Freelancing as a career has become very popular in the last few years. As of 2022, more than 1 billion freelancers are working globally. There are more than 58 million freelancers in the US alone, contributing to over $1.4 Trillion of the country’s economy. By 2023, the global freelancing market is expected to reach $455 Billion.
The United States of America estimates that by 2027, a significant chunk of its workforce will move to freelance, and over 51% of the population will consist of freelancers.
Working with independent contractors or freelancers is no longer a mere option however, it is now essential for almost all organizations owing to the fact that a major chunk of corporate talent is moving to freelance mode. While working with freelancers helps you tap into the top-notch talent of the world, it comes with its own sets of complexities, especially when it comes to payments.
Almost 86% of the global population of freelancers works remotely, which means that businesses are highly likely to collaborate with an overseas freelancer. Payroll can get more challenging when you frequently need to pay a foreign contractor, even more so when you start working with multiple foreign contractors.
This post will help you understand the key steps you must follow while paying freelancers to ensure the payment is accurate and on time.
Things to keep in mind when Paying Freelancers
- Classifying your workers correctly: You must classify your workers’ status on paper, whether an employee or an independent contractor. Freelancers have no long-term commitment to one organisation. They usually work on a fixed-term contract depending on the project timelines. In the US, freelancers are classified as 1099 independent contractors. You must ensure that the independent contractor you hire is legally classified as the same. This will keep you away from any trouble with the IRS.
- Getting the documentation ready: Once you have classified your workers, you must prepare the correct documents. Generally, 1099 independent contractors pay their taxes and benefits independently, and the employer is not obliged to do the same. If you’re unsure if your freelancer is legally registered as a 1099 independent contractor, you must fill out the Form SS-8 with the IRS to officially determine the worker’s status. You also must ensure that your freelancer provides you with their Tax Identification Number (TIN). You will need to deduct 24% of their earnings as tax liabilities if a TIN is not provided.
- Agreeing on the mode and frequency of payment beforehand: Having clarity of the frequency and mode of payment is crucial for both the employer and the contractor. This is even more important when you pay a foreign contractor. The frequency and the mode of payment should be mentioned in the contract. Upon mutual agreement, payments can be dispersed in multiple ways, such as checks, wire transfers, online payments, etc. The frequency can be weekly, bi-weekly, or monthly. You can also release payments when certain stages of the projects are completed or directly pay the total amount upon completion.
Now that the basics are set right let’s have a look at the details around the payment of the freelancers.
What are the best modes of Paying Freelancers?
You can pay your freelancers using multiple payment tools. The best and most preferred ways of processing freelancer payments are
- Checks: Checks are a great mode of payment for employers as they don’t require an additional fee. However, they may take time to be mailed to your freelancer. The mailing time can be eliminated using eChecks, which are sent via email. This, however, will not eliminate the time it takes to process the payment once the check is deposited.
- Bank Transfer: Bank transfers are the best and fastest way to pay your domestic freelancers. If your freelancer is based in the same country as you are, you can pay them instantly via a bank transfer without paying heavy transaction fees.
- Wire Transfer: Wire transfers work the same way as a bank transfer but also for international payments. A domestic wire transfer is generally processed within 24 hours; however, international transfers may take a few days. The main downside to wire transfers is that the transaction fees are quite hefty. This may become a deal breaker when it comes to large sums of money or when you need to use it too frequently.
- Credit Card Payments: This is the most secure mode of payment. Since the payments are not directly deducted from your bank account, you eliminate the risk of losing your money in case of fraudulent payments, as many credit card companies offer zero fraud liability. The only challenge with credit card payments is that the receiver must be registered to the same bank for the transaction to proceed.
- Online Payment: Today, various modes of online payment in the market can help you transfer money domestically and internationally. Applications such as PayPal and Venmo enable you to make payments within a few seconds, but they charge a heavy transaction fee. This fee can go up to 3.5%, which gets very expensive when making large or multiple transactions. However, this is also one of the best and quickest ways to pay a foreign contractor.
Once you have decided on a mode of payment, you can move on to paying your freelancers.
5 Steps to follow when Paying Independent Contractors
After you hire a 1099 Independent Contractor, you can pay them using the following steps:
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- Have your Freelancer fill out the W-9 Form: The W-9 form is essential as it is the single document that gives you all the information about your freelancers, such as name, type of business, certification, and Tax Identification Number (TIN). If the freelancer doesn’t provide his TIN, you must ensure that you withhold 24% of their earnings as a tax liability. This is essential because if you don’t receive a valid TIN, you as the employer will be responsible for any pending taxes.
- Revise Payment details: Once the documentation is done, go through the payment details as stated in the employment contract and ensure that both parties abide by the terms.
- Pay your freelancer on time: As an employer, you must ensure that your workers get paid the right amounts at the right time. The frequency and the mode of payment may vary with each freelancer. Therefore, employers must keep track of each freelancer’s payment dates and amounts.
- Clear pending Taxes (if any): If your freelancer has not provided you with a TIN, you must ensure that you hold 24% of their earnings and submit it to the right tax authorities.
- Fill out Form 1099-NEC: If you have paid your freelancer more than $600 in a year, you must fill out Form 1099-NEC. This form helps you report all non-employee compensations during the course of the year. Once this form is filled, send a copy to the IRS and the independent contractor.
These are the steps that you need to follow while paying an independent contractor. However, things might change when you pay a foreign contractor. Apart from processing the payment on time and in the right amount, you will need to ensure a few other things, including
- Paying the overseas freelancer in their local currency
- Staying complaint with the labor code of that country
- Withholding taxes, social security, etc. (if any)
The process may be relatively manageable if you work with a limited number of foreign contractors; however, managing all these aspects when paying multiple overseas freelancers can become challenging to handle internally. Keeping track of each contractor, managing payroll, and processing payments according to different labor codes might increase room for error. In such cases, the easiest way to ensure you get the benefits of working with freelancers worldwide and making right, on-time payments simultaneously is to partner with a Contractor Payroll Service.
Pay a Foreign Contractor using Multiplier
Processing freelancer payments can become challenging, especially when working with international freelancers.
Partnering with Multiplier will give you end-to-end support from onboarding to offboarding.
With our intuitive & easy-to-use dashboard, you can pay your freelancers and independent contractors securely, on time, and in just one click, and have 100% visibility of the payment status.
You can pay Multiplier in a single currency, and we will pay your freelancers in their respective local currencies. With Multiplier, you can have access to talent in over 120 countries.
Our platform tracks all the critical aspects of your freelancers and presents the data to you on a single dashboard. This includes hours worked, payment status, and leave tracking.
Our SaaS platform removes the hassle of managing the invoices, remembering the payout dates, and initiating the individual payments to the freelancers/contractors.