There are an estimated 76.4 million freelancers in the U.S. alone—a number that has grown by at least 2 million each year since 2017. As more people join the ranks of freelancers—and more companies continue to tap this talent pool for everything from marketing and graphic design needs to accounting help—understanding how to work with freelancers is becoming increasingly crucial. Among the various factors to take into consideration is the best way to pay freelancers to stay compliant and ensure a positive experience.
What’s the difference between freelancers and gig workers?
Before we dive into the best payment methods for freelancers, let’s pause a moment to discuss the different terms for people working outside of traditional W-2 employment. If you’ve ever wondered what the difference is between freelancers and gig workers, you’re not alone. Though the IRS classifies freelancers, gig workers, and contractors the same way (as 1099 workers) there are some slight differences in what industries each work and how much control they have over the terms of their work.
In general, independent contractors, gig workers, and freelancers are usually all paid on an hourly or per-project basis—not salaried. They all receive 1099-NEC forms from companies they work with if they earn $600 or more in a year.
But Independent contractors and freelancers are more likely to:
- Have a set pay rate or range
- Market their skills through their own professional website
- Maintain an LLC instead of a sole proprietorship
On the other hand, the term gig worker more often refers to people who work for platforms like Instacart, Uber, or Rover. Gig workers are more likely to:
- Work directly with the platform’s customers
- Take on multiple gigs for income
There are many different terms for people who have branched out from traditional W-2, 9-5 work, but for the purpose of this article we’ll explore the best way to pay freelancers in order to stay compliant and ensure a seamless payment process for all of your workers.
What’s the best way to pay freelancers?
Because freelancers often have more control over the terms of their work, providing a seamless payments experience is helpful in maintaining a positive working relationship. It’s also becoming necessary to ensure you pay freelancers in a way that is compliant with federal regulations, especially as reporting requirements continue to evolve.
Here are a few popular options for paying freelancers, as well as the pros and cons of each.
Paper checks
Many freelancers are still paid by paper checks in the mail, yet this traditional method comes with several drawbacks. For one, it can take a long time for a check to be issued and mailed. Checks can also be lost or misplaced in the mail. You’ll also have to deal with fielding questions from freelancers on when a check has been issued or sent.
All of this creates delays and hassles that your freelancers don’t want to put up with. Plus, it takes more time and effort on your end that could be saved for focusing on overall business growth.
P2P payments
Peer to peer apps like PayPal or Venmo may seem like an easy way to pay freelancer—and it does boast convenience—but all of that ease can actually increase the risk of potentially paying the wrong person. With P2P apps, there’s no mediator involved and often there isn’t a refund or dispute system in place, either. This makes it difficult to remedy errors. With P2P apps, you’ll also likely run into some steep payment processing fees for every transaction—which is a drawback for both your company and the freelancers you hire.
ACH bank transfers
Bank-to-bank money transfers processed through the Automated Clearing House Network are a reliable method for paying freelancers. Plus, since it’s a way to directly deposit funds into an account, it’s convenient and quick. However, ACH transfers can take up to three business days to process, and can sometimes come with their own fees, too. You won’t know how long the payment will take during any given pay period to hit the freelancer’s bank account, which may cause stress for both your company and freelancers.
Wire transfers
A wire transfer is a reliable way to transfer funds immediately from one account to another. A wire transfer works in a similar fashion to an ACH payment, but it usually comes with steeper fees. (Expect to pay as much as $25 for local transfers, and $50 per international transfer).
Cash
Though it’s not technically illegal to pay freelancers in cash, it’s somewhat of a risky business practice. For one, paying independent contractors in cash means you’re without an audit trail or a record of your payments. Choosing this method also makes it harder for freelancers to verify their income, which may mean they run into complications or extra hurdles come tax time.
Instant, digital payments
For many businesses, instant digital payments are becoming the best way to pay freelancers—and everyone else on their payroll. Here’s why:
- Speed and convenience. With instant, digital payments, freelancers receive their payment immediately. This improves their cash flow and boosts freelancer satisfaction. Your business might even benefit from faster project completion as a byproduct of knowing they'll get paid immediately after work.
- Security. Instant digital payments eliminate the risk of misplaced checks, and reputable payment platforms offer robust security measures to protect both parties from fraud.
- Clear and transparent. Clear transaction records streamline accounting for both freelancers and businesses, providing transparency and simplicity. You’re able to see when funds are instantly deposited to your freelancer’s accounts, eliminating stress for everyone involved.
- Fee-free options. Choosing a payments platform that allows you to pay freelancers instantly without fees can be a major win for your organization—and your bottom line.
Choosing the best payment method for freelancers—and your business
When you have a diverse workforce with a range of team members—from full-time and part-time to traditional employees and freelance workers—it’s important to know where your freelance talent fits in and how to best work with them. Choosing the best way to pay freelancers can help eliminate payroll headaches for you and help your business stay compliant.
Learn more about how Branch can help you pay 1099 workers and W-2 workers with one seamless platform.
