How to pay independent contractors: the expert guide

Hiring independent contractors might ‌just be what your business needs if you’re looking for help with a short-term project. You can tap into a diverse pool of talent, manage costs effectively, and scale your workforce up or down as needed without the complexities of traditional employment.

Paying independent contractors might seem straightforward—just send over the cash, right? But it can get a bit more complicated than that. From finding a payment system that works for both parties to navigating taxes and managing invoices, you’ll need to pay your contractors compliantly and on time.

Despite the challenges, paying contractors doesn't have to be a nightmare. With a bit of planning, a good system, and maybe some technology to help out, you can simplify the process.

This article will take you through the different kinds of independent contractors you can hire and how you can pay them efficiently. We’ll also explain how a reliable contractor management software like Remote can make the processes involved in hiring and paying contractors quick and simple. 

What is an independent contractor?

An independent contractor is someone you hire to do a specific job for you, but they're not employees. 

They're the freelancers, the side hustlers, the self-employed pros who set their own hours, handle their own taxes, and have the ability to work for multiple clients at the same time. They provide services under the terms of a contract or a project basis.

Since these self-employed contractors can choose when and where they work, they have the flexibility and autonomy to choose their own clients and manage their own working hours and projects. But it also means they don't receive the benefits and protections that are typically afforded to employees, such as health insurance, retirement plans, or workers' compensation.

What are the differences between an independent contractor and an employee?

An independent contractor is a self-employed individual or freelancer who provides short-term services to your company. An employee is considered a permanent part of your staff and typically does not work for any other company.

The definition is not always straightforward and can vary from country to country. Local employment laws usually dictate the parameters that define a contractor and an employee. Your contractor can easily slip into an employee status by working with you over an extended period. The way you pay a freelancer or independent contractor can also impact their employment status, depending on country-specific laws. If you begin to have control over the contractor's work — how, when, and where the work is done, rather than just focusing on the final result, this can indicate an employee relationship.

Misclassifying an employee as a contractor comes with consequences and heavy financial penalties, even if you make an innocent mistake. You’ll want to assess the pros and cons of working with independent contractors to determine whether it makes more sense to hire freelancer or employ someone as an employee.

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What are the different types of independent contractors?

An independent contractor can choose to work in a variety of work models:

Independent or self-employed contractors can work for you in other countries, but they are not employees. The engagement is governed by a localized contract directly with the contractor that defines the parameters of the relationship and the work being performed.

Subcontractors partner with an umbrella company that acts as a talent supply chain between your business and your contractors. The umbrella company manages all the compliance requirements, including payroll, taxes, benefits, and withholdings. Your business is charged a recurring fee to manage each overseas contractor.

Agency contractors are employed through an agency and move from one contract to another while maintaining stable employment. Agency contractors usually get paid when they’re between contracts. The agency helps maintain the quality of work, but it also puts a sizable markup on every billable hour or fixed-price project.

It’s worth reviewing the advantages and drawbacks of working with different kinds of independent contractors when deciding on the best arrangement for your company.

What is the best pay structure for independent contractors?

Payment policies for independent contractors or freelancers can be tricky. Depending on where your contractors work, the payment structure you use can affect their employment status.

Different payment structures for contractors include the following:

Project fee

A project fee or fixed-price fee is a pre-agreed payment amount for a specific scope of work outlined in a contract. Fixed-price project contracts should clearly define things like project milestones, progress reporting, and sanctions for missing deadlines. Be sure to include language regarding ownership of intellectual property in these (and all other) contractor agreements.

Retainer

A retainer is a set amount paid regularly. A common retainer arrangement is for a monthly payment that both parties might renegotiate at the beginning of each financial year. You should clarify in the contract what the retainer covers in terms of deliverables and/or time spent working on your behalf. This can be an attractive arrangement if you have multiple tasks or a variety of work you want completed regularly.

Make sure to address what happens if you haven’t supplied enough work to keep your contractor busy for the hours retained. It’s also important to understand whether it’s legal in the contractor’s country of residence to expect the contractor to roll hours over into the next period.

Time and materials

Time and materials projects are good for work you can easily manage at the task level. The contractor submits an invoice with a timesheet and expense report to prove the time and materials consumed for the payment period.

If you can accurately account for the time and effort it takes to produce the desired outcome, this could be the best payment arrangement for you. For creative industries, time and materials can be costly because it’s hard to determine how long it will take to arrive at the desired result.

How do I pay an independent contractor?

Nothing prevents you from paying your freelancers or independent contractors. You can send a bank transfer from your business account(s) or choose from a variety of other payment methods, such as digital wallets or common payment platforms like PayPal.

