The 5 Best Ways to Pay Contractors & Freelancers

Freelancing used to be a lesser-known aspect of the employment world. Instead, the norm was to have W2 employees. These are staff who not only worked consistently for a firm, but relied on the corporation’s payroll department to manage deductions for taxes, benefits, and more. And typically, these employees were paid through a routine schedule whether that meant receiving a physical paycheck or direct deposit.

But these days, distributed work, gig employment, and even a preference for independent contractors mean that more business owners are trying to navigate payment solutions that are easy to use, disburse timely wages, and don’t create an administrative nightmare when it’s time to file quarterly taxes. Before you throw your hands up in frustration, let’s highlight the five best ways to pay independent contractors (ICs) and freelancers.

Physical Paychecks

Everyone knows what a check is — even if we don’t always carry a checkbook with us anymore. Checks are typically accepted by banks and allow you to seamlessly pay large sums of money. But they’re not without drawbacks.

First, there’s always the risk that there aren’t enough funds in your company’s bank account to cover checks that are drawn on it. While for you this might simply mean a returned check fee, this can be catastrophic for a freelancer relying on that money to pay bills. And any IC who’s ever been burned by getting a bad check in the past will think twice before agreeing to accept contractor payment this way.

More importantly, if you’re working with a distributed group, sending checks in the mail can always be risky. Thanks to the increase in porch pirates, there’s always a risk that a check is intercepted before reaching its intended recipient. And now you have the added headache of trying to stop a check and reissue it to your now annoyed IC.

Direct Deposit

If insufficient funds or theft concerns leave you leery of using physical checks, paying independent contractors through direct deposit (also known as ACH transfers) is a good upgrade. Even though many people incorrectly assume that you can only accept direct deposit if you’re a W2 employee, this isn’t true. Depending on your banking system, you can set up one-time or recurring transfers as long as you have the recipient’s banking details (routing and account number; possibly also a swift code if you’re transferring to international accounts).

This is a straightforward solution for many people and is ideal if your ICs are working with you for an extended period. But some ICs may be reluctant to give you their banking details if it’s a one-time job — and this is understandable. From their perspective, once you give an entity your routing and account number they could potentially withdraw money just as easily as money can be deposited.

Wire Transfers

While technically similar to ACH or direct deposit transfers for contractor payment, they’re slightly different. In most cases, wire transfers allow for nearly instant payments which can be ideal. For domestic transfers, this is usually within 24 hours assuming the transfer is issued before the end of the bank’s business day — which may not be the same time as when the bank’s office hours close. International deposits may take one to two business days to complete.

But there is a downside. Whereas ACH deposits don’t come with bank fees, wire transfers do. ACH deposits don’t charge the sender or recipient to move funds between accounts. With a wire, both the recipient and sender will pay a fee.

Incoming wire transfer fees can vary by bank but:

  • Can be as little as $10 to more than $50
  • Vary depending on recipient versus sender
  • Vary for domestic versus international transfer
  • Vary by the types of accounts involved (personal versus business checking/savings)

In most cases, wire transfers make the most sense when you’re working with large sums of money so that the fees are negligible.

Online Payment Systems

If you’re concerned about protecting your financial privacy, or you’re working with ICs across several countries, any method that relies on traditional banking methods for moving money might not appeal to you. Thankfully, online payment systems have become standard practice these days and are considered the best way to pay contractors.

An online payment system acts like an escrow service that protects personal banking information. They allow funds to be seamlessly moved between people without sharing specific bank details. Rather than sharing sensitive information like routing and bank account numbers, you rely on emails, phone numbers, and even QR codes to send and receive money.

While Paypal is the leader in this space with support for transfers between more than 200 countries, there are other alternatives like Zelle, Venmo, Veem, Bill, and more. As many freelancing platforms and exchanges already used these types of payment systems, most ICs are familiar with them and are less likely to balk at providing an email or phone number for payment.

Better still, payment systems tend to be more agile, allowing you to adjust your payment terms for independent contractors so that it fits your financial needs. And it is most often the preferred method when working with freelancers in international markets because of its ease of use.

Accounting Software

This might seem like an unusual payment method for independent contractors, but more accounting software services are incorporating payment integrations into their offerings. For example, Quickbooks/Intuit allows you to send and receive payments. While you’ll still need to have your ICs give you their banking details, the upside is that you’ll also have an easier time managing your payroll records when tax time rolls around.

Picking the Right Option for Your Needs

No matter what payment solution you select, you need to ensure that it serves you and your freelancers well. Picking a payment option that’s convenient for you but moves money slowly or charges excessive fees to recipients means you won’t have a freelance talent pool for long. Meanwhile, if you can’t effectively track and itemize payments to freelancers so you can properly prepare tax forms promptly, that’s equally troubling. When in doubt, speak with your accountant or accounts payable team to determine what factors are most important when selecting the appropriate solution.

Newest Articles