How to Pay Independent Contractors in 2024

During the previous decade, we have witnessed many work trends and concepts that allow global businesses to adapt to changing market demands and incorporate flexibility in their workflows. Collaborating with contractors is just one concept that provides access to the global talent pool while reducing the administrative burdens of remote-first companies.

However, working with contractors also imposes a few significant challenges, and contractor payments are just among the major ones. In this guide, we offer tips and strategies on how to pay independent contractors while maintaining financial transparency and law compliance. Stay tuned for valuable insights!

Understanding independent contractors

An independent contractor is an individual who is hired to perform specific tasks or projects for a company on a contractual basis. Unlike regular employees, independent contractors typically work autonomously and are responsible for managing their own schedules and expenses.

These individuals are typically hired for their specialised skills or expertise and are not entitled to employee benefits such as healthcare, paid time off, and pension. The flexible nature of this hiring model gives contractors more control over how they complete their work, allowing them to work for multiple clients at the same time. 

On the other hand, independent contractors are responsible for paying their own taxes and are not subject to the same legal protections and regulations as regular employees, such as minimum wage laws and paid time off. Hence, independent contractors differ from regular employees in a number of ways, including their employment status, entitlements to benefits, tax responsibilities, and legal protections. 

Complete guide on how to pay an independent contractor

Independent contractor payments are entirely different from regular employee salary payments. Employers who work with contractors must pay careful attention to a variety of aspects and ensure compliance with the applicable tax laws. 

Below in this section, we’re guiding you through the most important considerations when making contractor payments. Keep reading for valuable insights. 

I. Setting up payment terms 

When setting up payment terms for contractors, it’s crucial to create a transparent and detailed contract that clearly outlines the expectations for both parties. This typically includes specifying the frequency of payments, preferred payment methods, and deadlines for invoice submission and payment processing. 

Discussing expectations regarding payment structures is also essential, as it enables both parties to choose the most suitable option based on the scope and the duration of the project. 

For example, hourly rates may provide compensation based on the time spent on tasks, while project fees offer a fixed amount for the completion of specific projects or deliverables. On the other hand, retainers involve paying an upfront fee to secure the contractor’s availability for future work, while commissions are earned based on a percentage of sales or revenue generated. 

Specifying payment terms before starting a collaboration will provide both parties with clear expectations and allow fair compensation in accordance with the agreed-upon terms. 

II. Choosing the right payment method 

Choosing the right payment method is one of the most crucial decisions that requires considering a few factors, such as convenience, speed, security, and cost-effectiveness. Below, we’re overviewing some of the most popular payment methods for smooth and successful global contractor payments.

Direct deposits

Direct deposits count as one of the most convenient contractor payment methods, where the funds are electronically transferred directly to the contractor’s bank account. This method provides fast access to funds and is very suitable for recurring payments.

Besides convenience, direct deposits are considered secure, as the electronic transfer minimises the likelihood of payment mishaps and fraudulent activities. With the transactions being recorded in the contractor’s bank statement, direct deposits also offer simplified record-keeping for both parties, making it a widely used method for paying contractors. 

Payment platforms

Payment platforms such as PayPal, Payoneer, and Native Teams are also convenient for transferring funds to contractors, offering instant or near-instant payments. Electronic payments can be made using bank account transfers, debit cards, or credit cards, which provides greater flexibility for contractors and their clients. 

Beyond their speed, payment platforms offer several functionalities, such as digital wallets for simplified financial management and invoicing tools for generating and sending invoices to clients directly through the platform. Such features are convenient for streamlining the payment process and ensuring that all the transactions are accurately recorded. 

Speaking about convenient features, many payment platforms also offer integration or even built-in features and software for tracking income, expense management, and accounting. With all of these features, digital payment platforms offer enhanced security, transparency, functionality, and cost-effectiveness for both parties of the transaction.

Checks

Checks are a traditional but still viable method for conducting contractor payments. As such, they are mainly preferred for record-keeping purposes and more transparent accounting. Checks also offer greater flexibility in terms of depositing funds, as contractors can choose when and where to cash or deposit their checks. 

However, checks also impose limitations like longer processing times, potential delays in mail delivery, and the need for manual handling, which leads to administrative inefficiencies and payment delays. Despite these disadvantages, checks still remain a preferred option among contractors who value simplicity and security. 

Wire transfers

Wire transfers are a fast and secure method for transferring contractor payments, whether domestically or internationally. One of their greatest advantages is their swiftness, facilitating quick and secure transactions even across international borders. This makes wire transfers very suitable for large and time-sensitive transactions, such as meeting project deadlines or fulfilling urgent payments. 

