Over recent years, the freelancer economy has been booming. From 2020 to 2023, there was an 89% growth in freelancers varying from fully independent to people doing the occasional side gig.
Demand has also increased, and you’ve likely either already worked with a freelancer or will work with a freelancer over the course of your business.
As you’re navigating the ins and outs of working with a freelancer, there’s one essential thing you need to figure out to ensure a solid working relationship: get them paid.
But to do that, you need to know what the payment methods available to you are and the pros and cons of each.
Who is a freelancer?
A freelancer is someone who works with a business on a project or contractual basis. Usually, the work to be completed is on a short-term timeline with the opportunity to renew down the line.
As opposed to an employee on payroll, who has ongoing employment on a salary or wage compensation model, freelancers have the flexibility to choose what projects they work on.
Freelancers use different pricing models. Some might have a set price per project, like a graphic designer who charges a flat rate per graphic provided. Others might use a monthly retainer (a flat rate for a month of work) or an hourly rate.
When the project ends, both parties can choose whether they want to continue the engagement or not.
Choosing to stop working with a freelancer isn’t like firing an employee. With less paperwork and administrative responsibilities, freelancers are the better option if you need a short-term boost of labor.
Best practices for paying freelancers
Whether you’re working with a freelancer for the first time or you’re simply looking to improve your processes, use these four tips to guarantee solid relationships and output from your freelancer.
Clearly define the work to be done
Everyone involved in the process—from the freelancer to the teams who'll benefit from the work done—should be on the same page. You should clearly define what is being done and when it'll be delivered.
Freelancers are often juggling multiple projects for different clients at a time. For them to be effective at planning their schedule, they need to know what the scope of the project is.
Anything left ambiguous might affect the freelancer’s ability to plan and deliver the work on time. Or you may end up with a delivered product that doesn’t meet the standards that weren’t clearly defined.
This can leave you feeling like you didn’t get enough value for your money. To avoid this, have teams draft a project brief with the input of the stakeholders requesting the work.
Agree on payment terms at the start
Before working with a freelancer, there should be clear terms of engagement and payment.
This means thinking beyond how you’re going to pay freelancers. You need to consider when they'll get paid, what they need to provide, and what kind of billing structure will be used.
If you want to work with a freelancer on an hourly rate, you need to determine if they need to provide additional documentation for the invoice. For example, you might want a time tracking report or a time breakdown by project to understand what’s driving the cost.
When should you pay freelancers who work on a per project basis? Your options are:
- Pre-payment: payment is made before the project is completed.
- Milestone payments: you make partial payments based on certain points of completion (e.g., 50% of payment delivered for a first draft, 50% after revisions).
- Post-payment: payment is made after the project is completed.
Offer multiple payment methods
Each freelancer you work with will have their preferences for what payments they’re willing to accept. By being restrictive in what you’re willing to offer, you could be limiting yourself in terms of who you’d be able to work with.
It’s best practice to have what’s essentially a ranking of preferred payment methods you offer. This way, when you’re discussing payment with a freelancer, you can work your way down your preferred options before agreeing on a method.
Know your reporting requirements
While working with contractors usually means less administrative work, there are still reporting requirements you’re responsible for.
In the United States, freelancers who you have paid more than $600 in the calendar year must be sent a Form 1099-NEC. Form 1099-NEC documents the total amount you’ve paid them with a copy going to the freelancer and the IRS.
To fill out a Form 1099-NEC, you’ll need to collect a Form W-9 from the freelancer. Form W-9 contains all of the necessary tax information you need from a freelancer for you to file the necessary tax forms.
Form 1099-NEC must be submitted to both the IRS and the freelancer by January 31 (or the next business day if it falls on a weekend or holiday).
To save yourself from any last minute scrambles, track payments made to freelancers throughout the year using a spreadsheet, your accounting platform, or even the classic pen and paper.
Freelancing payment methods
To help you understand your options for paying contractors, we’ve broken down five of the most common options to consider.
Check
Traditionally, freelancers were locals who were easily paid by check. You can stick with this method if you have a freelancer who’s local enough that you can mail or hand deliver a check to them.
Costs are relatively low as you only need to cover the cost of the paper check and postage.
