How To Pay Freelancers: Best Practices and Payment Options

How To Pay Freelancers: Best Practices and Payment Options

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Introduction

Freelancers can help you successfully scale your business operations, but you must pay them conveniently.

While multiple payment methods are available for freelancers, not all will be ideal. Some methods will be too costly, involve high transfer fees, or even require the freelancer to meet some legal requirements.

The payment terms you agree to serve your freelancers. Will you pay them hourly or per project? Are there any tax obligations you need to meet to work together? The more convenient payment terms will be fruitful.

Here’s a guide on how to smooth out everything that is payment-related to keep your freelancers happy.

Things To Consider While Paying Freelancers

Always start by asking your freelancers what they need to receive their payments. While situations will vary from one freelancer to another, here are a few necessities when working with any contractor:

Create a Comprehensive Contract

A comprehensive contract protects both parties involved. It also ensures that you can solve future disputes amicably.

For starters, your contract should spell out the payment terms. You need to agree on whether you should pay your freelancers an hourly or per-project rate. The contract must also explain how to calculate payment at the project's end and the invoicing requirements.

Second, your contract needs to include currency and payment method details. Since your freelancer might have to pay transfer and currency conversion fees, you can work out how to compensate them accordingly.

Third, ensure that you agree on the legal jurisdiction for conflict resolution. If you are working with a freelancer through a marketplace like Upwork, you can solve your disputes on the platform. Otherwise, you’ll need to agree on what country’s laws to follow for conflict resolution.

Plan for Tax Compliance

Avoid legal problems by ensuring you’re compliant with the necessary tax laws. Spend time understanding your tax obligations along with that of your freelancer.

For instance, U.S. laws don’t require U.S. companies to withhold, report, or pay taxes for any international freelancers with whom they work. However, foreign freelancers will have to sign a W-8BEN form.

Find out who’s obligated to pay the income tax, you or the freelancer. You should also research whether there are any tax treaties between your home country and the freelancer’s country. These treaties are meant to reduce the tax burden for your company and the freelancer.

Conduct a Background Check

It’s essential to do a background check on your freelancers to ensure they are who they say they are. A background check also helps you gauge whether you can successfully outsource your work to freelancers.

You can conduct background checks for employment history, criminal records, identity checks, and education verification.

While background checks might be unnecessary for freelancers you’ll only be working with for a short time; they are essential when planning to work with a freelancer on big projects or for the long term.

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Best Practices for Paying Freelancers

To successfully pay your freelancers, ensure that you:

  • Classify your freelancers accordingly. For legal and tax reasons, you need to classify anyone who works for you as a freelancer, employee, or contractor.
  • Sign an NDA. If your freelancers will be handling intellectual property, it’s essential that they sign a non-disclosure agreement (NDA). An NDA ensures that the freelancer understands how much information they can share with third parties about the project.
  • Ask for receipts for reimbursements. If you’re reimbursing your freelancers for the resources they used during the project, ask for receipts to support their purchase claims.
  • Define payment terms. Ensure you’re both on the same page concerning payment terms, from payment dates to late fees allowed.

Different Approaches To Paying Freelancers

There are four approaches to paying your freelancers.

Upfront Payment

Most freelancers prefer upfront payments, especially when working with a new client. It gives them enough peace of mind to dive deep into a project.

However, from a business perfective, it might feel risky to pay your freelancers upfront. Ensure you trust that your freelancer can deliver before making the payment upfront. You should also be comfortable that they’ll handle revision requests after the project's first draft. Learn whether you can trust your freelancers by performing a background check.

Milestone-Based Payments

Set specific project milestones, after which you’ll disburse specific payment amounts. The most common approach is to pay a percentage of the total payment upfront. You’ll pay the rest at the end or after every milestone.

Milestone-based payments allow you to assess the quality of work the freelancer delivers as the project progresses. Real-time quality assessment is especially vital for large or complex projects.

Payment For Completed Project

This is the best option if you’re a small business with limited resources. It will also be an ideal payment option when you’ve already formed a trustworthy working relationship with your freelancer.

Hourly Rate

Once you agree on your freelancer’s hourly rate, you can use time-tracking tools to keep tabs on your freelancer's work hours. Upwork and Time Doctor has some amazing time-tracking tools.

However, some freelancers want something other than hourly payment since they can be punitive. For instance, a software developer with years of experience might take less time to finish the same project as a junior developer. This essentially means that they’ll get paid less for being more efficient and skilled.

How To Pay Freelancers

The best payment option should be affordable, convenient, and secure for you and your freelancer. Here are a few payment options you can discuss with your freelancer:

Checks

Checks are an affordable payment options thanks to the low cost of postage and envelopes. Freelancers prefer other methods since checks aren’t secure. They can get lost, stolen, or damaged. It is also possible for checks to bounce, which invalidates the payment.

What’s worse is that checks are quite slow. Freelancers will have to wait for their mail to arrive. They’ll also have to wait for their bank to clear the check.

Digital Payment Platforms

Freelancers mainly love using digital payment platforms as they easily allow cross-border payments. You can use platforms like Stripe, MoneyGram, PayPal, Wise, and Payoneer. However, some platforms might not be available in some countries.

Confirm the availability of the payment platform of your choice in your freelancer’s country of residence before you start working with them. More importantly, assess the typical currency conversion rates, fees, and transaction costs associated with the platform before making your decision.

Cryptocurrency

Cryptocurrencies have established themselves as solid payment options for some freelancers. They ensure secure and fast payment and can be quite helpful for freelancers working within heavily censored regimes.

If you’re worried about the volatility of cryptocurrencies, you can always use stablecoins like USDT to pay your freelancers. USDT’s value will always remain similar to the dollar, so you’ll easily gauge how much you’re paying freelancers.

Freelance Marketplaces

Marketplaces like Upwork and Fiverr allow companies to pay freelancers through their portals. What’s better is that these platforms can act as intermediaries.

They allow you to create pre-designed contracts on the platforms. You’ll then send cash to an escrow account. Once the freelancers complete their end of the bargain, you can initiate the release of the cash from escrow to the freelancer.

In case of a conflict, the platform will act as a mediator, ensuring that all parties leave feeling satisfied.

Wire Transfer

Wire transfers have almost been made obsolete by digital payment platforms since the latter are faster and more convenient. However, they are still a viable option for sending out large payments.

You’ll send cash directly to your freelancer’s bank account with wire transfers. Wire transfers‘ biggest downside is that they’re considerably more expensive than other payment options.

Credit Cards

You can pay freelancers through your credit card, but you’ll need to install a digital payment app. The most popular apps you can use are Google Wallet, Wave, PayPal, and Square. Since credit cards are an integral part of everyday life, they can be a convenient payment option for you and your freelancers.

Freelancer Payment Methods To Avoid

Avoid any payment method that’s confusing or inconvenient to you or the freelancer.

For instance, if you started working with a freelancer within a marketplace, ensure that you make payments through the same market until the project is over. Switching to offsite payment platforms might complicate the project.

Platforms like Upwork act as mediators for any disputes. If you took payments offsite, it would be difficult for the platforms to help solve conflicts.

Pick Convenient Payment Methods and Terms

It can be confusing to pick the perfect method for paying your freelancers, considering the number of options that are out there. You’ll want a payment method that’s legitimate, convenient, and secure. Talk to freelancers about their ideal payment method and terms to build a strong working relationship.

Need help managing freelancers? Schedule a demo with Skuad today. We can help you hire, onboard, pay, and manage freelancers so that you can focus on your business’ core needs.

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