Best Ways To Pay Independent Contractors & Freelancers

In this article, we explain paying independent contractors & freelancers. Does your company know the best ways to pay them? Check out our eBook,“Are You Struggling With Paying Contractors?.”

Sometimes business owners have projects that they don’t have the bandwidth or expertise to handle themselves. This could be a product roll-out, marketing campaign, or integration of new technology. Given the limited scope and length of these projects, it may not make sense to hire new full-time employees.

But paying an independent contractor with a contractor agreement per project or per working hour is not the same as paying a regular employee. Unlike employees, independent contractors are self-employed, set their pay rates, and can negotiate payment options and schedules. The tax implications of independent contractors differ from employees as well. Independent contractors pay self-employment taxes, including the equivalent percentage of both the employer and employee share of payroll taxes.

This article will take a look at the most cost-effective ways to pay contractors while remaining tax-compliant. Each of the payment methods discussed in this article has a unique combination of strengths and weaknesses and deciding which is best for you starts with evaluating your circumstances.

The 7 Best Ways to Pay Contractors & Freelancers

  1. Checks
  2. ACH Transfers
  3. Credit Cards
  4. Wire Transfers
  5. Online Payment Systems
  6. Accounting Software and Automation
  7. Freelancer Platforms

1. Checks

Tried and true, checks are simple, relatively cheap, and there’s no need to sign up for an app or money transfer service. But despite their simplicity, there are some downsides. 

Paper checks are slow. Once a check is written, it has to be mailed to the recipient, the recipient then has to deposit it into their bank account, and it can take up to 2-5 additional business days for the check to clear and the funds to be made available in the contractor’s account.

Additionally, the funds are not guaranteed. This often makes contractors wary of accepting checks from a new company that they are not familiar with. A bounced check can leave them with fees from their bank as well as delay their payment.

One of the more overlooked downfalls of checks is security. While the recipient does not have to share any of their banking information, the issuing party’s bank account information is printed right on the check.

When you consider check vs. ACH costs, ACH is less expensive at about $2.01 to $4.00 for a check vs. $0.40 for an ACH transfer payment.

All things considered, checks remain a cheap, reliable form of payment but given their lack of security and slow processing time, they are best reserved for one-off situations where recurring payments are not necessary.

2. ACH Transfers

ACH transfers are the most common form of payment between employers and employees (i.e. direct deposit). While contractors are not employees, they can be set up with one-time or recurring ACH transfers in the same way to pay contractors with direct deposit. This is particularly convenient if you’re using software that can automate recurring payments. 

Additionally, ACH transactions are paperless and thus relatively secure. The contractor will have to share their bank account info with the hiring company, but most people are comfortable with this as anyone who has received direct deposit has been through this process before.

3. Credit Cards

Credit card payments are another quick and easy way to pay contractors. The allure of credit cards comes primarily from their security. Credit cards offer a layer of protection by keeping your bank account information private and separate from your daily transactions. 

Additionally, because you’re paying with a line of credit, you have the ability to dispute and resolve errant transactions without putting any of your actual money at risk. And when it comes to erroneous or fraudulent charges, credit card companies are typically more willing to resolve disputes quickly and often cover the total amount of the charge until the issue is resolved. Many companies take it a step further by offering zero fraud liability for their customers.

However, in order to pay a contractor via credit card, the contractor must have a merchant account with their bank or another merchant service like Square, so this isn’t always an option. 

4. Wire Transfers

Wire transfers are one of the best options when speed is paramount. If you need to make a payment quickly, a wire transfer is one of the quickest ways to make the funds available. 

While international transfers can take a few days, domestic transfers usually process within 24 hours. This speed though comes at a cost. For domestic and international wire transfers, the sender and recipient usually incur fees. Fees for domestic transfers average $15-$20 for recipients, and $20-$30 for senders. International transfers cost even more. 

The most important thing to consider before initiating a wire transfer is how well you know and trust the recipient. Once the funds have been transferred to the recipient’s account, it’s much more difficult to reverse. This is particularly true for international wire transfers.

In short, wire transfers should be reserved for time-sensitive payments. For small or routine payments, the relatively high cost and risk associated with wires make them less attractive than the other options we’ve looked at thus far.

5. Online Payment Systems

Online payment systems are another great option for business owners. PayPal, the world’s leading online payment system, definitely leads the pack. It is available in over 200 countries and has over 300 million active users.

PayPal is lauded for its security because it keeps your personal bank account separate from the transaction you complete. PayPal links to your bank account so you can transfer funds between the two. To pay another PayPal user, you simply transfer the funds from your bank account to your PayPal account and then process the transaction. The recipient will receive the funds in their PayPal account and can then transfer the funds to their bank account. For some types of payments, PayPal charges payment processing fees and foreign currency conversion fees.

In order to use PayPal in a commercial setting though, your contractor will need a PayPal business account, so choosing PayPal is only convenient if the contractor already has that set up. If they do have an account though, PayPal automatically produces a 1099-K form at the end of the year which saves you the hassle of having to send a form 1099-NEC.