For the freelancer, concerns about checks bouncing or getting lost in transit make it a less desirable payment method. Add in the time to deposit a check and the funds to be processed, and the freelancer could be looking at weeks or months before the money is in their bank account without the certainty that it'll go through.
Credit card
If your freelancer accepts credit cards, you get access to an easy and streamlined payment experience.
There’s still risk in providing your credit card information to a freelancer, especially if you don’t have a prior history. If you’re feeling uneasy in any way, it might be best to opt for a different payment method that makes you feel secure.
ACH payments
ACH stands for “Automated Clearing House,” an electronic network used by banks in the United States to send paperless payments.
How ACH payments work is you submit a transaction request, which gets added to a queue of transfers that gets cleared out every business day. Funds are taken from your account and directly deposited into the recipient’s bank account.
ACH payments are convenient, secure, and reasonably cost effective with processing fees of 1.3% to 3.5% of the transaction.
There are some limitations of ACH payments to be mindful of.
Transfer limits will cap how much you can send on a single transaction, day, or month. If you’re sending large sums of money, you might find yourself unable to use an ACH payment when you need to.
For an ACH payment to work, both banks need to be on the ACH network. This means you won’t be able to use an ACH payment if the freelancer is outside the United States or uses a bank that’s not on the ACH network.
Wire transfers
Wire transfers work similarly to ACH payments: a transfer of funds is submitted to a network that clears out transactions in batches.
However, wire transfers use an international network of banks and financial institutions. This international network has higher costs and longer processing times.
This makes wire transfers effective at paying international freelancers, but be prepared to pay fees of around $50 per international wire transfer.
Fees are less for local wire transfers (typically around $25), but it’s worth looking at ACH payments as an alternative as costs could be lower.
Online payment portals
The freelancer you want to work with could be set up on their own payment portal.
Some invoicing software has payment processors built right into them. This lets you make payments directly through the invoice without passing on your credit card information.
Another common example of a payment portal is PayPal, which allows you to pay by credit card or directly from your bank account.
These are convenient options but depend on whether the freelancer is offering them. If you’re only willing to work with freelancers who offer a payment portal, you might block yourself from working with specific freelancers.
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Freelance payment FAQ
How to pay freelancers overseas
Paying freelancers overseas will depend on what payment methods they're willing to accept.
The most likely option will be wire transfers, which make bank-to-bank transfers internationally at the cost of some lofty fees.
However, they may also use a payment portal like PayPal, which allows you to pay in your local currency with the funds being converted on their end. Some credit card processors will do the same.
If the freelancer is set up to accept payments using a payment portal or credit card processor, they will likely be of a lower cost to you because they charge fees to the receiver, not the sender. Just be careful you’re not racking up international transaction fees if your credit card provider charges them.
What is the best payment method for freelancers?
The simple answer to what payment method is best for freelancers is “it depends.”
The main determining factor will be whether the freelancer is local or international. There are more limitations on what international freelancers can accept, and you should be prepared to offer wire transfers or use a payment portal they’re set up on.
Then it comes down to costs and security.
Checks and credit card payments are low cost options, but have security risks including providing your banking or credit card information, which could be exploited.
ACH payments keep costs low and are high security. However, if you’re sending large sums of money, you might be restricted by the transfer amount limits.
Ultimately, the best payment for freelancers is the one you’re confident in sending and they’re comfortable receiving.
When should freelancers be paid?
There are different payment schedules freelancers can be paid on.
Pre-payment involves paying the freelancer upfront. This is common for in-demand freelancers who don’t want to spend time chasing down payments for completed work. But for the payee, there’s risk in not being protected if the work isn’t completed or isn't up to standard.
Post-payment is when you pay the freelancer after the work is complete. In this case, the payee is protected, but be prepared for some freelancers to be non-negotiable on getting paid upfront.
The compromise is milestone payments, which involve paying the freelancer at different stages of completion. For example, if you’re working with a web designer, you might pay a portion upfront, when a mockup is delivered, when a functioning beta is complete, and then finally when the website is up and running.
Always review due dates for payments as you may be charged late payment fees or sour a solid working relationship with overdue payments.