5 Ways to Pay Freelancers
What is a Freelancer?
The term freelancer applies to any individual earning money on a per-task or per-job basis. A freelancer is considered an independent contractor, often getting paid for short-term work. Freelancers are not company employees and can complete different jobs concurrently for various firms or individuals, unless they are committed to working exclusively on a particular project.
Since freelancers are independent workers, they set their own time and work full time or as a side job to supplement their full-time employment. As independent contractors, freelancers typically sign contracts with clients that define the job and the predetermined fee, usually based on the effort and time required to complete the project. Freelancers can ask for a flat fee or define a per-hour, per-project, or per-day fee.
5 Ways to Pay Freelancers
Here are the most common ways to pay a freelancer in your local country.
Traditionally, employers paid hired talent in checks against an invoice. While sending checks is generally considered outdated, this form of payment is still effective, helping employers avoid the service fees that come with using other payment options.
The downside of paper checks is that they take a while to arrive and may get lost during delivery. There is also no way to secure these payments and guarantee the work is performed. As a result of these inconveniences and security concerns, many forgo checks for electronic payment.
PayPal is one of the first digital payment platforms, often used as the default option for paying international freelancers. However, while it is a global service, PayPal does not operate in several countries—you need to check whether the company is available in the freelancer’s country of residence.
PayPal is less popular nowadays, possibly due to its hefty fees. Since PayPal’s initial release, the service has hiked up its fees considerably. Transaction fees are now 2.9% of each payment and an additional fixed fee of $0.30. Add currency conversion fees and freelancers stand to lose another 5%.
3. Credit Cards
Some freelancers accept credit card payments. While it is uncommon for individual freelancers to have their own credit card processing equipment, they often work with PayPal or other digital payment systems that accept commercial credit cards. Paying by credit card is highly convenient both for employer and freelancer, but you should take into account the fees charged by the credit card company and the relevant payment service, which may range between 1-7%.
4. Electronic Funds Transfer (EFT)
An EFT, also called direct deposit, is a faster and more cost-effective alternative to wire transfers, depending on the bank. Employers typically choose EFTs to pay a regular contractor every month. The main advantage is that it does not cost freelancers anything, but it may cost from $50 to $200 to employers in addition to a monthly transaction fee and a per-deposit fee.
Like wire transfers, EFTs are not instant and may take up to four days to reach the payee, depending on the type of bank and country. Direct deposits can save employers the money it costs to print paper checks if used for long durations. It helps save on administrative costs and simplifies payroll.
5. Freelancer Platform
Freelancer platforms often include a built-in onboarding and payment process that can accept payments from an employer on behalf of a contractor. This method is reliable and secure but typically requires both parties to pay fees. It may also apply restrictions on when and how a freelancer is allowed to withdraw money.
Freelance platforms typically ask employers to deposit funds into escrow to ensure the freelancer gets a deposit upfront. However, it means employers must pay immediately before initiating this business relationship.
Paying Freelancers: Tips and Best Practices
Setting the Price
Ask your freelancer what they prefer—a fixed price or hourly pay. They may ask for a percentage upfront for goodwill—a common practice when paid a fixed price, engaging with new clients, or taking on large projects.
Strive to write a contract with the clearest language stating the project’s timeframe and what happens if it is not completed within this time or at all. Specify the payment due to the freelancer and define who owns the completed work.
You should also clearly stipulate rules for sharing resources. For example, what happens if you do not receive a draft on time, and how long the freelancer must wait for your resources before the wait hurts the timeline. Also, determine what happens when payments are late and define whether a late fee is applicable, or the work is withheld.
Ensure Compliance with Tax Laws
When entering into an agreement with a freelancer, ensure the contract terms specify compensation, payment method, tax liability, submission deadlines, and other provisions. Employers must comply with the labor laws applicable to the freelancer’s country of residency, even if the employer resides in a different jurisdiction.
Even though the process can be challenging, employers must create an agreement that complies with all relevant tax laws. US tax laws, for example, do not require US companies to withhold, report, or pay taxes for international freelancers outside of the US.
Use Marketplaces and Management Systems
Freelance marketplaces can help handle legal disputes, payments, and tax compliance. There are many marketplaces that facilitate hiring and managing freelancers. These platforms provide various payment options and act as arbitrators if legal disputes arise.
Freelancers are a key part of the on-demand economy, which is helping many businesses achieve scale and business agility. In this article, I explained the basics of paying freelancers, and provided a few tips that can help you avoid common problems:
- Setting the price - clarify the price and get a written price quote before beginning the project
- Ground rules - have a clear contract stating what your freelancer needs to do and on what timeframe.
- Ensure tax compliance - in some countries, some types of contractors can be legally defined as employees, meaning the employer needs to pay full social benefits.
- Use marketplaces and management systems - as you grow the number of employees, automated freelancer management tools and marketplaces can help you improve the quality and efficiency of your freelance workforce.
I hope this will be useful for your future freelance hires.
About the Author
Craig Lebrau is the CMO of Media Insider, a Wyoming-based PR company that aims to disrupt the way companies communicate their brand in the digital era.