It’s worth noting that if you plan on making frequent or large international contractor payments, other systems like Xoom (owned by PayPal) and Wise (formerly Transferwise) might be more cost-effective options. These platforms handle currency exchange and could prove cheaper than using PayPal. For a more in-depth look at these services, take a look at our Transferwise vs. Xoom comparison. 

6. Accounting Software and Automation

While accounting software isn’t necessarily a payment method, it’s worth pointing out that using accounting software or payroll software is especially handy if you’re hiring multiple contractors. Accounting software like QuickBooks and Intacct are powerful tools that integrate with other systems to automate tracking, invoicing, tax preparation, and payments. These platforms reduce administrative costs by keeping everything housed in one place and automating tasks that would otherwise be performed manually.

Your business can efficiently pay global independent contractors and freelancers with AP automation and mass payments SaaS software integrated with your small business accounting software or ERP system. Tipalti automation software scales with growth and works for multi-entity businesses, including mid-sized and large companies. 

With Tipalti AP automation and global payments add-on software, businesses process and approve invoices to make and automatically reconcile domestic and global freelancer, independent contractor, and other supplier payments. These payments are made:

  • In batches
  • Using a choice of preferred payment methods
  • In 196 countries and one of 120 currencies
  • With FX (foreign exchange) feature options
  • With automatic global regulatory compliance and 1099 tax reports

Tipalti offers a virtual credit card for tracking spend by employee and getting cash-back rebates on your business purchases when you use the Tipalti Card. 

7. Freelancer Platforms

Examples of freelancer platforms are Upwork and Fivver. Project terms, including fixed price or hourly rates, are set between the hirer and independent contractor (through accepted freelancer proposals). 

Business owners sign up with a freelancer platform and provide a payment method from which each freelance project will be paid to the freelancing company upon approval of the freelancer’s work deliverable on a project. Payments are due within days after completed milestones or projects, as specified in the proposal. 

Early in the process, the freelancing company verifies the payment information on file, which may be a credit card or other selected payment option. 

For projects, the freelancing business receives an add-on percentage fee from both the receiver of freelancing services and the freelancer for their use of the freelancing platform and matching the participants. 

Freelancer platforms then make contractor payments for these agreed milestones or completed jobs (less a percentage fee), using the payee’s choice of available payment methods such as ACH transfer in the U.S. or a global method of payment like PayPal.

The reality is, you likely won’t find a one-size-fits-all solution. Your contractors may have varying preferences and you’ll have to balance a combination of payment methods and schedules. Understanding the tools and methods available is the best way to maximize efficiency and minimize the cost.

How can your business improve the way it pays independent contractors?

Download our eBook, “Are You Struggling With Paying Contractors?” to explore how to pay independent contractors and freelancers better.

Use AP automation and mass payments software with self-service supplier onboarding and verification (including independent contractors), a choice of available payment methods, payments tracking for tax compliance reporting, and screening for global regulatory compliance.

Things to consider before choosing how to pay your contractor

Deciding how best to pay your contractors depends on a number of factors. Among the most important are taxes, the number of contractors you plan to hire, how frequently and how much you pay them, and where they are located.

How to handle taxes?

Unlike employees, independent contractors pay their own taxes. The contractor provides the hiring company with a W-9 form (similar to the W-4 form for payroll wages that employees fill out) or a W-8 form and at the end of the year, the hiring company generates and sends a 1099-NEC form (formerly known as a 1099-MISC form) to the contractor to file with their taxes. 

While the process is simple, it’s important that the information on the form W-9 or W-8 is accurate and that the contractor is appropriately classified. Mistakes, like having an incorrect taxpayer identification number (TIN), can lead to backup withholding which requires the hiring company to set aside income tax on payments to that contractor. Misclassification can also be costly, so be sure to check the IRS guidelines before making any hiring decisions.

How many contractors do you plan to hire?

The more contractors you hire, the more labor-intensive your costs become. It’s important to plan ahead for this because you will have to produce tax forms, track hours and/or projects, and issue payments to each individual. Remember that contractors can negotiate how they are paid, so theoretically, each contractor could negotiate a different form of payment. This can quickly become an administrative nightmare, so it’s important to have a clear idea of how many people you’re going to hire before negotiating payment terms and methods.

How frequently (and how much) will you be paying your contractors?

Different forms of payment have different cost structures, so it’s important to understand payment amounts and how frequently you’re going to be paying your contractors. For example, let’s say you need to make a one-time payment to a domestic U.S. contractor of $50,000. It might make sense to do a wire transfer at a transfer fee of $30. However, if you’re paying a contractor $2,000 a week for 25 weeks, you’ll be charged 30 dollars each time. This will cost you $750 in wire transfer fees over the course of the contract.

Where is your contractor located?

In some cases, you may need to hire an independent contractor who is working abroad. In this scenario, currency exchange rates come into play. Depending on how you pay these non-employees, the fees can become costly, not to mention the added security concern.


With all of these considerations in mind, take a look at the seven best ways to pay independent contractors and freelancers. Then decide how to pay independent contractors in one or more ways with the tools you need to best fit your business needs and budget. Download our eBook, “Top Strategies for Online Marketplaces.”

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