Most businesses have a set process for paying employees, but running payroll for independent contractors is slightly different. Key differences exist that you must gather, wage reporting, and how they’re born. Consider using a contractor management software program that can handle payments. It will make it easier to pay contractors more frequently, which can benefit both your business and theirs.
Generally, independent contractors should be left alone to do their work. It would be best to communicate with them or ask for progress reports. Still, if your supervisors are hovering over your contractor’s shoulders or demanding revisions and updates more frequently than necessary, this could be a sign that they are micromanaging. This management technique is often a bad idea even when it is well-intentioned. It is because it can lead to an employee feeling frustrated with their managers and may cause them to lose trust in leadership. In addition, it is not scalable – eventually, one person cannot possibly review every task and detail of each workflow. However, there are alternatives to micromanagement that can allow team members to feel trusted while enabling managers to monitor progress. One such method is to document your processes – this gives everyone clear instructions on performing certain tasks while also allowing managers to check in at any time. Software for managing payroll for contractors can make this easier than ever.
Set a Budget
Managing contractor payroll can be expensive and time-consuming. The first step is to set a budget for the work you plan to perform with contractors and how frequently you will pay them. It should also include a projection of new projects you plan to hire for. Unlike employees, independent contractors must pay their taxes. They can receive payment in cash, check, direct deposit, or even pay cards (reloadable debit cards employers use to give workers access to wages). Moreover, you may have different rates for different projects, and some states require additional paperwork like tax forms and worker certifications.
Additionally, it’s important to keep in mind that misclassification of workers could lead to costly penalties for your business. As such, you must review your team’s work regularly to ensure they are classified correctly. It will help avoid overpaying and underpaying and minimize compliance risk.
Create a Contract
One of the most important things you can do for yourself and your contractors is to write an agreement. This contract spells out all the details of the specific project you have hired them to do, their responsibilities and deliverables, price, deadlines and more. If something goes wrong, it guarantees everyone is on the same page and safeguards both sides. It also ensures you’re not paying your contractor as an employee and avoiding taxes. It’s a good idea to keep these agreements in a secure location, either on your own or through a dedicated contract management system. If you need to use a contractor management system, it’s easy for mismanaged contractor relationships to snowball into issues with local labor laws and workforce classification regulations. A formal approach to contractor management can help you avoid these compliance risks by monitoring freelancer classification and alerting you when changes happen.
Establish Strong Lines of Communication
The more you communicate with your remote contractors, the better your collaboration will be. But don’t go overboard. While checking in regularly and asking if they need support is important, you want to avoid bombarding them with questions every other day. Remember, they are independent SMEs with different demands on their time than your employees.
Additionally, be sure to establish a payment schedule with your contractors. Depending on the project and what was agreed upon in the initial contract, the contract typically states that your firm would pay the contractor weekly, bimonthly, or monthly. The final best practice is to ensure that your contractors meet all legal requirements for their classification, which may include a Form W-9 (verifying name, address, and Taxpayer Identification Number) and a non-disclosure agreement. Learn more about navigating local labor laws, misclassification risk, and international payments.
When working with freelancers or contractors, it’s important to have a system that allows you to process payments and record accounting entries in one place. It makes it easy to run independent contractor payroll alongside your employees and ensures that all your data is accurate. It also makes preparing 1099-NEC forms for your contractors at year-end much easier. The frequency and amount of money you pay your contractors can vary depending on the work they’re doing for you. For example, pay them on a project basis or retainer basis. If you choose to spend on a project basis, ensure you and your contractor agree on the payment amounts upfront and include them in your contract. Many companies use online solutions for recurring payments. These solutions provide quicker and more secure transactions, even though they could call for your contractors to establish a merchant account with their bank or another merchant service. For very fast payments, you can also use wire transfers. However, this can cost you and your contractor a fair fee (domestic transfers usually incur about $15-$30 for senders and recipients).