The gig economy is in full swing, from consultants to writers, rideshare drivers, and graphic artists, it seems every industry has found an advantage to hiring a freelancer.
The global freelance market economy is projected to reach $90.1 million by 2028, up from $3393.5 million in 2019, growing at a CAGR of 15.3%. Freelance work is slowly replacing the normal employee, and companies of all sizes, including small businesses, have found a way to incorporate them into everyday workflows.
So, what is a freelancer and how can you pay them? In this article, we’ll look at setting up a proper payment system, the top ways to pay a freelancer, and the best practices to get started today.
What is a Freelancer and Why Do You Need One?
A freelancer is simply a self-employed individual that offers contracted services, usually on a short-term basis. The number of freelancers is forecasted to hit 90.1 million by 2028 and more businesses are hiring freelancers. Here are some common reasons:
- Fast deliverables from a larger talent pool
- Cost savings with no long-term commitment
- Easy to find, hire, and onboard
- High-quality work from specialized talent
It’s also a cost-effective solution that offers businesses flexibility. For example, if you’re looking for a temporary hire to fill a role on your team, it’s more cost-effective to hire a freelancer than a full-time employee. In fact, top brands like Google actually have more freelancers (54%), than permanent workers (46%).
How to Setup a Proper Freelancer Payments System
Before you can start making payments to freelancers, you have to find the top talent and get them used to your brand. Here’s how to get started with a new freelancer:
When looking for freelance work, start by making a list of all the projects you need someone to complete where your team doesn’t have the bandwidth.
Create intelligent job descriptions and carefully assess candidates. Use automated self-service portals to onboard freelancers quickly and get them used to your brand.
A few platforms that can help you hire freelancers include:
Types of Freelancers
According to an extensive study of the gig economy and freelancers, there are five common freelancer types that you will run into during the hiring process. By no means are they mutually exclusive, and many freelancers may fall into more than one category.
These five freelancer types are:
- Diversified Workers
- Independent Contractors
- Temporary Workers
- Business Owners
Diversified workers make up 35% of the total freelancer workforce and just as the name suggests, receive payment from a variety of sources and clients. They can be hired by one company part-time, while doing freelance projects on the side.
31% of freelancers are independent contractors. These workers have a range of clients and operate on a project-to-project basis.
Moonlighters represent 23% of freelancers and are closer to diversified workers than anything else. They only differ in that they have steadier work with a company, typically working full-time while freelancing nights and weekends.
These individuals are employed by a company for a fixed amount of time and make up less than 6% of the freelancer workforce.
These contractors own a business with employees, but still consider themselves self-employed and identify as freelancers.
Understanding Taxes and Compliance
No matter where a contractor is located, you must ensure freelancer tax compliance from anyone you hire and pay. Although you should have a preferred payment method and currency, it’s also important to be flexible.
In the United States, freelancers are considered 1099 contractors. Unless they provide a TIN (tax ID number), you will have to deduct backup withholding from their earnings. If the backup isn't paid, you may be liable for their uncollected taxes.
When you hire a freelancer, you need to follow a set of prescribed rules to ensure tax compliance. This includes making sure the proper documents are filled out and filed accordingly. Accounts Payable automation software is typically used to provide a supplier portal that collects all of this information electronically.
All freelancers should fill this form out during the onboarding process. A W-9 form will ask for the following information:
- Taxpayer Identification Number (TIN) (social security number for an individual)
- Type of business (Sole Proprietor, Corporation, Partnership, or other)
- Other types of industry-specific data
AI is built into payment automation software to ensure every payee is submitting the proper forms. This involves turning in the correct documents based on factors like payment method, taxes, hourly rate, currency, currency conversion, conversion fees, and country of origin.
When the right form is selected, the software will digitize the document and apply thousands of rules, like immediately matching the TIN number.
The best AP automation software supports the following:
- Verification of all tax information to ensure document completion
- Documents like W-9, W-8BEN (and E), W-8EXP, W-8ECI, W-8IMY, W-4, and/or 8233
- Collects Tax IDs and optimizes electronic signatures
- Protects a business from IRS penalties
You should also be monitoring metrics for 1099 and 1042-S end-of-year paperwork. This submission-ready file helps manage reporting to state and federal agencies. The tool you choose should be approved to meet IRS requirements and must be KPMG-reviewed.
There should also be tax solutions worked out if you intend to hire international freelancers. This includes tools for VAT and local tax ID capture.
The more countries an online payment platform supports (including languages and different currencies), the more freelancers you can hire in different parts of the world.
It’s also helpful to identify payment solutions that offer a fixed fee when you’re looking to make an international payment. Wise (formerly known as Transferwise) and Lumanu is a great payment solution in this case.
A critical part of developing a positive freelancer relationship is hashing out a strong contract at the beginning—one that benefits both parties.
Unlike regular employees, freelancers have more leverage during contract negotiations. It’s much easier for them to simply walk away.
