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6 Min. Read

How to Pay Contractors: 4 Best Ways to Pay Independent Contractors

How to Pay Contractors: 4 Best Ways To Pay Independent Contractors

There are a lot of benefits for a business to outsource work to a contractor or freelancer. It can be cheaper than hiring an extra set of employees since you don’t have to withhold any taxes. But, what’s the best way to pay an independent contractor that you hire?

Before any work starts you should have an agreement in place with the contractor that you hired. This should outline the agreed rate and any other stipulations for the project or work that needs to get done. It could be an hourly rate or a per-project rate.

You should also look into the frequency that contractors get paid. Is it going to be a single, one-off project? Can it get completed in less than a week? Or will it be a month-by-month invoiced rate? Depending on how you set up these terms, it could determine how you pay the contractor.

Here’s What We’ll Cover:

Things to Consider

The 4 Best Ways to Pay Independent Contractors

Key Takeaways

Things to Consider

Before you decide exactly how you are going to pay a contractor, there are some other factors you should consider. One of the most important is tax needs. You should also determine the number of contractors you’re going to hire and how frequently they will get paid.

Hiring a contractor means that they will provide some documentation for tax purposes and it’s a simple process. But making sure information is accurate and contractors are classified appropriately is important. Receiving an invalid taxpayer identification number, for example, can lead to pay getting withheld.

How many contractors do you need to hire? One? Multiple? Planning ahead for hiring your contractors can help save you time with payroll processes. You can make sure you have the necessary tax forms organized and have adequately tracked relevant hours.

Once you have a sense as to all of that information, you can decide which payment solution to use. You can then determine how the contractors will get paid and how frequently payroll services happen. This can get sorted out by discussing details with the contractor you’re going to hire. Take a look into if there are any transfer fees to be aware of.

The 4 Best Ways to Pay Independent Contractors

It all depends on the business that you operate and the type of contractor that you hire. One payment option might work well for one business but might not work well for another. It’s important to look into the frequency you will need to pay contractors and how many you will hire.

Here are the 4 best ways to pay independent contractors.

1. With a Check

A personal check is simple, tried and tested and fairly cheap. There’s no need for you to download an app or sign up for a payment transfer service. Checks can be a reliable form of payment but they also have a few downsides to be aware of.

One of the biggest downfalls is the time it takes for a check to get delivered and processed. A paper check could take time to get mailed to the contractor. And then after it gets deposited, there will be an additional hold until the check clears.

That said, eChecks have become more and more common over the years. They work exactly the same as a paper check, they’re just digital. You would send the eCheck to the contractor through email, and they can then deposit it directly to a linked bank account.

Now they will still have to wait for 2-5 business days for the hold to clear. But this can help avoid the time it takes to mail a paper check. Checks might work best to pay independent contractors that are only hired once.

If recurring payments are needed, another form of payment might work better.

2. Wire Transfers

Sending payment through a wire transfer is one of the quickest ways to make a payment. If you have to send money internationally it could take a little bit longer. But domestic transfers can oftentimes get processed within 24 hours of the payment getting sent.

It’s worth looking into the fees that come with wire transfers, however. Depending on how often you send payments, the fees could add up fast. Both the sender and receiver usually get hit with a fee and it varies between a domestic and international wire transfer.

If you are sending small and routine payments, the fees that come with sending a wire transfer might not make the most sense. Take a look into the frequency that you will need to pay contractors. This will give you a better sense of the best approach to take.

3. Direct Deposit

Using direct deposit payments is one of the most common ways to make payments to employees, contractors and freelancers. All you need is the relevant bank account information from the contractor, and payment is sent directly to the account.

This can be a good option if you regularly send payments or use accounting software to automatically send recurring payments. Plus, transfers are completely paperless and secure. Depending on the rules a financial institution has in place, most direct deposits are available 1-2 business days after they get sent.

4. PayPal

An online payment app like PayPal is a great option for business owners to pay contractors. You simply link your bank account with your PayPal account to transfer funds. Once you have funds in your PayPal account, you can then send them directly to the recipient.

The recipient will then receive the funds to their own PayPal account. They can use PayPal to make purchases with the funds that are available or they can transfer the funds directly to their bank account. You should look into whether or not there will be a processing fee for business transactions.

Key Takeaways

There is no perfect fit and you could even have to pay a contractor in more than one method of payment. Some contractors have different preferences or only accept payment in a certain way. This can make things a little tricky, but the good news is that there are options out there for you.

Understanding the different tools and resources that are available to you can help you make the right decision. Use one or more of the four payment methods outlined above to pay your independent contractors. They provide a range of flexibility to help make sure contractor payments are made for the work they complete and there are no delays.

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