Paying independent contractors or remote team members can be tricky. In most cases, it’s not the act of sending money that requires significant effort. Rather, it’s the process of accounting for all the variables that change when new situations arise.

But before worrying about how to pay independent contractors, business owners have to determine if their team members are actually contractors. A company that incorrectly categorizes its employees as independent contractors can face expensive legal consequences.

So how can you tell if your team members are classified as contractors or employees?

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Independent contractors vs. remote employees

The IRS has a set of guidelines that differentiate an employee from a contractor. Businesses need to review these guidelines to make sure they comply with federal tax regulations. Worker classification will determine whether a company needs to withhold income taxes, Medicare taxes, and unemployment tax on wages or not.

To make things simpler, answer these three questions about your workers:

  • Will they be required to undergo a formal onboarding or training program?
  • Are there specific tools they need to use or guidelines they need to follow?
  • Is there a specific number of hours that they need to meet weekly?

If you answered “yes” to any of these two questions, they should be legally classified as employees. In that case, you’re responsible for withholding taxes on their wages.

The key point to remember is that employees are required to follow pre-established procedures and schedules to do their work. With independent contractors, the results are all that matters. How and when they want to do the job is up to them.

Contractors may have more freedom in the way they work, but there’s a trade-off. Since you won’t be hiring them as regular employees, they’ll be in charge of paying their own taxes, Social Security, and other fees that are typically withheld by employers. Since contractors pay all these things themselves, they’re treated as self-employed professionals.

We’ll get into fees and deductions in a bit.

How to pay independent contractors

When paying independent contractors, it’s crucial that you understand which IRS forms to prepare, what kind of fees you need to withhold, as well as which types of deductions you’re entitled to.

What forms should employers have for independent contractors?

According to the IRS, there are two forms that business owners need to prepare: Form W-9 and Form 1099-NEC. Here’s what these forms are:

Form W-9 (Request for Taxpayer Identification Number and Certification)

An independent contractor is required to fill out the W-9 form to confirm their name and Taxpayer Identification Number. W-9 forms don’t need to be submitted to the IRS — a W-9 form is primarily for verification purposes and future references.

Form 1099-NEC (Non-employee Compensation)

The IRS requires you to submit a Form 1099-NEC if you made a payment of more than $600 for the professional services of an individual or business entity during the year. Make sure that whoever you’re filing this form for qualifies as an independent contractor.

Withholding fees and deductions for independent contractors

As previously mentioned, independent contractors are considered self-employed. You’re not required to withhold taxes and other fees you would normally pay for regular employees.

Regardless of the payment terms that you have agreed on, the money that you pay your contractors will be counted as tax-deductible expenses. This amount will be subtracted from your business’ income before it becomes subject to taxation.

The amount in question isn’t restricted to the fee that you paid for the contractor’s work. Depending on the agreement between you and them, this could also include additional expenses such as:

  • Laptops, office chairs, and other work supplies
  • Monthly allowances for work (i.e. essential utilities like internet bill, membership fees, etc.)
  • Contractor’s travel expenses

Let’s say you’re having a retreat for your remote team. There are several other kinds of contractor-related expenses you might incur. You can classify them as tax-deductible expenses in most cases — as long as you can prove that they’re necessary for your business to make a profit.

How to pay remote employees

If you decide to hire full-time remote employees that reside in a country outside of where your company is registered, you’ll want to pay them in one of the following ways:

Have a local partner pay your remote employees

If you have a partner company in the country where a remote employee is located, you can have the partner put your employee on their payroll. The employee will technically be the partner company’s employee, but they’ll be working for you.

This will ensure you’re complying with local laws and providing the employee with adequate compensation and benefits.

If you have remote employees in a lot of different countries around the world, this approach might not be practical because it would require having just as many partner companies.

Use an outsourced payroll provider

The other option is to outsource payroll to a dedicated payroll provider.

This type of company specializes in handling payments and benefits for remote employees. These providers are able to do this because they have registered entities in every country they provide their services in.

Using an outsourced payroll provider can simplify your payroll management process significantly and relieve you from having to worry about local laws and regulations for every country where your remote employees are located.