Make sure the contract you both agree upon and sign, includes important information like:
- Project scope with expected deliverables
- Contact details for both parties (full names, phone numbers, and emails)
- Agreed-upon pricing and rates for each line item
- Deadlines and timeline
- Ownership, copyright, and all legal terms
Automation is the quickest and smartest way to onboard new freelancers. Rather than a business team rifling through stacks of paperwork and tax forms, the freelancer can take care of the documents themselves with a self-service onboarding supplier portal.
This includes signing all contracts and NDAs, entering bank data, submitting IDs, etc. This enables your AP staff to focus on more important tasks than onboarding multiple freelancers.
6 Best Practices for Paying Freelancers
When managing freelancer payments, there are some important factors to consider:
- Don’t Skip on Taxes
It is not something you should guess. Always have the correct tax documents for any freelancer you hire and make sure you have classified the worker correctly.
A self-service supplier portal makes registration go smoothly and helps to collect essential VAT/local tax ID documents as part of the onboarding and data capture process. It should also give freelancers the option to choose payment thresholds that will keep your business within full tax and regulatory compliance.
- Clearly Define Payment Methods
Select a suitable payment method and clearly define payment terms. This can include anything from ACH to wire transfers, EFTs, credit cards, online payment platforms, and much more.
- Discussing Pricing Upfront
You must discuss with the freelancer how they prefer to be paid. During the beginning of the relationship, many contractors will want a percentage of the payment in escrow. This is more common when the payment is a fixed price, rather than hourly.
Here are the most popular ways to pay a freelancer:
- Pay Upfront - This is for trusted and highly sought-after freelancers. However, since they are sole proprietors, this can be a gamble if the freelancer gets sick or hurt.
- Pay After Project Completion - This is typically for newer freelancers and is the least risky option. However, more experienced freelancers are less likely to work without any type of upfront payments.
- Pay During - This is when you agree to milestone payments with the freelancer. Whenever they meet a goal, another payment is released. This is the best type of contract for both parties.
- Hourly Pay - In this case, the freelancer requests an hourly payment much like an employee. Time trackers online can be used to ensure accuracy.
- Third-party Platforms - A third-party freelancer platform (like Upwork or Fiverr) collects payments for both parties, and then pays out accordingly (typically holding funds in escrow).
- Layout Ground Rules and Sign Contracts
The contract should be written in clear and concise language stating how long the project will take and what will happen in the event it is not completed. The contract must include how much payment will be owed to the freelancer and when.
Establish how you will share resources as well. Discuss what happens if payments are not made on time or milestones are not met. Will there be a late fee?
If the freelancer is producing creative content, the contract must also talk about who owns what (known as intellectual property).
For example, if you hire a graphic designer for a t-shirt campaign, are you allowed to resume the artwork later down the road? Can you reuse photographs provided? All of this needs to be delineated in the contract.
Don't forget to make sure both parties sign and execute the contract!
- Establish a Solid Non-Disclosure Agreement
To protect everyone’s rights and intellectual property (IP) a freelancer will typically be asked to sign a non-disclosure agreement (also known as an NDA). This separate document will govern exactly what a freelancer can and cannot share about a certain project.
- Setup Invoicing
It’s important to establish exactly how and when your freelancer intends to invoice. This should be laid out plainly in the contract. Typical payment terms include 30, 60, or 90 days.
How to Pay Freelancers?
There are a multitude of ways to pay a freelancer. Use this chart below for easy reference:
If you're using an automation platform, it’s pretty easy to pay freelancers.
The step-by-step process includes:
- Sign up and/or purchase the service
- Connect a bank account, credit card, or debit card
- Wait for account authorization
- Start sending out payments to freelancers anywhere, at any time
Other platforms will boast additional features like invoicing, recurring payments, and subscriptions. It’s all about finding the tools that work best for your top business needs.
One of the best freelancer payment platforms on the market is Lumanu. The platform handles every manual accounting process including onboarding, tax form collection, and freelancer payments, allowing your staff to focus on more value-based tasks to drive growth.
With Lumanu, you can gain instant access to working capital and pay freelancers outside of the United States at mid-market exchange rates. Freelancers can also access funds immediately with the EarlyPay feature, allowing everyone to get ahead of the invoice due date.
Pricing for Lumanu starts at zero dollars, with no processing fees. The basic plan is called Business Lite and costs $99/month.
Lumanu also offers a Business Pro plan which is priced at $299/month and offers cash advances, mass payments, and smart third-party integrations.
Final Thoughts: Paying Freelancers
The freelancer market is booming and it’s an incredibly smart way to fill in the operational gaps of your business. Save money, streamline operations, expand your network, gain expert advice, get work done fast—the list goes on.
Freelancers come in a variety of types and they will anticipate payments in the same vein of complexity. You need to take the time to understand each freelancer, discuss their requirements, and work to align the relationship with your business needs.
Lumanu is an advanced solution where a business can manage payouts, access working capital, and gain advertising permission—all in one universal space. Want to explore more? Schedule a free demo with Lumanu professionals today.