The importance of independent contractor payments
Many organizations rely on independent contractors (freelancers, 1099 workers) to drive their business success. Independent contractors are invaluable in helping businesses scale quickly with on-demand talent and can help fill much-needed skills gaps on projects where it doesn’t make sense to hire full-time employees.
But once you’ve found winning talent, it’s important to keep them, and how you pay your independent contractors is an important part of retention. Speed and flexibility are critical for keeping workers happy - while processing payments efficiently, without administrative hassles, is key for your business.
Ways to pay independent contractors
We all have a preferred way to be paid, whether it’s by direct deposit, pay card, PayPal or some other method. Offering a wide range of payment methods can go a long way towards building a positive experience for your independent contractors. Here are some of the most common ways independent contractors prefer to be paid:
1. Direct deposit
This is the most preferred payment method amongst independent contractors. Direct deposit can save your business money and helps avoid potential problems associated with routing or late delivery of paper checks. Of course, a worker must have a bank account in order for direct deposit to work. It can also be difficult to stop a direct deposit payment once triggered if you don’t act quickly. Any changes must receive authorization from the independent contractor. Also, it’s your organization's responsibility to maintain the security of the worker’s personal information, which could add additional security burdens to your business infrastructure.
2. Pay card
This method of payment involves issuing a debit card from a provider like Wisely® by ADP and paying the worker by putting their payment on the card. These cards are safe and secure options, funds are FDIC-insured, and workers don’t need to open a bank account to receive their paychecks. Pay cards can be lost or stolen, however, leaving the worker with no access to their funds, or worse, stolen funds. (Although options like Wisely do have policies to protect against fraud or stolen cards.)
3. Electronic payment systems
This would include services such as PayPal and HyperWallet, which allow you to easily pay international workers too. While these all have the same benefits as direct deposit and pay cards, there are often fees for receiving money and transferring it out of the system.
4. Paper check
While there are still some instances where this method would be needed, it is often considered the last resort if all other methods are unavailable. The issuing of a paper check requires a longer, manual process that can be fraught with errors, like checks being lost in the mail. Paper checks are examples of business inefficiencies that can lead to frustration not only for your independent contractors but for your administrative staff as well.
Making sure you pay independent contractors on time
With competition for talent as fierce as ever, the last thing you want your business to be known for is late payments. Besides, independent contractors that are paid quickly are more likely to give you their best work.
Most independent contractors have multiple clients and assignments in the air at once. Since they’re self-employed, they get to pick and choose with whom they work and when. Like any business, they have expenses and cash flow to manage.
Imagine what it’s like to be an independent contractor who submits invoices to a company that repeatedly pays late, after the agreed upon payment terms. The worker gets frustrated, at best. At worst, they’ll take their talents elsewhere because they get tired of chasing their money with follow-up emails and phone calls. Their work may also suffer because who wants to work for a client who’s showing lack of respect for the time and effort they’ve put in by not paying them as agreed?
“When a HUMAN is wondering whether they would get paid on time or not, they are not working as hard or creatively as they could be…”
-Yu-kai Choi, an expert in human motivation and behavioral science
So paying your independent contractors by the agreed upon time is crucial to maintaining a good relationship. It all starts with the upfront payment terms in your agreement.
The importance of payment terms
Establishing payment terms in advance means that you and your independent contractor agree on how and when they’ll be paid and by what means.
Hourly vs. flat-rate contractor payments
Many independent contractors charge an hourly rate. This is when the worker logs the hours they’re working on the project and payment is made based on the number of hours worked. Some companies are fine with these payment terms while others prefer a flat-rate agreement.
With a flat-rate, the rate or amount to be paid the independent contractor is negotiated in advance and it’s a fixed amount. You agree to pay X dollars for a service performed or on a per-project basis. There is a clearly defined scope of work between you and the contractor. This is then closed out as a one-time payment issued upon completion of work.
Many companies (and contractors) like flat-rate negotiations. For businesses, there are no surprises and no “nickel-and-diming” with excess hours added on. For independent contractors who work fast, they can get paid “more” for the same amount of effort.
Independent contractor invoice payments
The standard terms of payment for invoices is often Net 15 or Net 30 days, meaning an invoice must be paid within 15 days or 30 days, respectively, depending on company payment policies, after the invoice has been received.
Some independent contractors may have more immediate payment terms such as Payment Due Upon Receipt. Companies and their contractors often negotiate half-upfront, half-upon-completion terms, meaning you pay for half of the work up front as a gesture of goodwill to get the worker started and then the other half once the work is done. Depending on your business and payment processing policies, you can choose to negotiate (or not) the terms proposed by an independent contractor.
Regardless of your payment terms and scheduling, it’s imperative to verify completion of projects and track worker invoices and payments.
Companies are often managing all of this with outdated systems and processes. Spreadsheets are the norm, as are siloed systems and programs. These operations slow down a business’ ability to onboard new contractors and get people to work to meet growing client demand.
That’s where technology and automation comes in.
See WorkMarket in action
Explore our interactive demo to see how you can leverage automation to manage independent contractors — and virtually eliminate manual processes — from onboarding to pay.
How an independent contractor management system can help
Consider the time it takes for an independent contractor to create an invoice then send it for approval, which often means it then gets sent to the accounting department for further verification, approval and payment. Throughout the process, there is risk of error, such as misplacement of the invoice or routing to the wrong person, which can lead to significant delays.
With an independent contractor management system like WorkMarket, once you approve an invoice, the system automatically initiates payment based on your preset payment terms. The system also gives you visibility into payment spend across workers and projects so you can readily analyze data as needed. In addition to being a central repository for all your contractor payments, such a system further helps eliminate manual processes by automating:
Invoice generation on behalf of the worker (creating an invoice audit trail)
Workflows to manage assignments at scale
When tax season comes around, the system provides compliance support by prepping and filing 1099-NEC forms with the IRS and relevant state agencies on your behalf. Your workers also get their copies, alleviating the administrative burden on your internal staff.
Plus, your independent contractors can choose how to accept funds (e.g., bank transfer/ACH, PayPal, debit cards) and they can log into their user portal to update their payment information and preferences anytime they want.
Whatever payment processes and methods you choose to pay your workers, keep in mind the importance of paying them on time to create and maintain goodwill and professionalism. Also be sure to relieve your internal staff from tedious administrative tasks by leveraging technology that accelerates payment processes and helps keep your business compliant.
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