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The best ways to legally pay your contractors and freelancers

As the demand for open talent is on the rise, more businesses are choosing to hire contractors, freelancers, or other independent workers. This can be a great financial decision too, contrary to popular belief. While freelancers and contractors tend to charge higher than what you’d pay an employee, they also tend to have very specific skills that mean they can get the job done quicker, which can be more cost-effective in the long run.

But one thing that often doesn’t cross the minds of businesses, is how to pay freelancers or contractors. While this might not sound like a question that needs answering, the way you pay independent workers does differ from how you’d usually pay employees on a payroll.

Including them in the payroll doesn’t work as they don’t pay taxes in the same way employees do, but simply paying by bank transfer isn’t always the right way either. In order to make sure you’re paying your freelancers or contractors correctly, it’s important to consider the legalities involved to ensure you’re doing so in a compliant way.

What do you need to consider when paying contractors and freelancers?

One of the first things to consider when it comes to organizing paying independent contractors is the classification status. It is the employer’s responsibility to correctly classify their workers and determining status is fairly simple.

Essentially, a freelancer or contractor has far more control and autonomy over when, where and how they work, and are responsible for their own expenses, equipment and anything else they need in order to carry out the work. They are not entitled to company benefits or holidays, but instead are responsible for their own work schedule. The more control the independent worker has, the greater it is to prove they are self-employed.

You can read more on independent worker classification in our article 5 tips for keeping your projects compliant.

Freelance payment types and agreements

Now that you’ve classified your workers correctly, it’s time to consider what the best payment method is and agree with your freelancer or contractor.

Freelancers and contractors may have their own preferences regarding how they are paid, so it is important to negotiate what works for you both. Most freelancers or contactors will charge either an hourly or date rate, or they may choose to quote a price per project.

In terms of when to pay independent workers, some may want to be paid upfront (however always consider your relationship with the freelancer and how much trust you have in them), some may ask for half up front and the rest later, or they may also be happy invoicing you after the work is complete (again this often requires trust in the working relationship).

If the work being done will take a number of months, it is common for the payment to be staggered across this time, either as a monthly retainer, or a project fee split into chunks, rather than paying one big chunk at the end. This helps with cash flow on both sides.

Whatever you agree, it’s best to have this in writing in the contract to ensure both parties are protected should either side not deliver. You should also set out boundaries regarding what happens with payment if projects run over, if work isn’t complete or if you need changes made/ more work needs to be done.

Freelancer payment methods

Payments can be made via a number of methods, with EFTs (Electronic Funds Transfer) being one of the easiest methods for paying freelancers or contractors. Not only is it fast (with funds being transferred anything from 1-4 days from payment being made), but its also one of the least costly options for businesses.

Other payment methods such as via credit card, or PayPal are also widely used but may take a small fee for each payment transaction from either the business’s end or from the freelancer when payment is received.

Accounting services and apps such as QuickBooks or FreshBooks offer a variety of different ways to pay your freelancers and contractors weekly, monthly and as one-off payments. They won’t often incur a service fee but these types of apps and services are usually offered on a subscription basis where you can keep a complete record of your accounts.

Cheques are rarely used in this day and age and are usually one of the slower methods, but are still a valid method of payment. However, with the rise of online banks and apps such as CashApp, faster payments can be made directly to freelancers or contractors without even needing to set up an account to send funds, making it a popular method of payment, similar to EFTs.

Whatever method of payment you use, be sure to collect invoices and keep a record of what’s been paid – either via reference numbers, receipts or screenshots to ensure you have evidence of payment should there be any disputes.

There are many different options available to you and it’s about finding out what works best for you. This may take some trial and error when you first start working with independent freelancers and contractors, but you’ll quickly find the right method for your business and feel confident when it comes to legally paying your contractors and freelancers.

WorkSavvy offers a flexible platform to easily manage performance, compliance and deliverables when working with freelancers and contractors. To see how WorkSavvy can benefit your business, why not book in for a free demo today?

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