Global Payroll
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6
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How To Pay Contractors

Is the gig economy the future? Is the human labor workforce contracting the fad of being a contractor? Does this mean businesses have to learn the subtle art of paying independent contractors?

Well, if you think you should, here are a few tips to inform you on the subject. 

Several factors such as preferences, tax, compliance, time play a significant role in paying independent contractors. 

Promo alert: Multiplier users pay their contractors in a single click. Book a demo to learn how!

Things to know when hiring and paying a contractor

Paying contractors is similar to paying a full-time employee. However, there are a few things that we need to know before hiring and paying a contractor: . 

  • Tax Compliance: Independent contractors manage their own taxes. Hence contractor-related compliance works a bit differently. For instance, contractors should submit forms like W-8 and W-9, which requires you to maintain a centralized system to store these forms. 

Additionally, you’ll have to help contractors fill a form called 1088-MISC. 

Misclassification of workers is another issue you’ll have to pay attention to as you wouldn't want revenue agencies to come after you for wrongly classifying your employees, would you?

  • Country: The next factor you would have to consider when you pay contractors is their country of origin. In these uncertain times, employees are boldly hiring workers from cross-borders. Considering this factor is vital so that you can come to terms with your contractor on which currency you have to make payments.
  • Number of contractors: Managing one or two contractors doesn’t require much mental or monetary effort. However, things get interesting when you have to pay independent contractors in large numbers. Here is where the question “ how to pay independent contractors” arises. 

Costs for administrative functions, storage facilities, and setting up processes and systems to monitor onboarding, tax documents, compliance add up as the number of contractors increases.

Multiplier is one tool of convenience to manage your contractor’s payments. It allows you to disburse salaries, generate invoices and keep up with compliance in a unified platform. 

6 Methods to Pay an Independent Contractor

Companies have both traditional and online means to pay contractors. Online means offer the convenience of speed and security. However, they seem to be accompanied by subscription costs. 

Traditional means of payment, on the other hand,are slow and unreliable. However, when you pay contractors, these means are cheaper than their online counterparts.

Best way to pay contractors online

Here are a few ways to transfer money through online platforms.

  • Multiplier

One of the most hassle-free ways to pay independent contractors is to use an EOR solution like Multiplier.

What’s unique with Multiplier, one may wonder? Using Multiplier, you can not only pay independent contractors but endow them with health benefits as well. 

Multiplier’s solution also helps you in processing payments across different countries taking into account local tax laws and payments as well.

  • Freelance Management Systems

You can also choose a freelancer manager platform to pay your independent contractors. Platforms such as stock talent help you reduce paperwork and manage all operations, finance, and legal components. 

With the increasing prevalence of remote work, a freelance management system can come in handy. Particularly, in times when you depend on talent from around the world, you pay your contractors from these platforms.

Other Alternatives

There are some ways of paying contractors that have aged like fine-wine. They are easy to implement. 

An age-old alternative to paying your independent contractors is using checks. This paper-based mode of payment is one of the cheapest options to pay your independent contractors. 

However, they are difficult to disburse, monitor, and ensure security. Particularly, when your contractor is working remotely, checks are difficult and slower modes of payment when compared to other technological means.  

Lack of speed is another hindering factor in disbursing checks. For example, checks may take a week or more to reach your international contractor. Sometimes a misspelling or two can cause your check to bounce. In such events, your contractor may be inflicted by feelings of distrust.

  • ACH payments

ACH transfers or payments is an umbrella term for all types of direct transfers - transferring money into bank accounts, retirement accounts, taxable brokerage accounts, and college savings accounts.  

With governments softening financial regulations all around the world coinciding with advancements in fintech,  ACH payments are one of the easiest ways to make your contractor richer at the end of the month.

ACH payments are of two types: ACH direct deposits and ACH direct payments.  

Examples of these types of payments are paychecks, tax refunds, annuity payments, government benefits and any type of transfers that are made by business or a government agency to an individual.

However, ACH transfers are safer than any form of paper-based payment.

  • eCheck 

E-checks are digital versions of checks. 

These checks make use of ACH to transfer money from the company's account into the contractor’s account. 

This option is super feasible as it allows fast and secure ways to transfer money. Processing fees for these kinds of transfers occur below $0.10. Moreover, there are little to no intermediaries during these transfers.

  • Credit cards

Credit cards are one of the safest and fastest ways to pay a contractor. This keeps you in your contractor’s good books. 

Paying using a credit card endows several benefits. One advantage is that it is secure. Also, credit cards enable you to pay from outside your company's books. 

When you use credit cards to pay your independent contractors, the latter needs to set up a merchant account. Hence, this mode of payment is rarely used.

One disadvantage of this payment method is the high processing fee as credit card vendors charge up to 3% as processing fees.

Frequently Asked Questions

Here are a few commonly asked questions on paying independent contractors.

Can I refuse to pay a contractor?

When working with an independent contractor,you sign a mutually agreed contract which shall define the terms of payment for both parties. You can only refuse payment if there arises a problem that violates the terms of the contract.

How do you pay a contractor?

You can pay contractors via traditional and online modes of payment. Traditional modes include credit cards, checks, cash, etc. Online modes of payment include payroll processing systems such as Multiplier, freelancer management platforms. 

Can you pay contractors with a credit card?

Yes, you can pay contractors using your credit card, provided your contractor has a merchant account to receive and process your payments.

What happens if you don’t pay a contractor?

If the reason for not paying your contractor is because of a violation of terms and agreements, then you will not suffer from any legal issues. However, if you do not pay a contractor according to the terms of a contract, then your contractor can press legal charges pertaining to the laws of their contractor’s jurisdiction.

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