Besides fast transaction times, wire transfers are also considered a secure payment method due to their bank-to-bank transfer nature, which minimises the risk of interceptions, mishaps, or fraudulent activities. 

Even though wire transfers offer many advantages, it’s important to note that they typically incur higher fees compared to other payment methods. Fees can vary depending on the financial institutions involved and currency exchange rates. Hence, wire transfers may not be the most cost-efficient method, especially for smaller payment amounts where fees can take up a significant percentage of the total payment amount. 

III. Legal and tax compliance

Legal and tax compliance is crucial to ensure proper adherence to law and tax regulations and avoid potential penalties. Below, we are discussing some of the most important considerations for both businesses and contractors.

Form W-9

Form W-9 serves to collect important information and ensure accurate documentation for tax reporting purposes. 

When filling out the form, contractors are required to provide information such as name, address, taxpayer identification number (TIN) or social security number (SSN). Such information is important for businesses to accurately report payments made to contractors to the relevant tax authorities.

By providing accurate and up-to-date information on Form W-9, contractors enable businesses to fulfil their tax obligations effectively. Businesses rely on information provided in Form W-9 to prepare and issue Form 1099-NEC, which is used to report non-employee compensation to the tax authorities.

Form W-9 is a legal document that establishes the contractor’s status and ensures compliance with tax regulations. Contractors are obligated to provide accurate information to avoid discrepancies in tax reporting and potential legal issues. 

Form 1099-NEC

Form 1099-NEC is a document used by businesses to report non-employee compensation paid to contractors to the relevant authorities. Once businesses get the necessary information from Form W-9, they are obligated to fill out Form 1099-NEC to accurately document and report payments made to contractors throughout the year. 

This form is crucial for tax compliance, providing a comprehensive overview of the total compensation submitted to contractors during the preceding tax year. Businesses are required to submit Form 1099-NEC to the relevant authorities by the end of January each year to ensure timely and accurate reporting of non-employee compensation.

On the other hand, Form 1099-NEC must also be provided to contractors by the end of January to enable them to report their income accurately on their individual tax returns. With Form 1099-NEC, contractors ensure consistency between the income reported on their tax returns and the income reported by the businesses they collaborate with. 

By detailing non-employee compensation and ensuring timely reporting to the tax authorities, Form 1099-NEC facilitates transparency, accuracy, and adherence to legal requirements in financial transactions between businesses and independent contractors. 

IV. Implementing efficient payment systems 

When working with contractors, businesses must set up an efficient payment system to ensure timely and accurate payments. Below, we are discussing some of the considerations and practices that can help implement and maintain efficiency when paying independent contractors.

Using payroll software

Using payroll software can help streamline contractor payment processes and promote the organisation’s financial transparency. Today, the choice of available payroll software is wide, offering many different features designed for the convenience of global companies.

For instance, payroll software offers automated payroll calculations, including deductions, taxes, and contributions, which reduces the risk of inaccurate payments. Some payroll solutions even include direct deposit functionalities, allowing businesses to transfer funds directly to the contractor’s bank account and speed up the payment process. 

Payroll software also ensures tax and payroll compliance, as it automatically calculates and withholds taxes based on the contractor information and tax regulations in the specific country. 

Ensuring accurate contractor classification

The classification of independent contractors differs widely from regular employees. Hence, businesses must ensure that contractors are properly classified according to the legal guidelines of contractors’ residential countries. 

Some of the differences between the contractor and the regular employee classification are the degree of work autonomy, the permanence of the work relationship, and the provision of employee benefits. In other words, while independent contractors enjoy greater flexibility and independence in workflows and work obligations, they’re not entitled to regular employment benefits such as healthcare, insurance, pension, and others. 

Misclassifying workers often leads to severe penalties and legal consequences, including fines, back taxes, and potential lawsuits. Therefore, it’s important to understand the criteria used by the relevant country’s tax authorities to distinguish between employees and independent contractors.

Ensuring accurate payment details

Ensuring accurate payment details is crucial for a variety of aspects, including transparency, fairness, and efficiency in contractor payments. When inputting payment details into their payroll system, businesses must be precise and ensure that they’re covering all the compensation terms agreed upon in the contract. 

Some of the most important payment terms include:

• Hourly rates specified within the contract
• Project fees for projects with fixed scopes and deliverables
• Retainer amounts for ongoing and periodical services
• Bonuses, incentives, or reimbursements if agreed upon.