Best payment services for paying independent contractors and remote employees

Looking for a reliable way to pay independent contractors and remote employees? Here are the top four options:

Hubstaff

Hubstaff payments

The best way to pay independent contractors online is to streamline their work tracking with an automated payroll system.

Hubstaff is a time tracking and payroll software that addresses the main challenge mentioned above: ensuring that you get value for your money. Hubstaff tracks every hour worked so you know exactly how much you will pay.

Ditch paper checks and use Hubstaff to pay independent contractors, remote team members, or freelancers. Hubstaff offers an online payment solution that can be maintained right from within your account by integrating with international payment platforms like PayPal, TransferWise, Bitwage, and Payoneer.

But Hubstaff isn’t just a payroll software tool. It can also track time automatically and maintain a record of which time logs you’ve paid and which ones you haven’t.

It simplifies remote time tracking and adds an extra layer of insight and reporting. Payments can be sent out automatically or manually. All your contractors have to do is download the desktop app and press start to track time.

Hubstaff will automatically calculate payroll based on a team member’s hourly rate and the time they have logged.

You can also use Hubstaff’s reporting feature to view how many total hours they have worked over a specific date range and pay them accordingly upon project completion. It even integrates with accounting software solutions such as QuickBooks and FreshBooks to simplify your accounting process.

Other benefits of using Hubstaff include more accurate project budgeting and automated scheduling and attendance reporting.

As an added bonus, Hubstaff Desk offers tools to help you measure productivity and create proof of work for independent contractors and distributed team members.

Hubstaff Desk creates more visibility into what’s getting done by showing you which apps and URLs your team uses, tracking activity scores, and allowing you to configure optional screenshots to help you spot the source of productivity problems.

Your team can see everything that’s tracked. Hubstaff Desk is a transparent, ethical solution to create proof of work.

PayPal

PayPal

PayPal is the largest online payments processor in the world, with over 325 million active users in 202 countries and 25 supported currencies.

Businesses around the world use PayPal to pay contractors and team members. This means that if you want to outsource talent, there is a solid chance that the independent contractor you end up hiring already uses the platform.

PayPal emphasizes security and automatically encrypts confidential information when storing and transmitting it.

Keep in mind that, even though most people around the world can receive payments via the platform, not all countries have the option to withdraw funds to a local bank account via wire transfer.

Hence, you may end up paying your international team members overseas only for them to get stuck with balances that they can only use for online purchases.

Payoneer

Payoneer

Payoneer allows businesses to send payments to remote team members and contractors through direct deposit. It’s available in more than 200 countries and supports over 150 currencies.

The company is a regulated entity in the US and EU and is licensed to remit funds globally.

Payoneer gives employees and contractors multiple ways to withdraw their earnings, including using Payoneer’s prepaid Mastercard cards and global bank wire transfers.

Additionally, the company follows the strictest security practices to ensure your data and funds stay safe.

Wise

Wise (formerly TransferWise)

Wise leads with a pretty compelling offer: the fairest exchange rate. Unlike other payment platforms, Wise is a payment method that doesn’t add a premium to the wholesale (mid-market) exchange rate. That means you end up paying only what you have to for currency conversion.

Similar to Payoneer, Wise offers a debit card users can use to withdraw or spend funds once they get paid.

The platform also follows strict security regulations that ensure your data and funds are secure.

However, Wise is only available in 60 countries. If you have remote employees or contractors that live outside of those 60 countries, you’ll need to look for a different payment service.

Which payment method should you use to pay independent contractors?

When making a financial decision on how to send payments to remote team members and contractors in your company, you shouldn’t base your decision on which platform is the cheapest.

Make sure that you select the one that’s the most convenient for your business — and supports all the countries in which your contractors are based.


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Were you able to determine which of the payment methods mentioned above is best for your company? Are there any payment platforms that you use that are worth mentioning? Let us know in the comments below.

Read our other articles on money transfers:

This post was originally published in December 2014. It has been updated in April 2019, July 2020, and August 2021 for accuracy, and to include more relevant payment systems.