A Quick Guide to Freelancer Payments

The gig economy is expanding at an astronomical pace. It’s becoming quite apparent that the future workforce is freelancers. We’re living in a time where remote work is not only a perk, but an essential part of running a safe and effective business. 

Freelancing is no longer a fad.

Organizations must be more open to workforce flexibility. This includes hiring the contracted services of a freelancer, whether on a short-term or long-term basis. 

Who is a Freelancer?

A freelancer is an individual who is self-employed and offers contracted services typically on a short-term basis. With the rise of the gig economy, an increasing number of businesses are hiring freelancers for long-term commitments. 

Freelancers usually work remotely on multiple projects, at their own pace, during their own time. A freelancer typically sets an hourly rate or charges a client based on a variety of parameters, like project length, time, scope, etc.

Highly sought freelance services usually involve:

• Accounting
• Software
• Consulting
• Multimedia Production

Individual freelancers are classified as 1099 independent contractors. In America, they must fill out 1099 forms for the IRS. This also means freelancers pay for their own taxes, benefits, and insurance.

Freelancer Contracts

Before you hire a freelancer, the most important part of the relationship is hashing out the contract. Unlike regular employees, freelancers are lone wolves. This gives them a lot more leverage when it comes to negotiations. It also means a different kind of onboarding process and consideration of classification. 

Best Practices for Paying Freelancers

When it comes to your accounts payable workflow, paying freelancers is a bit different than payroll employees. 

Three best practices to effectively streamline this type of worker includes:

• Always gather the correct tax documents for the IRS
• Make sure you have classified the worker correctly 
  • Legal contractor
  • Freelancer
  • Regular employee
• Select a suitable payment method and agree on terms

Setting the Price

The first step is asking the freelancer whether they prefer to be paid hourly or a fixed price. Additionally, many freelancers will want a percentage upfront for goodwill. Especially if you are a new client or it’s a large project. 

It is common for workers to request this when payment is a fixed price as well. Not so much when freelance work is paid hourly. 

Consider Payment Terms

When is the due date for invoices? If there is a late payment fee, this should be in the contract. 

You should also discuss with the freelancer the checkpoints they have to meet in order to get paid and what happens if they are not met. 

Both parties should agree on how to parse payments, such as:

Paying Upfront

In a new relationship, don’t put all your eggs in one basket. You should only consider paying everything upfront if you trust the freelancer and have worked together in the past. 

Even then, however, it is a gamble since they are sole proprietors. If anything happens to your freelancer and they cannot work, you have paid for something you won’t get. 

Paying After Completion

This is where the freelancer’s trust in you comes into play. Keep in mind, the more experienced the contractor, the less likely they are to accept these terms. Especially if the relationship is new. However, this is the least risky option for a small business. 

You should also consider any materials or resources that need to be paid upfront and whether it is fair asking the contractor to eat these initial costs. Remember, the idea here is to build positive working relationships with freelancers so you always have helpers on hand.

Milestone Payments

Another option is to parse out payments as you go. The most common way is to pay half up front and the other half upon completion. 

If you commission a larger project that spans over months, you may want to consider setting up milestone payments with the freelancer. In this case, you can pay a third up front, a third halfway through, and a third upon completion—or however both parties agree to break it out.

Hourly Payment

In some cases, if you trust the freelancer, paying them by the hour may be easiest. There’s less paperwork and payments to make. This can be done in a variety of ways. 

Some contractors use a third-party freelance platform like Upwork, while others use time-tracking software. It all depends on your system and agreement with the contractor.

Resources

If the freelancer needs to purchase any resources or you need to provide assets to get the job done, this should all be listed in the contract. Make sure if you allow the contractor to do their own procurement, they keep well-documented receipts and expense reports. 

Ground Rules

The contract must have clear language that states how long the project will take and what happens in the event it is not completed. This includes how much payment is due to the freelancer and who owns the completed work. 

Lay out ground rules for sharing resources. What happens if a client doesn’t get you a draft on time? How long should a freelancer wait for your resources before it hurts the timeline?

Lastly, it should be discussed what happens when payments are not made on time. Is there a late fee? Will work be withheld?

Intellectual Property

If the freelancer is producing creatives, it’s important to clearly define who owns what. For example, if you hire a graphic artist to print t-shirts, can you use the same design years down the road for hats? Can you reuse photographs a freelancer provides? 

Non-Disclosure Agreement

To protect a company’s intellectual property, it’s also important to have a freelancer sign a Non-Disclosure Agreement (NDA). This document governs exactly what can and cannot be shared about the specific project.