Clear and accurate payment information is not only essential for fairness but also helps prevent disputes or misunderstandings between parties. When payment details are accurately documented in the payroll system, both parties can have a clear reference when tracking payments and ensuring compliance with the terms of the contract.

Establishing a payment schedule

Establishing a consistent payment schedule is essential for promoting trust, reliability, and transparency among the two parties. Therefore, organisations must clearly outline the payment frequencies, whether it’s weekly, bi-weekly, or monthly. 

A consistent payment schedule also provides contractors with predictability and financial stability, allowing them to plan their finances upon receiving. In addition to this, adhering to a regular payment schedule also fosters a positive relationship and demonstrates respect for contractors’ time and contribution to the project or business operations.

Establishing a payment schedule not only promotes transparency and trust but also helps prevent misunderstandings and disputes related to payment timing and expectations, leading to better relationships between businesses and independent contractors.

Common mistakes when paying independent contractors

When paying independent contractors, employers often make a few common mistakes that, unfortunately, lead to legal issues and financial penalties. In this section, we discuss some of the most common mistakes to avoid.

1. Not having contractor agreements

When working with contractors, one of the most important things is establishing a contractor agreement. Such agreements have the purpose of outlining the most important work terms, such as project or task requirements, payment rates, deadlines, and other relevant details.

Clear and comprehensive contractor agreements are essential for establishing expectations and protecting both parties’ interests. Failing to establish one can lead to misunderstandings and potentially open legal disputes and issues.

2. Misclassification of workers

One of the greatest mistakes global employers make is misclassifying independent contractors as regular employees. Independent contractors should have control over how and when they work and aren’t treated as regular employees in terms of benefits, taxes, and other employment aspects.

Another issue of treating contractors as employees is dictating their schedules, providing work equipment, and even exerting too much control over their work. Misclassifying independent contractors as regular employees often means failure to fulfil relevant taxes, which leads to legal consequences, financial penalties, and even damage to reputation. 

3. Not withholding taxes

Independent contractors are typically responsible for paying their own taxes, including income tax, social security, medicare, and other applicable taxes. Unlike regular employees, independent contractors do not have taxes withheld from their paychecks by the employer. 

However, in certain situations, employers may be required to withhold taxes from payments made to independent contractors. An example of this is backup withholding, which occurs when the contractor fails to provide a valid tax identification number or social security number. 

Failing to withhold taxes when required can result in penalties for the employer. Such penalties typically vary depending on the degree of noncompliance, with higher penalties for intentional disregard of the tax requirements. 

4. Late or irregular payments

Independent contractors rely on steady payment streams for their work to support themselves and their businesses. Therefore, late or irregular payments can have significant consequences, such as challenges in covering expenses, a decline in work quality and productivity, and even damage to the working relationship between the parties.

In some cases, independent contractors may pursue legal action against employers for late or non-payment of invoices. Depending on the agreed terms of the contract and the applicable laws, contractors may be entitled to pursue remedies such as interest on overdue payments, collection fees, and even legal action to enforce payments.

Global employers should be aware that legal disputes can be costly, time-consuming, and even damaging to their reputation. 

5. Not maintaining proper records

Keeping accurate payment records holds significant importance for both the contractor and the employer for a variety of reasons.

Accurate payment records are essential for tax compliance purposes, such as filling out forms, reporting income, validating business expenses, and minimising tax liabilities. In addition to tax and legal compliance, proper payment records help with financial planning and making more informed financial decisions.

By investing time and resources in record-keeping practices, both contractors and their employers can maintain transparency, ensure integrity, and keep up compliance. 

6. Ineffective communication

Clear communication is key to successful working relationships with independent contractors. Failing to communicate effectively about important collaboration terms may lead to misunderstandings and conflict that can hinder the relationship and the overall quality of work. 

By fostering effective communication, employers ensure that both parties have a shared understanding of mutual requirements and expectations, are able to provide feedback and open performance evaluation and nurture a relationship of trust, respect, and collaboration. 

Clear communication also helps mitigate legal risks regarding misinterpretation of important terms. By effectively communicating project requirements, agreements, and other important terms, businesses can provide more evidence and protect their interest in the case of legal challenges.

Common challenges and solutions for paying independent contractors

When it comes to independent contractor payments, there are many challenges that need a strategic approach to be properly addressed. In the section below, we explore the most common contractor payment challenges and offer practical strategies and solutions for successfully overcoming them.

