When you’re growing your business, your full-time employees are your core team. They work hard to contribute to the success of your business.
But sometimes, you need outside help. Maybe your website needs an update, and no one on your payroll has the expertise.
That’s where independent contractors come in. With contract workers, you can fill the gaps in your workforce without investing time and resources into hiring a new employee.
While contractors offer countless benefits, working with them can present some challenges—especially regarding payment. With that in mind, we’ve assembled this step-by-step guide on how to pay contractors and manage their payments effectively.
Understanding the Basics of Paying Contractors
Contractors are professionals who do work for you but aren’t officially employed by your organisation. Companies around the globe work with all kinds of independent contractors, from freelance graphic designers to self-employed tax experts.
From the government’s perspective, contractors and employees are two very separate categories of workers. While the exact details vary from country to country, the main benefits of hiring contractors vs. employees are:
- Contractors provide a defined, short-term service; employees are permanent
- Contractors don’t receive benefits (health insurance, paid holiday, etc.); employees do
- Contractors are responsible for their own schedule; employees have fixed hours
- Contractors pay for their own travel expenses; employees (usually) have travel covered
All these discrepancies lead to differences in the way contractors receive compensation. For example, while employees receive regular pay cheques, contractors are typically paid when they complete the project.
There are other differences, too, particularly around taxes and legal compliance.
As such, paying contractors properly is essential. If you misclassify a contractor as an employee—or vice versa—, you can face serious consequences.,
Understanding Payment Terms in Contractor Relations
Clear payment terms are vital when onboarding contractors. Clearly defining when and how payments occur ensures that both the business and the contractor have aligned expectations. This not only fosters trust but also mitigates disputes related to payment delays.
When setting these terms, consider project scope, projected hours, and available funds to ensure a successful contractor relationship. Consider using a payment solution that integrates efficiently with your payroll. Deciding upfront whether payment is hourly, per project, and any required upfront deposits can streamline the payment process.
Open communication about all fees, possible expenses, and the use of services like cheques, PayPal, or bank transfers should be established in the initial contract discussion, saving both parties from unexpected financial discrepancies.
Key Payment Methods for Contractors
So, how do you guarantee your global contractors get paid correctly?
You could partner with an employment lawyer everywhere you do business, ensuring you respect each country’s unique laws and customs. However, the costs of retaining a dozen legal experts can add up quickly.
Luckily, there’s a more practical answer. If you want to save money on compliance without cutting corners, here’s how to pay independent contractors.
Leveraging Contractor Payment Platforms
The easiest way to pay contractors is through a contractor payment platform.
With a contractor management system—like the one from Omnipresent—you can seamlessly manage your roster of independent contractors. This will help ensure your freelancers get paid properly and on time.
Like any good contractor management platform, Omnipresent enables you to:
- Pay contractors in multiple currencies
- Track contractor status
- Receive invoice reminders
- Handle all administrative tasks from a single location
- Comply with necessary regulations
- Offer your contractors a better experience
Managing Taxes and Compliance for Contractor Payments
The reason for using a contractor payment platform is simple: Paying independent contractors can be complex. That’s true even with local contractors, but it’s doubly true when you partner with workers from other countries.
When paying contractors, you face two significant hurdles:
- Taxes – With employees, taxation is relatively straightforward. Most of the time, the employer withholds taxes on every pay cheque and gives the money to the government. With contractors, the reality is more complicated. Contractors usually handle their own taxes, but depending on where you’re based, you may still need to file tax forms for each worker. Additionally, tax requirements vary by location and the contractor’s residency status, so each contractor may be subject to different regulations.
- Compliance – Beyond tax law, there are other regulations to follow. These rules vary widely from country to country. For example, if your contractor is in the UK and provides services through a limited company, you may need to deduct Income Tax and employee National Insurance contributions. Failure to comply with local laws can result in fines and legal penalties.
Best Practices for Paying International Contractors
To avoid any unwanted consequences, follow these best practices for contractor payments:
- Set up clear contractor agreements – When you first engage a contractor, draft a comprehensive agreement that respects the laws in your home country and in theirs. A well-made contract should clearly define the contractor’s status, terms of service, and deliverables, as well as the termination procedure.
- Pay contractors in their currency – Whenever possible, make payments in the contractor’s local currency to protect them from unfavourable exchange rates. If their currency is unavailable, send payments in a stable, internationally traded currency, such as USD or EUR.
- Communicate openly and often – Above all, be transparent with your contractors. Explain all fees and deductions clearly, and inform them of any payment delays or mix-ups as soon as possible.
