One of the biggest struggles of business owners working with freelancers is figuring out a convenient way to handle payments. In this article, we will dive into the most popular freelance payment methods and help you choose the most suitable option for your business. Here’s a step-by-step guide on how to pay freelancers easily.
Figure out the details
Unfortunately, there is no one-size fits all solution. So selecting the best method requires some preparation. It might be helpful to ask yourself questions like:
How many freelancers are you planning to hire in the foreseeable future?
Will you only work with local contractors? Or do you want to stay open for international talent?
Will you work strictly with independent contractors? Or are you considering hiring freelancers as employees?
How often will you need to issue payments? Do you need to inform other people, such as accountants, in advance?
How much are you planning to spend on the outsourced projects?
Is your company already using any payroll services or software to pay employees or contractors?
Answering these strategic business questions will help to select the best ways to pay your talents. Also, ensure that you’re staying tax-compliant. A viable solution should help to minimize your payroll costs.
Understand your local tax laws
Tax compliance when working with freelancers is strongly tied to correct worker classification. What is it? Laws of worker classification define the differences between independent contractors and employees. Each group will require different tax forms (for example, in the US, independent contractors receive a 1099 form, and employees should receive a W2 form). Additionally, freelancers and independent contractors pay their own taxes, which will reflect on the final quote.
Local laws will also have different methods for calculating tax withholding. For example, the US tax law does not oblige companies to pay, withhold or report any taxes for payments sent to a foreign independent contractor.
Discuss the payment terms
A good payment method should be convenient both for you and the freelancer. If this is your first time dealing with contractor payments, we recommend starting with research on the most popular options on the market. For example, working with your talent with Useme. We will send a tax invoice to you and transfer the payment to the freelancers after you approve the work. Freelancers have several options to choose how they would like to receive the payment from us. Choosing a widely accessible, freelancer-preferred payment solution will later maximize your chances of finding the best talent for your projects.
When negotiating the contract and payment terms with your freelancer, make sure to discuss:
Methods in which they accept payment (e.g., direct deposit, electronic payment options, credit card payment)
Way of calculating their fee (e.g. hourly rate, per project rate)
Fees for additional tasks in the project
Timeframe for paying the invoice
Currency of the payment
All of the information above should be clearly stated in a freelance work contract, along with your agreed obligations. When gathering information for the payment, make sure to also collect the freelancer’s bank account or wallet credentials. As well as a correct taxpayer identification number to avoid backup withholding.
Choose the right currency
At the moment, the most common currencies used in freelancer payment methods are USD and EUR. But if you are in the same place as the freelancer, paying in the local currency might be more cost-effective. Securing payment processes handling several currencies will allow you to open your talent pool to international contractors, which is especially crucial if you’re sourcing language specialists. When deciding on a currency for payments, keep in mind that the actual money you spend will depend on exchange rates and transaction fees. In order to minimize the costs, consider using exchange platforms such as Wise or Payoneer, which allow users to transfer money between different currencies for a low fee.
Select the suitable payment method
When choosing a way to pay freelancers money, you should consider which of the options will be the most convenient for your business. Each different payment method has its benefits, from the simplicity of wire transfers to comprehensive online platforms with currency accounts. Some of the most popular ways to pay contractors are:
Direct deposits and wire transfers:
A direct deposit is basically an electronic funds transfer from one bank account to another. Its main advantage lies in security and simplicity, and an extra layer of payment protection. This method is suitable if you plan on sending routine payments to freelancers in the same country. A wire transfer to a different bank or currency might hold expensive transfer fees. So paying independent contractors with international bank accounts won’t be the best option.
The best solution for: Recurring payments or time-sensitive payments within the same currency.
Paper and electronic checks:
Checks are a form of payment that draws money directly from a checking account upon endorsement by signature. In this case, you have to issue a manual or electronic check stating the amount owed to the freelancer, which they can later cash in or deposit in a bank. Checks are currently the most expensive way to pay contractors compared to digital payments. While considered outdated, they are still used by 42% of millennials, mainly due to distrust towards online financial services.
This option is the best for : Businesses based on traditional payroll or when working with contractors without a bank account.
Online payment systems:
Online payment options facilitate easy electronic transfers between banks, private accounts, and e-commerce systems. Their strength lies in accessibility and, often, support of multiple currencies on with low service fees. Currently, the leading online money transfer service is PayPal, with over 400 million registered users. Other similar payment processing platforms are:
Paypal and similar services are often preferred online payment solutions. In order to use it, you should connect whichever bank accounts or credit cards you want to use with Paypal payments. Once you set the payment request, money from your Paypal balance will be transferred to the freelancer’s Paypal account. They can later withdraw the funds to their bank or electronic wallet.
Potential disadvantages of using online systems include variable fees, which can grow significantly when processing large transactions. While the platforms are fairly safe, there have been instances of fraud and hacking resulting in compromised user accounts. When choosing the service, review the fees and exchange rates for the currency you plan to issue your payments in, since all platforms offer different fees.
This option is the best for international payments in small volumes.
Credit card payments:
Next to a bank transfer, payment by credit card will be the safest and simplest solution. It offers quick process time and zero fraud liability. Make sure to review your bank agreements prior, as the terms and fees will be different for each major credit card provider. While simple to set up on the payer’s side, credit cards might be tricky for freelancer payments. Consult your current contractors on whether they can accept credit cards, since they might have to hold a merchant account to avoid high processing fees.
This option is the best for : Time-sensitive transactions used to pay freelancers with a business account or accounting software.
Useme connects businesses with freelancers together. We will send a tax invoice to you and transfer the payment to the freelancer after you approve the work. This way, you save time checking the paperwork and focus more on your business.
This option is the best for businesses to work with freelancers and contractors.
Online wallets like Venmo, Revolut or Cash App are payment tools, usually in app form. Their main goal is to allow for quick transfer of funds between two user accounts. They offer a good exchange range for many currencies and usually have low or zero service fees. But lack security compared to other solutions. Mainly built for personal use, online wallets won’t be convenient on a larger scale, but they might be a good option for a quick fund transfer.
This option is the best for one-time payments.
We hope this short guide answers most of your questions on how to pay independent contractors! Once you have chosen the currency, agreed on the fee, and received your invoice. Now only left to find a suitable way to send the payment! It can be easy and simple to send payments to freelancers.