A freelancer is an individual who earns money by project and works for a person or organization short-term. Because freelancers are not employees of the company, they can work on other tasks at the same time. Freelancers can do their freelance work on a full-time basis, or do contract work in parallel to a full-time job.
As an independent contractor, a freelancer must sign a contract that specifies what tasks they need to complete, and agree to a given fee based on the time and effort required to complete the task. Rates may be on a flat rate, hourly, daily, or project-based.
The US Internal Revenue Service (IRS) classifies freelancers as self-employed. Unlike company employees, the payer does not withhold their taxes, paying them in full. Therefore, the payment of income tax is the sole responsibility of the freelancer. Typically, an estimated tax amount must be paid quarterly. In addition to income tax, freelancers are subject to an additional self-employment tax.
Direct deposits for freelancers are becoming increasingly popular as more workers transition to remote work. Direct deposit means depositing money electronically into a bank account without using a paper check. Technically, it is a transfer from a corporate bank account to a freelancer account via the Automated Clearing House (ACH) network.
Paying Freelancers by Check
Checks paid to freelancers are losing favor because they are inefficient for employers, create complex logistics, and might result in errors and payment issues.
When freelancers are paid by check, payroll managers first need to process the payment, and within a few days they send the check by physical mail to the freelancer, or distribute it in person. In some cases, payroll managers will hold the check until it is claimed by the freelancer, which creates security issues.
Another challenge is tracking checks until they are deposited. Freelancers might lose their checks, and they can get lost in the mail (or worse, stolen). This means that a new check must be issued, which can be time consuming and frustrating for employers and freelancers alike.
Paying Freelancers via Wire Transfer
Wire transfers are commonly used for large transactions, and are increasingly being used to pay freelancers as well. Wire transfer works by receiving funds from one person’s bank account and depositing it into another person’s bank account, usually through a wire transfer company such as Western Union. Some providers allow same-day wire transfers, but transfers can take up to three days and usually include a transfer fee. A major advantage of wire transfers is that they are often the fastest way to transfer funds to foreign countries.
Freelance Management Systems (FMS)
An FMS allows freelancers to get paid the way they want, using almost any payment method available. Most FMS systems meet the 1099-K definition and can handle all tax compliance requirements such as issuing 1099 forms and collecting W8/9 forms.
A similar solution is freelance marketplaces (such as Upwork or Fiverr). These marketplaces too handle payments and tax compliance, and can also help organizations find and qualify freelancers. However, they also charge 10% to 25% of the freelancer’s fee in commission.
Paying Freelancers: Tips and Best Practices
Setting the Price
The first step is to ask the freelancer if they are paid by the hour or at a fixed price. Also, many freelancers want part of the amount paid upfront, especially if you are a new customer or they are starting a large project. It is important to receive a formal quote from the freelancer stating the price and the exact work and deliverables required in exchange.
Ground Rules
Contracts need clear language that explains how long the project will take and what will happen if it is not completed. It must be clear when payment is due and whether payment is dependent on specific milestones, and who owns the completed work.
An effective contract defines a timeframe for the project and handles all possible cases—for example, it should define what happens if the freelancer is late, or if the company ordering the project does not provide feedback on an agreed timeframe.
Another contingency the contract should address is late payments—whether the freelancer will be eligible for late fees, and whether the work done will be withheld.
Consider Payment Terms
Here are common payment terms:
Upfront payment—involves paying the entire cost of service in advance. Since this is a big risk, you should agree to these terms only if you trust the freelancer.
Paying after completion—involves paying the entire service cost only after the freelancer has completed the work. Here, the freelancer takes the biggest risk. This option is considered fair only if the freelancer does not have big upfront investments.
Milestone payments—involves parsing out payments as you go. Typically it means paying half upfront and the other half after completion. This option is ideal for commissioning a large project spanning months.
Hourly payment—involves paying freelancers per hour, using time-tracking systems or other options, as agreed and contracted in advance.
Ensure Compliance With Tax and Labor Laws
Freelancer contracts must comply with tax laws, but this can be challenging. For example, US tax law does not require US companies to pay, withhold, or report taxes for international freelancers outside the US. Employers must also comply with the labor laws of the country in which the freelancer is located, even if the company is located in other jurisdictions.
Conclusion
In this article, I covered the basics of freelancer payments, and proposed four tips that can help you manage freelancers more effectively:
Setting the price—always make sure you have a clear agreement with the freelancer clarifying what deliverables they need to provide and their compensation.
Ground rules—ensure there are terms in place for situations like late delivery or breaching of contract terms.
Consider payment terms—payment terms must be defined in advance with each freelancer. There are various options including upfront payment, payment upon completion, payment by milestones, and payment by the hour.
Ensure compliance—make sure you understand the legal implications of working with your freelancers and that you are meeting regulatory requirements in your country, as well as the country the freelancers operate from.
I hope this will be useful as you improve management and cooperation with your freelance workforce.
