How to pay an independent contractor: The 5 best methods

Today’s workforce wants flexible work schedules, freedom to move, and a solid work-life balance. From IT and programming to finance and engineering, independent contractors are more prevalent than ever, collaborating with organizations across an ever-growing list of job roles. 

The break from traditional work introduces new questions and challenges for human resources and payroll, including how to pay independent contractors that are spread across the globe. In this guide, we’ll explore different payment schedules and methods, best practices, and compliance issues your organization should be familiar with before adopting an international hiring strategy.

Determining if a worker is an independent contractor or employee

First, is your new hire an independent contractor or an employee? The distinction is vital—miscategorized employees can bring costly litigation, fines, and tax penalties. Not only can offenders land in hot water with the IRS, but they’ll also earn a bad reputation.

Independent contractors (such as freelancers) are self-employed individuals hired by organizations on a contract basis. Self-employed workers trade a set salary and benefits in exchange for flexible work and independence.

Independent contractors handle tax forms and pay taxes independently, including Social Security and Medicare taxes. They’re also responsible for their own health insurance, retirement plans, and vacation time. Businesses may offer benefits or insurance—like independent contractor liability or performance bonuses—as optional perks to attract talented freelancers. 

In the United States, full-time employees earn a fixed income with payroll deductions withheld by their employer. They receive benefits like health insurance and paid time off. Additionally, employers have extra tax liabilities (e.g., federal unemployment tax, disability insurance, and Medicare tax), and workers are better protected by labor laws. They may be entitled to severance, workers’ compensation, and overtime pay.

5 ways to pay independent contractors

Countless payment services exist to pay independent contractors worldwide. Depending on the available payment methods, currency exchanges, and local compliance issues, payroll may require various payment methods to pay out different team members. 

Here are five of the top methods for paying contractors:

• Check: A business check is fast, simple, and affordable. This straightforward form of payment doesn’t incur any fees. It’s attractive if the payment isn’t time-sensitive, but checks can get delayed or lost in the mail—not ideal when working with international contractors.
• Wire transfer: Domestic and international wire transfers are fast and convenient. Payroll should consider delivery speed and fees before choosing this payment method. 
• Direct deposit: An ACH payment is a quick and convenient way to pay independent contractors. An ACH is an electronic bank-to-bank money transfer that can be set up for one-time or recurring payments—helpful in managing both 1099 contractors and W-2 employees. However, ACH payments can take several business days to process and may incur fees or come with spending limits that delay payments. 
• Instant online payment system: Online financial operations platforms—like Oyster’s all-in-one HR and payroll software—centralize payroll and simplify administrative tasks. Payroll can use third-party online payment systems to pay both W-2 and 1099 workers, making payments easy to document and track. Likewise, many platforms offer freelancers cash advances and digital wallets to get paid quickly.
• P2P pay networks: Peer-to-peer networks like Wise, Payoneer, and Paypal are popular for distributed teams because of their simplicity. Typically, you only need a name, email, or phone number to process an online payment. P2P apps are best for one-time payments since they charge commissions, don’t allow mass payments, and often lack mediators to handle refunds, disputes, or payroll system integrations.

Oyster streamlines independent contractor management by consolidating operational, financial, and legal tasks. Organizations of all sizes can manage payment for large, globally distributed freelancers with simplified onboarding, document storage, and compliance, no matter where contractors work.  

5 steps to pay independent contractors

Independent contractor payment is simple since businesses don’t need to worry about withholding taxes or managing benefits. Here is a simple five-step protocol to ensure freelancers get paid for their work:

1. Classify the worker

First, you should verify that the worker is truly an independent contractor. If you aren’t sure how to classify a worker, you can file form SS-8 with the IRS to receive an official determination. Additionally, HR should check special state and local legislation for location-specific regulations. 

2. Set payment terms

The payment rate is determined based on project needs and industry standards. Contractors pay taxes and handle work benefits on their own. To attract top talent, you may need to pay more compared to salaried employees to cover contractors’ tax liabilities and benefits. Whether weekly, monthly, or project-based, agree on a clear payment schedule that prioritizes happy independent contractors and smooth cash flow management. Document everything and sign an independent contractor agreement. 

3. Collect a W-9 form

After agreeing upon a payment method, rates, and frequency, collect a W-9 form. A W-9 form is a federal tax form documenting the worker’s information, including their taxpayer identification number. An independent contractor should complete a W-9 tax form before beginning work to facilitate earnings reporting on their 1099 form.

4. Calculate and process payment

Establish a reliable payroll system with consistent, accurate, and timely payments. A well-organized payroll process maintains contractor satisfaction by avoiding payment delays or errors. Untimely or incorrect payments jeopardize the relationship and the organization’s overall reputation.

5. Process Form 1099

At the end of the fiscal year, complete and file Form 1099 for each independent contractor paid more than $600 in a single year. Send a copy to the freelancer so they can pay their income taxes. 

Factors to consider when paying independent contractors

Independent contractors likely have a preferred payment method with low fees and quick payment processing. However, it’s up to payroll to determine and clearly communicate which invoice and payment method is the most cost-effective, efficient, and compliant. Here are the essential factors:

• Local labor laws: An independent contractor’s location can affect contractor classification, wage requirements, and payment schedules. Compliance with these regulations is vital to properly manage contractor payments and avoid legal complications. 
• Payment methods and fees: For a large, distributed team, payroll may need multiple payment methods, each with distinct processing fees, currency exchanges, and transfer times. Choose a method that balances cost and convenience for the organization and the independent contractor. Steep fees and long wait times can soil job satisfaction and negatively impact your relationship with a valuable freelancer. 
• Payment frequency: Decide on a frequency of payments, whether one-time, recurring, or mixed. For example, you might set up monthly payments using direct debit and make additional payments for project milestones or completion. This approach helps manage cash flow and aligns payments with project progress. 
• Clear communication on payment terms: Agree on payment terms and rates before starting work to avoid misunderstandings. Discuss various payment structures (e.g., pay-as-you-go, prepay, upfront, payment on completion, hourly rate). A clear independent contractor agreement ensures alignment and fosters a strong working relationship. 

Tax obligations when paying international contractors

When you work with independent contractors, you generally aren’t required to withhold taxes like you would for employees. However, each country or jurisdiction may have unique tax compliance and reporting requirements for employers. Stay abreast of these to remain compliant.

Research your responsibilities and create a system for handling taxes and ensuring tax compliance. Although independent contractors are responsible for self-employment tax, you need a comprehensive system for recording contractor information, classifying contractors correctly, and reporting to government agencies.

Go global: Hire contractors and simplify payments with Oyster

There’s no shortage of freelancers in the global job market. Today’s workforce is eager to work on their own terms outside the traditional employer-employee relationship. A comprehensive understanding of payment options ensures your company maintains positive, long-term relationships with talented independent contractors. 

Looking for payroll software to help you automate invoices and pay international freelancers on time across multiple currencies? Oyster makes hiring and onboarding your global workforce easy. Try Oyster today.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.