How to pay independent contractors in 2024

The global gig economy is estimated to be worth $347 billion in 2021 and it’s expected to grow to $455 billion by 2023. The number of independent contractors on the market is rapidly increasing as more people seek flexible work schedules, geographic freedom, and the opportunity to work on their own terms. In the United States, 44% of gig workers consider freelancing to be a primary source of income. 

Independent contractors can work in a wide variety of industries and provide a diverse skill set, serving across different business functions ranging from engineering to finance and marketing. Some of the most common fields of work for freelancers include web and graphic design, programming, IT, multimedia production, content writing, and translation services.

In this article, you’ll learn about the different pay rates and terms, payment methods, best practices, and compliance issues you should be familiar with before hiring international contractors. This will ensure that your company is set up for a successful working relationship.

Determine if a worker is an independent contractor

Independent contractors are self-employed individuals who are contracted to provide services or work to a company as a non-employee. They are also commonly referred to as ‘freelancers’. Independent contractors choose to forgo the stability and benefits of traditional employment relationships to take advantage of work independence, flexibility, and freedom. 

Regular employees, on the other hand, receive a regular wage for their labor from which the employer withholds taxes. Employees are also eligible for employee benefits and the employer has a significant input into the employee’s working hours and schedule. Full time employees are often legally protected and can receive severance and worker’s compensation.

Independent contractors are responsible for paying their own income taxes and Social Security and Medicare taxes. Unlike regular employees, independent contractors are typically not eligible to receive employment benefits such as health insurance, 401k programs, and paid time off. 

Establish payment rate and terms

When hiring an independent contractor, one consideration you’ll have to make is the rate and amount you’ll pay. Establishing a clear rate early on will ensure that each party is clear on the cost and pay of the project. There are several different payment terms that you should be aware of, including the pros and cons for each. 

Pay as you go: The employer will work with the contractor to establish key milestones for the project. As each milestone is reached, the contractor will receive a certain portion of the total pay. This option is ideal for longer projects with a clear scope and measurable milestones. It may not be the best choice if the project is short-term or the milestones can’t be easily tracked and measured. 

Prepay/down payment: The employer will put down some predetermined portion of the project budget. This is ideal for when you’re working with busy independent contractors and have a larger project you need help with. Providing a down payment reassures the contractor of your commitment to see the project through and can secure your relationship when the contractor is facing a high demand for their services. 

Upfront payment: The employer makes the full payment before the independent contractor starts the project. This is the best option for employers who can afford to pay for the project upfront and can develop a strong relationship with contractors. You might consider this if you’re familiar with the independent contractor’s work and are looking to maintain a positive long-term relationship with them.

Payment on completion: The employer provides the full payment after the independent contractor shares the final deliverable. While this may be a more affordable option for the employer, it can be challenging to find reputable contractors who are willing to forgo payment until completion. This option is best saved for projects that are short-term and have a clearly defined scope. 

Payment by the hour: The contractor will track the hours required to complete the project and invoice the employer based on a predetermined hourly rate. Many experienced independent contractors tend to avoid this pricing strategy because it requires more effort to track hours and it does not accurately account for the years of experience that they bring to the table. As a result, this option is best saved for working with contractors that don’t need to have a lot of experience and will work on an ongoing project (such as a data entry project).

Agree on a payment method

Once you determine what payment rate and terms you will follow, you need to agree on the preferred payment method. While independent contractors may have a preference for payment methods, many will offer different options to fit the company’s needs. However, it’s best to compare the pros and cons of every option to reduce the risk of a costly and/or time-consuming error.

With that in mind, here are four of the top methods for paying contractors:

• Check: A business check is fast, simple, and affordable. It’s an easy form of payment that doesn’t involve any fees and can be an attractive option if the payment isn’t time-sensitive. However, a check can get delayed or lost in the mail. It’s not ideal when working with contractors abroad. 
• Wire transfer: Domestic and international wire transfers are fast and convenient. Check into delivery speed and fees before choosing this payment method. Fees will vary based on where your contractor lives. 
• Direct deposit: If you pay your independent contractors the same amount every month, you can set up direct deposit to put the process on autopilot. 
• Online payment system: Online payment systems such as Wise, Payoneer, PayPal, and Revolut can securely process payments across currencies. They are linked to your bank account and allow you to send immediate payments to contractors around the world.

