5 Step Guide on How to Pay Independent Subcontractors

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Are you having a tough time paying independent subcontractors? With lots of startup businesses taking advantage of the gig economy and hiring global talent or independent contractors to lower running costs, it’s critical to note that the finance and banking system is different all around the world. This is why it’s essential to plan ahead on how to make payments to contractors to avoid any issues down the road.

With Statista projecting that by 2027 86.5 million people will be into freelancing or independent work in the United States, and the global freelance platform market size projected to reach $6.7 billion by the end of 2025, business owners certainly find hiring remote team members a lot more cost-effective, and in most cases, more rewarding.

If you plan to hire freelancers, here’s a complete overview of the entire process. We will cover everything from the guidelines for paying contractors to how to pay independent subcontractors. Before we dive in, let’s get a clearer picture of the differences between full-time employees and contractors.

How Does Paying Subcontractors Differ From Paying Employees?

An independent subcontractor is a self-employed professional who offers their services and gets paid for the same. Unlike traditional full-time employees, subcontractors decide which projects to take up and determine their own remuneration, payment terms, and in some cases, their working hours. They usually also don’t depend on the client to provide their work tools or other social amenities, which in most cases creates a payment disparity between contractors and full-time employees.

For most independent subcontractors, their contract agreement may not include the following essentials in the salary of a full-time employee:

  • Health benefits or medical insurance
  • Unemployment/disability allowance
  • Workers’ compensation insurance
  • Pay unemployment taxes or social security taxes
  • Overtime pay
  • Wages paid during sick leaves or vacations
  • Worktools provided or fully-equipped workspace

We will review the best practices for paying independent contractors in a separate section later in this blog. First, let’s look at a few common methods for paying independent subcontractors.

5 Best Ways to Pay Independent Subcontractors

Payments to independent subcontractors should be prompt and efficient to keep them motivated. At the same time, it’s crucial that the payment process is cost-effective and in line with your organization’s policies.

best way to pay contractor

Thankfully, here are five ways to pay subcontractors with optimum security and required flexibility.

1. Payment through direct deposit

Direct deposit is one of the most common and fastest payment methods when paying independent subcontractors. It is simple, secure, and paperless. Besides, it is efficient and accurate for both smaller and big transactions.

To send out payment through direct deposits, all you need is the account details of the recipient and they should receive payments within 1-2 business days. Some banks also offer same-day deposit services which would certainly delight the subcontractor. If you work with contractors often—either on a retainer basis or use software to automate your recurring payments—direct deposits can be your go-to time-saving payment option.

2. Payment by check

Check payment is one of the oldest and still one of the most reliable payment options available today. However, it’s a bit time-consuming for today’s business climate as checks take about 2-5 business days to get cleared into the recipient’s bank account.

Payments through checks are also relatively cheaper and simpler than signing up for payment transfer services or installing a software system. If you plan to work with an independent contractor on a single project, checks can be a decent payment option. And nowadays, businesses now leverage online checks as many payroll systems enable the printing and approving of checks through their system.

3. Payment via wire transfers

A wire transfer is one of the fastest ways to pay your subcontractor in the digital age. While domestic money transfers take about 24 hours or less to get processed, international transfers may take a bit longer, depending on the payment medium.

For most wire transfer transactions, both the sender and receiver are charged a fee, which could be a flat rate or a percentage of the amount sent. This can be quite expensive for both small businesses and subcontractors, especially for routine milestone payments.

4. Payment via online payment solutions

Many online payment platforms like PayPal, Wise, and Payoneer have made it convenient to transfer funds securely and directly to independent subcontractors in a matter of minutes.

With Wise (formerly TransferWise), you can send payments directly to a contractor’s bank account with your linked debit card, credit card, or bank account. To pay contractors via most online payment systems, they must provide their full name as it appears on their bank account, bank account number, and account routing number. Most digital payment solutions also charge a processing fee for their services and it’s important to learn about their rates before getting onboard.

5. Payment through the in-house accounting system

Many independent contractors prefer this payment method to others as it helps them sort out their finances as they tend to work with multiple clients. InvoiceOwl for example, helps contractors automate many payment related-processes, including invoice tracking, payment notifications, and tax management.

InvoiceOwl accepts online payments via multiple options like Google Pay, Apple Pay, credit cards, and debit cards, making it easy to issue payments, especially for businesses working with multiple freelancers who may find it cumbersome to create an account on the various payment services their contractors use.

InvoiceOwl Helps Contractors Accept Client Payments.

Considerations When Deciding How to Pay Contractors

Before finalizing an ideal payment option to pay independent subcontractors, you first need to ascertain the number of contractors you plan to hire, your budget, and the frequency of payments.

You also need to sort out financial documents like tax forms to ensure a swift and smoother payroll process. Another factor to consider is the transfer fee and limitations which vary with the type and mode of payment.