1. Currency exchange rates

Working with contractors from multiple countries often leads to dealing with multiple currencies, which consequently imposes fluctuations in exchange rates. This can be a significant challenge, as it affects the cost of payment for the employer and the contractor’s earnings.

One solution to fluctuating currency exchange rates is opening a multi-currency bank account. This allows businesses to hold and manage funds in various currencies, reducing the need for currency exchanges and automatically minimising the exchange rate fluctuation.

However, many global employers prefer the convenience of payment platforms for managing fluctuating exchange rates. Platforms such as PayPal, Payoneer, and Native Teams often offer competitive rates, support multiple currencies, and provide transparency throughout the payment process.

2. Banking fees

Except for currency exchange rates, global employers and contractors are typically exposed to high banking fees. This occurs due to international wire transfers, which reduce the amount received by the contractor and increase the overall cost for the employer.

Payment platforms can also help reduce the high banking fees imposed by international transfers. Compared to traditional banks that charge flat and percentage-based fees, payment platforms offer more transparent and flexible payment structures. This allows many businesses to facilitate contractor payments with minimal transaction costs and without reducing the amount received by contractors.

3. Compliance and tax implications

Payments made to independent contractors may be subject to withholding taxes or other tax obligations, depending on the employer’s and the contractor’s country of residence. Also, when it comes to contractor payments, some countries impose unique requirements, including anti-money laundering (AML) and Know Your Customer (KYC) regulations.

Seeking assistance from legal and financial experts can help ensure compliance with regulatory requirements in both the employer’s and the contractor’s countries. Such experts can provide guidance and assistance on AML/KYC procedures, tax obligations, and other relevant regulatory matters. 

4. Payment delays

Payment delays in international contractor payments are common due to the complexity of the global payment system. First, international payments involve multiple intermediary banks that facilitate the transaction, each with its own processing times and procedures. Other factors, such as different time zones and currency conversions, may additionally affect the time required for a transaction to reach the contractor.

In order to avoid payment delays, global employers typically rely on payment platform services. Besides offering lower fees and minimising banking costs, such platforms often provide faster international transfers compared to traditional bank wire transfers. In addition to this, some payment platforms also provide other convenient payment tools where global employers can track and manage contractor payments and promote better transparency.

How can Native Teams help you pay independent contractors?

Native Teams is an all-in-one platform offering solutions for successful global work. With a comprehensive suite of tools and features for global contractor payments, businesses can simplify their workflows and have peace of mind without the administrative and compliance burdens. 

• Multi-currency virtual wallet 

Our multi-currency virtual wallet is a centralised space where you can top up, send, transfer, and manage your funds in your preferred currency.

• Payment requests

With our payment request tool, you can easily send automatic or recurring payment requests to any local or global client.

• Client invoicing

Our client invoicing tool will empower you to bill your global clients easily without the need to open your own company.

• Native Teams card

Our Native Teams cards are designed to provide you with the flexibility of making in-store and online payments anywhere in the world.

• Euro IBAN

Our contractor payment solutions will provide you with a dedicated Euro IBAN for transparent global transactions and simplified management of your earnings. 

• Withdrawals to a local bank

With the Native Teams platform, you can withdraw your funds to a local bank and enjoy the flexibility of managing your finances on your own terms.

• Native vault

Our platform will provide you with a Native vault feature, where you can securely store a portion of your earnings for a pre-determined period and receive financial rewards on the sum once the period ends. 

• Expenses categorisation

Within our expense management tool, you can easily categorise your expenses as business and personal for more transparent financial management and compliant tax reporting.

• 3rd party integrations

The Native Teams platform allows 3rd party integrations, enabling you to optimise your workflow and have a smoother experience on the platform.

• Payroll calculator

Our payroll calculator will allow you to easily and accurately calculate salaries and get full breakdowns for your employees all around the world.

• Dedicated account manager

With our contractor payment solutions, you’re also getting a dedicated account manager for an ultimately personalised experience.

• Work permit and visa

Native Teams will provide you with work permits and visa assistance to simplify the relocation of your global team. 

Summing up

Paying independent contractors requires a careful balance of transparency, efficiency, and compliance. Global employers who work with independent contractors must pay meticulous attention to detail and have a comprehensive understanding of legal and tax requirements and financial strategies for efficient and compliant global work.

Contractor payments are indeed a complex topic, imposing a lot of challenges that require strategic solutions. However, with the help of technology, expert advice, and global payment providers, businesses can successfully overcome contractor payment hassles, facilitate smooth operations, and stay on the right side of the law.