Escrow options such as Paypal and escrow.com will hold the payment deposit until the project is complete. This gives you ease of mind that the project will be completed, while assuring the independent contractor that the appropriate amount of funding has been set aside to pay for the project. Keep in mind that these services may include small transaction fees. While the fee amount is trivial for smaller projects, it can add up quickly and is something to consider when paying freelancers larger sums of money.

Platforms like Oyster makes it easy to stay organized by managing the operational, financial, and legal components of working with independent contractors. Keeping track of all these functions in one place helps your company to streamline processes. These platforms are ideal if you’re looking to pay and manage lots of freelancers who are globally distributed because they can help you quickly onboard and offboard, store important documents, and remain legally compliant regardless of where the independent contractor is located.

Factors to consider when agreeing on a payment method

Some of the payment options outlined above include processing fees and take longer to transfer the money. This is important to consider and communicate with the independent contractor prior to agreeing on a payment method. 

If you’re planning to use a wire transfer, be prepared to pay higher fees than if you use some of the other methods. For larger projects, you may also need to consider the transfer limit and take that into consideration when choosing a payment method. 

Online payments are often a good option for paying contractors because they’re fast (often immediate), efficient for both the company and the contractor, and simple to manage. For instance, Oyster’s automated payment using direct debit ensures that contractors are paid on time, regardless of their location and preferred currency.

Best practices when paying independent contractors

Now that you’ve established a payment rate and payment method, it’s important to consider a few best practices to establish a strong working relationship with the independent contractor.

For example, before any work is done, make sure that both parties are clear on and agree on the payment terms and rates so you can avoid gray areas or complications in the future. Understand the independent contractor’s local labor laws and take into consideration how the contractor’s location impacts payment processing, currency exchange rates, and payment expectations.

Determine the frequency of payment for independent contractors. Depending on what payment structure you’ve decided to go with, payments may be made on a one-time or recurring basis. You may also choose a mix of payment methods. An example would be setting up a monthly payment using direct debit on Oyster and making an additional off-cycle payment at the completion of the project.

While it’s easy to want to just jump into the work, it’s worth taking the time to make sure everyone is in agreement to avoid later conflicts.

Things to keep in mind when paying international contractors

If you’re paying contractors in other countries, here are a few additional questions you’ll need to address.

• What payment options are available in the contractor’s home country?
• How can you pay the person in their own currency?
• Will the exchange rate cause any issues for you?

In addition, you’ll need to make sure you’re paying international contractors in a way that’s legally compliant, regardless of where they’re located. That means understanding regulations in your home country, as well as the countries in which your contractors live.

Tax obligations when paying international contractors

When you work with independent contractors, you generally aren’t required to withhold taxes as you would with employees because contractors handle their own taxes. However, each country or jurisdiction may have tax compliance and reporting requirements that you need to be aware of and compliant with as an employer.

Make sure you understand your responsibilities and have a system for handling taxes and ensuring tax compliance. Even though independent contractors are responsible for their own taxes, you need to have a good system in place for recording information, classifying contractors correctly, and reporting compliance.

Conclusion

Independent contractors can offer an attractive alternative to traditional employment models for companies with seasonal demands or specific projects that require a unique skill set. Startups and companies with tight budgets may also consider freelancers as an alternative to temporarily save money on overhead costs. 

There’s certainly no shortage of options as 79% of full time independent contractors are happier working on their own than in a traditional job. Having the understanding of how to navigate the conversation around payment will ensure that your company maintains a positive, and potentially long-term, relationship with any independent contractors you choose to work with. 

Looking for a tool to help you automate invoices and pay international freelancers on time and in multiple currencies? Oyster makes hiring and onboarding your global workforce easy. Try it today!