Now let’s discuss different payment arrangements for paying.

What are the Contract Types for Independent Subcontractors?

How you pay independent contractors largely depends on their preferences. However, here are the most common types of remuneration provisions for contractor payments:

1. Hourly rates

Many independent subcontractors prefer to bill clients by the hour. And to accurately charge their hourly rate, contractors often log their working hours with a time tracking solution or fill in the timesheet provided by their clients. Billing clients by the hour is often common for professionals like coaches, service workers, caregivers, landscapes, content editors, copywriters, and business advisors.

2. Fees per project

A lot of independent subcontractors may charge a flat fee for projects. In some cases, they require an advance before commencing a project and the rest after the project completion. You can also agree to pay the compensation at predetermined project milestones.

Such type of pay is suitable for self-employed professionals, such as general contractors, artists, designers, software/web/app developers, and event planners.

3. Commission-based payment

In payments based on commissions, an independent subcontractor is compensated on the basis of their performance. The commission can be a predetermined amount or percentage of the total revenue or sales.

While this is not a suitable payment method for all projects, commission-based remuneration is ideal for any independent contractor in real estate, sales, recruitment, staffing, and marketing.

4. Retainer fees

For an independent contractor, consistent cash flow is of utmost importance. That’s the reason why many prefer to work with organizations on a retainer. Also, many organizations nowadays would agree that a retainer fee is the best way to pay independent contractors.

Retainers are usually fixed routine payments for a monthly, quarterly, or 6-month period. Retainers work best for independent contractors working as business strategists, marketing professionals, visual/graphic designers, lawyers, and tech executives.

Here’s a five-step guide to help you hire and set up payments for any independent contractor while ensuring you remain tax compliant.

5 Steps Guide to Paying Independent Subcontractors

best way to pay contractor: 5 steps to paying independent subcontractor

1. Discuss Payment Terms

Once you have decided to hire a contractor for a particular role, the first thing to do is to educate yourself on the current market rates. Based on your research, you should arrive at an appropriate payment process that is accurate and cost-effective.

To ensure you get the best fit for the role, ensure you write a job description that clearly itemizes the job’s requirements, roles, and responsibilities. When you’ve found the best independent contractor for the job, discuss the engagement requirements to ensure you both are on the same page about pay rates and payment terms, creating an agreement to make the deal official and legally binding. It’s also important to inform contractors of your preferred payment method to avoid misunderstandings down the road.

2. Collect the W-9 forms

After reaching an agreement and deciding on the most appropriate method to pay contractors, it’s time to collect the contractor’s details through a W-9 form before you assign any task to them. The W-9 form is an IRS document that requires personal identifiable information like the full name, address, taxpayer identification number, or Social Security number, which businesses use to report the payments they make to independent contractors, freelancers, or consultants.

Useful Extra Reading

Even though subcontractors are usually responsible for their own taxes, you’re required to withhold 24% of your contractor’s payment (known as backup withholding taxes) if they refuse a legitimate request to fill out a W-9 form or provide an invalid Social Security number.

Businesses are obligated by the IRS to obtain a completed W-9 Form when they pay contractors $600 or more during the year and failure to comply results in heavy fines.

3. Add contractors to your payroll software

When you have collated all the required information, you can proceed to include the contractor in your organization’s payroll system. Collating all the details in the system well in advance helps you make rapid, error-free payments.

4. Process the payment

Once you have all the details in your organization system, pay independent contractors as per the agreed payment terms including additional fees like overtime where applicable.

5. Share the 1099-NEC forms

While approaching year-end, set aside time to prepare the 1099-NEC forms. The 1099-NEC form helps you report the payments you made to independent contractors to the IRS in the financial year and is required for every contractor you have paid more than $600 a year.

You should keep a copy of the 1099-NEC forms for your business books as you share copies with the contractors, the IRS, and the state tax authority. Doing so ensures your books are accurate and helps contractors pay their federal income tax correctly.

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InvoiceOwl makes your invoicing simpler and faster so you can get paid promptly and keep your business finances healthy.

Ending Note

To establish a pleasant working relationship with independent subcontractors, it is essential to pay them fair and on time. Since there are several ways to pay independent contractors, it may get difficult to choose the right one.

For contractors looking to make it easier for their clients to issue payments, InvoiceOwl is an industry-leading invoicing solution that supports payments via multiple options like Google Pay, Apple Pay, credit cards, and debit cards. Whether you’re in construction, landscaping, consulting, photography, auto repair, or the medical field, InvoiceOwl makes it easy to create, send and track estimates and invoices in real-time.

InvoiceOwl was built for small business owners like you! and get paid faster!

Author Bio
Jeel Patel
Jeel Patel

Jeel Patel is the Founder of InvoiceOwl and is the main curator & writer of the content found on this site. With ideals of quality, commitment, and perseverance, he believes in creating lasting business relationships with the clients.

United States