tax regulations in your nation. For instance, US citizens who work as independent contractors for US businesses must pay tax at a rate of 30%. In order to give state tax authorities precise information, you need additionally obtain the freelancers' TIN.
4. Producing A 1099 Form
The IRS requires US independent contractors to complete Form 1099 in order to confirm their non-employment income. This form must be completed by all companies that employed independent contractors to complete work valued at more than $600. If not, you won't need to submit this form just yet.
Here is how to issue a 1099 form step-by-step:
Step 1: Gather the necessary data Obtain the fundamental details of your contractors, including their name, address, TIN, and the total amount paid throughout the tax year. Following the completion of the W9 form by freelancers, you can obtain this data.
Step 2: send copy A to the IRS. Two copies of the form 1099 are provided: Copy A (Form 1099-NEC) and Copy B. Copy A must be sent to the IRS by January 31. Unlike other tax forms, this one requires you to print it out and mail it to the IRS.
Step 3: Distribute copy B to contractors: Next, request that freelancers complete copy B. This form, as opposed to Copy A, can be downloaded from the IRS website.
Step 4: Send in the form 1096 You must additionally complete Form 1096 in addition to Form 1099. The payment made to independent contractors is summarised in this document.
Step 5: Submit your state's 1096 forms The payments you paid to independent contractors are stated on the 1096 form. This is an IRS obligation and must be submitted by January 31 just like copy A.
Step 6: Speak with a CPA Although small business owners are able to file the 1099 form on their own, you should speak with a CPA to make sure you stay in compliance with the law.
The Best Methods For Paying Contractors And Freelancers
You are now prepared to begin working with independent contractors. How can you begin paying your contractors? Here are some of the best systems for paying freelancers:
Money Transfer
Paying freelancers quickly and effectively is done through direct payments. Because it doesn't deduct payments from freelancers, it's perfect for firms who need to pay contractors each month. The setup fee for this kind of transaction, however, can range from $50 to $200 or more. Additionally, it can take a few days for the freelancer to get paid.
Checks
Because there are no deposit fees associated with checks, they are a practical form of payment. But because it could take days or weeks, it might take longer for freelancers to receive their payment. And before they can receive their payment, they must wait for the check to clear.
Apps and Systems for Online Payments
Online payment systems and applications are among the quickest and simplest ways to pay your freelancers. When you use freelancers who are based abroad, these tools are especially beneficial and economical.
PayPal
One of the most widely used methods of internet payment is PayPal. You may pay anyone from anywhere in the globe because it is supported in more than 200 nations and regions and more than 25 different currencies. Each transaction's Paypal costs can range from 1.9% to 3.5%, with a set fee of between 5 and 49 cents. International fees, meanwhile, will incur an additional cost based on the nation. Although it is a practical option, when determining rates for your freelancers, you must take into account the transaction costs that will be subtracted from their invoices.
Gusto.
With Gusto, businesses can choose between automated and manual payroll processing. You can prepare and send 1099 tax forms, as well as set up and monitor payments for independent contractors. Additionally, it sends reminders prompting freelancers to update their profiles with the required information.
Venmo
With more than 80 million users, one of the most well-known payment services is Venmo, which is owned by Paypal. Freelancers can create both a personal and commercial profile using the solution. This implies that a freelance writer's business account may accept payments from clients while their personal account is kept separate. Additionally, processing in-store payments and giving customers rewards and cashback are both viable. But keep in mind that Venmo is only accessible in the US.