Global employment partners like Remote make paying global contractors easy to manage in a quick, easy, and compliant way.

How to pay independent contractors

Below, you’ll find an overview of some of the most common ways to pay freelancers or independent contractors.

Bank transfers

International money transfers are usually the most expensive way to pay overseas contractors, with unfavorable exchange rates, service charges for every transfer, and other hidden fees. Intermediary bank fees, sometimes called “receiving bank fees,” can be levied multiple times in a single transfer, depending on how the money is routed. As a result of these fees, your international contractor may end up shorted on their invoice, making you look like an unreliable client.

Paper checks

Checks are not a popular option with international contractors because they may require a fee to be deposited, they’re at the mercy of the bank’s exchange rate, and the funds are held in escrow until the check clears. With global mail delays, combined with a 4-6-week clearing period, your overseas contractor could wait months before they’re paid.

International money orders or wire transfers

Once a quick and safe way to send money, wire transfers through companies like Western Union are now almost as outdated as paper checks. Both they and money orders attract large deposit fees and require the foreign contractor to deposit the payment physically. In countries where digital payments aren’t accepted, this might be the only choice, but these situations are rare today.

PayPal

PayPal is perhaps the most well-known way to make online payments. The platform is useful for paying international contractors in different currencies, and you can make mass payments for up to 5,000 vendors at a time. You can also link credit cards to your PayPal account. However, the recipient will also need to have a PayPal account (not allowed in every country), and you’ll pay fees of around 4%.

Xoom

Xoom is owned by PayPal, but it focuses more on sending money quickly and transferring funds out of the US. You can use it in over 160 countries, and it comes with a guarantee that if your money isn’t sent to the right place, you receive a full refund.

As a flexible option, Xoom allows you to transfer money to a bank account, debit card, or mobile wallet or send literal cash for pickup or delivery — although specific services vary by country. Based on where you live, the app has different levels with varying limits on how much you can transfer at once.

Wise

Formerly known as Transferwise, Wise is one of the best fintech platforms for sending international payments. Wise lets you set up multiple foreign currency accounts, gives you bank-level security, and enables batch payments of up to 1,000 transactions in one click. You can send money using the real exchange rate to more than 70 countries with no hidden fees.

SWIFT transfers

SWIFT, which stands for the Society for Worldwide Interbank Financial Telecommunication, is a messaging organization that allows for international electronic payments through banks. It’s connected to over 11,000 institutions in more than 200 countries and territories, so there’s a good chance you and your contractors can use it.

You need to gather a few details before conducting a SWIFT transfer, including the contractor’s personal information, their bank’s SWIFT code (also known as a Bank Identifier Code, or BIC), and their bank account number.

Cryptocurrency

Instead of paying your contractor with traditional money, it’s possible to send them funds in cryptocurrency, such as Bitcoin.

Paying with crypto is a quick method that doesn’t involve going through a bank or third party, like SWIFT transfers or PayPal. Contractors can receive their wages instantly. Plus, neither party has to pay a fee for the transfer — which can be especially helpful when paying workers internationally.

Remote

Remote simplifies contractor payments without charging any hidden fees. Beyond handling payments, Remote lets you stay compliant and mitigate risk when working with overseas contractors to scale your team. You can easily manage and approve one-off and recurring invoices using Remote and initiate payments for contractors in their local currency.

We can also support international contractor management if you want to hire freelancers or self-employed contractors in other countries. Check out our article below for detailed guidance on paying international contractors.

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Remote makes independent contractor payments fast and simple

Managing and paying contractors or freelancers can quickly become a pain, especially if you’re working with several contractors simultaneously. If you’re looking for an efficient way to manage your independent contractor payments, Remote’s contractor management solution might be just the ticket.

Remote ensures that your contractor agreements comply with local laws and tax regulations, which can otherwise be complex and time-consuming to understand. This is crucial because it helps avoid legal and financial pitfalls. From tools to create and send contracts to handling tax compliance, Remote helps you navigate the maze of contractor payments in one platform.

A single dashboard allows you to manage all your contractors from one place. This includes viewing their payment status, contract terms, and communication history, which can significantly reduce administrative overhead. Our automated payment system smoothly handles the invoicing and payment processes, saving you time and reducing errors.

Remote's contractor management platform makes it easier for businesses to hire, onboard, manage, and pay contractors globally, ensuring compliance and reducing the administrative burden associated with freelance and contract-based work.

Check out our expert guide to learn more about working with contractors.

It’s easy to get started with Remote. Sign up to onboard and pay contractors today!

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