Onboarding Process

The smartest way to onboard any new person in your company is through automation. Rather than an accounting team rifling through stacks of paperwork and chasing new clients, a self-service supplier portal neatly does the trick.

Supplier Portal

The primary role of any accounts payable department is to make payments for a business. 

However, the AP team often ends up being more like a “help desk”—answering consistent questions or guiding new vendors through the onboarding process. Your AP staff are not customer service representatives. 

Providing a self-service supplier portal for freelancers puts the onus on them for collecting, filing, and maintaining all work-related documents like tax forms, ID, bank data, etc. This means AP staff can focus more on aligning business processes and meeting needs for growth.

Self-service onboarding gets new freelancers up and running quickly. Contractors can use the portal to update information, set up invoicing, track payments, and more. Not only does automating this process cut out manual labor, it eliminates duplicate registrations.

Some key advantages to automating the freelancer onboarding process include:

Identifying Issues

A supplier portal allows a business to securely collect data from a freelance business. 

AP automation tools like Tipalti provide a rules engine driven by 26,000 different rules. This will identify payment issues before they happen and reduces error rates. 

The rules you have in place for your freelancer payment system should include:

• Notify of any indiscretions
• Vet and validate local bank details, such as SWIFT and IBAN codes
• Screen OFAC blacklists

All of this data is based on the payee’s preferred payment method and country of origin. 

Tax Compliance

No matter where a freelancer lives, your business must ensure tax compliance from anyone you hire. Your payment process should have a preferred method and currency, but it’s also important to be flexible. 

In the United States, freelancers are labeled as 1099 independent contractors. Therefore, if you hire such a worker, you’ll have to follow a set of prescribed rules. 

Unless a freelancer provides a TIN, the business will have to deduct certain backup withholding from their earnings. If the backup isn’t paid, you may end up liable for the freelancer’s uncollected taxes. 

Self-registration on a supplier portal will prompt all freelancers to provide their VAT/local tax ID as part of the entire onboarding and data capture process. 

This helps keep all information up-to-date. Especially since accurate data is tied to a supplier getting paid.

W-9 Form

It starts with having a contractor fill out a W-9 form. This will give you all identifying information needed for tax purposes, including:

• Name
• Type of business (Sole Proprietor, Corporation, Partnership…)
• Taxpayer Identification Number (TIN) (usually a social security number for an individual)
• Certification
• Other data depending on the industry

AP automation and invoicing software typically provides a supplier portal where all of this tax information is collected electronically. 

Proper Forms

Artificial intelligence is built into AP automation software to ensure every payee is selecting the proper forms. This involves submitting the correct documents based on the payment method, currency, taxes, and country of origin.  

Once the right form is selected, the program will digitize the document and apply thousands of rules. This includes matching the TIN number. 

To handle freelancer onboarding, look for tax compliance that supports:

• W-9, W-8BEN (-E), W-8EXP, W-8IMY, W-8ECI, W-4, or Form 8233
• Verification of tax data to ensure documents are complete
• Tax IDs collected and optimized for electronic signatures
• Protects a business from IRS penalties

You should also be running 1099 and 1042-S end-of-year metrics for a submission-ready file that helps manage reporting to state and federal agencies. The tool should be KPMG reviewed and approved to meet IRS requirements. 

International Freelancers

You should also have an AP solution that provides tools for non-US payers, like VAT and local tax ID capture. Platforms like Tipalti allow non-US payers to take advantage of local tax/VAT ID collection in 49 countries. 

The more countries a platform supports, the more freelancers you can hire.

For European countries, additional documents may be needed. This includes features like self-billing invoices where you must approve all documents before payments can be processed. 

You need a system with a built-in tax engine that validates against 3,000+ rules to prevent any ID errors or cross-border issues. This helps to simplify the invoice process further down the road.

The supplier hub you provide for freelancers should also support multiple languages. It must give contractors the option to choose specific payment thresholds which keep your business in full tax and regulatory compliance.

Payment Status

One of the largest disruptions in the AP workflow is when suppliers flood with requests for payment status. Trigger-based messaging helps to remove bottlenecks, ensure data is accurate, and keeps freelancers updated. 

Automated communications mean you are on the same page with contractors every step of the payment process. Status notifications can be sent via email or text, and will include information on:

• Invoice status
• Payment history
• Missing payment information
• Request for documents

This helps to reduce processing costs and elevate the freelancer business relationship. With this proactive approach, freelancers onboard faster, are confidently paid, and consistently kept in the loop.

Payment Methods

When it comes to paying freelancers, you have a multitude of options.

Paper Check

The oldest means of paying any contractor is with a paper check. As the virtual divide increases between in-office employment and remote work, paying with a check isn’t always feasible. Especially if your freelancer is located in another country.

That being said, checks are the simplest form of payment. The cost is limited to the checks, envelope, labor, and postage. Many freelancers do not prefer this method for obvious reasons. Lost checks, bounced checks, and lengthy payment windows are top concerns for a contractor. 

If your bank offers bill pay, you can use this method to have a check sent to freelancers without incurring extra costs to you or your freelancer.

PayPal

PayPal is one of the most popular ways to pay a freelancer and for good reason. The online payment processing service has been around for a long time. Although it’s a fast way to send money, freelancers are charged a percentage of the transaction. This means, when using PayPal, smart contractors generally raise their prices to offset the fees.

There are ways to limit the costs associated with PayPal. Invoicing outside of the platform saves freelancers money and a business is only charged a flat fee of $.50 per transaction. It’s also worth noting that PayPal fees are, in fact, tax-deductible.

Credit Card

Companies like Square allow a freelancer to accept credit cards over the internet. It’s fast and fees are relatively low, but you have to be comfortable sharing your credit card information with the freelancer. This can be risky in new freelancer relationships. Especially if the project scope is low and the credit line is high. 

Bank Wire Transfer

A bank wire transfer is secure and reliable with money being exchanged directly between bank accounts. However, the fees for wire transfers can be very high.

Fees can cost upwards of $30 or more per transaction. They can also take four to five business days to clear. Especially if you’re paying a freelancer in another country.  

However, wire transfers DO make sense if you’re dealing with a large sum of money (more than $5,000) because it ensures the money is highly secure. 

Electronic Funds Transfer (EFT)

An EFT (sometimes called direct deposit) can be faster and cheaper than a wire transfer, but it all depends on your bank. This method makes sense if you have a regular contractor you pay every month. Direct deposit doesn’t cost the freelancer anything, so it helps to rope in top talent with this payment method. 

It should be noted, direct deposit does cost anywhere from $50 to $200 to set up. You then pay a transaction fee each month and a per-deposit fee. Like a wire transfer, it is not instant. An EFT can take up to four days to hit the payee depending on the country and type of bank.

Over time, direct deposit can save a business the money it costs to print paper checks, it simplifies payroll, and saves on administrative costs. This is also an easier option if you’re a growing business and already pay employees through direct deposit.

Accounting Software

Many freelancers have accounting software set up and expect to be paid electronically. Tools like QuickBooks, Wave, and Due enable the contractor to create and send invoices through the system, then accept payment from your business. 

Payment processing is always secure and fast, with relatively low fees (none for you). Companies prefer this method because they feel reassured paying through a trusted brand.

Freelancer Platform

The places where you find freelancers are also a great means of paying them. Platforms like Upwork and Freelancer.com have a built-in onboarding and payment process that accepts all payments from a business on behalf of the contractor. 

Although this method is secure and reliable, both parties have to pay varying fees for the service. There may also be restrictions on how and when the freelancer can withdraw their money. 

Additionally, with freelance platforms, a business is usually asked to deposit funds into escrow. This is to ensure the freelancer has a deposit upfront. However, it’s money you have to pay immediately before initiating the business relationship. Not all platforms or projects ask for escrow, but it’s something that should be noted.

Payment Gateway

If a freelancer has a built-in payment gateway on their website, a business pays there. A contractor can easily add an online checkout system to receive payments through a site. 

You may be familiar with some online payment gateway brands like:

• Stripe
• Payline Data
• 2Checkout
• WePay

This is a payment method that’s only worth the cost if the freelancer is receiving a high volume of transactions per month. You typically will not see this payment type, but it can happen with popular professionals.

Online Payment Solution

If you’re hiring freelancers overseas, chances are they’ll be using an online payment solution. That’s because it’s one of the easiest payment methods for international transactions. 

These platforms are important for paying people in a different currency and will convert money for you. Plus, freelancers receive the funds quickly, with few fees.

Due to the competitive market, you’ll find a lot of good payment deals through these programs. Expect to see brand names like:

• Cash App
• Google Pay
• Payoneer
• Skrill
• Authorize.net
• ProPay

In order to make transactions through an online payment solution, you must have an account. They’re typically free to open.

International Payment Methods

When it comes to paying freelancers on a global basis, it’s important to have all your ducks in a row before the project starts. A few questions to consider during negotiations with the contractor include:

• What currency do you want to be paid in? (it may differ from their country of origin)
• Does this preferred method work in your region? For example, your client may prefer a bank transfer, but if they live in India, it’s not even an option.
• Will my business have to pay foreign exchange fees? This helps to determine the exact payment method.

International Preferred Payment Methods

If you still need a little push, consider these top payment methods by region:

• United States – Credit cards
• Europe – Local or regional bank transfers
• Japan – Credit cards or cash at Kombini
• China – Online payment solutions (AliPay and PayEase are top)
• India – Internet bank payments
• Russian Federation – Qiwi kiosk-style payments, online payment solutions (Yandex is top)
• Latin America – Local and regional online payment solutions (DineroMail and MercadoPago are top)
• Africa – Mobile payments
• Asia-Pacific – Mobile payments 

Top Brands for Freelancer Payments

When it comes to getting your contractors paid, there is no time to waste! If you’re still wondering how to start your search, consider these top brands:

Transferwise

One of the best ways to pay global freelancers is through Transferwise. The online money transfer service is based out of London and makes it easy for freelancers to send you invoices. The service claims to be 19 times cheaper than PayPal and allows freelancers to receive money from anywhere like a local.  

Transferwise will convert currencies and even offers a direct debit card. However, unlike freelancer platforms, Transferwise does not have escrow accounts or payment protection for freelancers. So, this solution is a great option for global payments but is a tad riskier than platforms like PayPal.

Tipalti

Tipalti is one of the best brands for paying freelancers around the world. They offer invoice-to-pay-to-reconciliation automation with in-depth vendor management tools. The platform also employs a dynamic self-service portal that walks freelancers through the entire onboarding process. 

Save time and money with secure, pre-built integration methods and a full-featured API. This means, no matter your freelancer payment workflow, Tipalti is a tool that can accommodate it. 

They remove the friction involved in processing contractor invoices and reconciling international payments. The system also integrates seamlessly with other popular platforms like Sage Intacct, NetSuite, and QuickBooks. 

Top features include:

• Payment options in over 196 countries
• 120 different currencies
• Choose Global ACH, wire, paper checks, prepaid debit cards, or PayPal – KPMG-verified

PayPal

PayPal is among the most common methods used to pay freelancers. When you make a payment, contractors receive the funds immediately into their PayPal account. The freelancer then has the option to withdraw to their local bank account or a prepaid PayPal debit card. 

Opening an account is free for all parties. It doesn’t cost a business anything to send money via a PayPal balance or bank transfer in the United States. However, if you’re using a debit or credit card, expect a 2.9% transaction fee, as well as another fixed fee.

PayPal is good if you’re working with one or two freelancers every now and then. The more people you add to the roster, the harder it becomes to manage. The platform lacks common freelancer management tools like security, escrow, and tracking.

Bill.com

Bill.com offers a basic receivables account to freelancers that makes paying them quick and easy. Contractors can send invoices electronically, track the status, and receive payments, all in one platform. 

Companies pay contractors through ACH transactions (i.e. from your bank to theirs). The immediate deduction on your side means a better view of cash flow. No more waiting for checks to clear. It’s also less costly, at about $.49 per transaction. You can even automate payments to your freelancer and schedule recurring monthly transfers.

All payments are automatically tracked and auditable. If a freelancer needs to know, you can tell them when an invoice was received, who reviewed it, when it was approved, and if/when it will be paid. This creates an audit-compliant payment process for your business.

Venmo

Venmo is the mobile option for paying freelancers. If your business is always on-the-go, Venmo is a good choice. Consider it like carrying a digital wallet. Freelancers can receive payments directly from your Venmo account to theirs.

Signup is free using email or Facebook. Then, connect whichever bank accounts or credit cards you pay with. Once you load money onto the balance, you can pay freelancers at any time.

Payments made in the U.S. via bank transfers or well-known debit cards come with zero service fees. If you aren’t using a U.S. bank or a major credit card, there is a service fee of up to 3% per transaction.

Although Venmo is simple, it does not offer the payment complexity of other solutions. You cannot track invoices or receive the type of security offered by some comprehensive payment methods.

Paying Your People

The method you choose must streamline the freelancer payment process, and should be agreeable to all parties. If you’re paying a contractor in a way that’s expensive, they’ll either move on or raise their prices. It’s not conducive to developing a long-lasting relationship.

The face of business is changing and the rise of the gig economy demands a new way of doing things. Freelancers are just as important as your regular, full-time employees—they simply serve a different function. The faster you can find an efficient way to pay them, the more of a competitive edge your business gains. 

The gig economy is not going away. Streamline your freelancer payment process now, and it’ll be smooth sailing for future projects.

Need to dive deeper on contractor payments? Check out our latest e-book, Contractor Payments, for more.

You may also be interested in:

Echecks: Efficient Global B2B Payment Methods 

Automated Invoice Processing Software: What is it and How Does it Work?

Global Payments Methods: 4 Popular Types of ePayment – Tipalti

eBilling – What is Electronic Billing?