If you’ve ever worked with contractors, you know that tracking billable hours and making payments can be a hassle.
Sometimes you might feel like you’re spending more time on paperwork than actually getting things done.
But when you have the right systems in place, time tracking and payments are almost completely automated. Imagine what you could do with all of those hours back!
In this post, we’ll show you how we save over $32,000 every year on paying our own contractors online, how we helped Skyrocket save 30% on their contractor fees, and how you can use the same systems to slash your own costs.
How we save over $32,000 by paying contractors online
At Hubstaff, we have a team of 16 contractors spread all over the world. I’ve been running remote teams for 14 years (as of 2017), and I hate paying unnecessary fees. So I always look for innovative ways to send more money to the bottom line.
We’re currently moving approximately $32,400 to our bottom line with ingenious methods.
If you don’t have time to read the full post, here’s the gist of it: I discovered PayPal Mass Payments about 7 years ago and have used it ever since. This online payroll solution balances cost effectiveness with ease of use.Paying contractors and freelancers is easy with PayPal MassPay. Here's everything you need to know. #smallbusiness Click To Tweet
Here’s why it’s the best way to pay contractors:
We pay our virtual team for less than $200 monthly. And we could reduce it to less than $60 if we paid once a month instead of once a week. To top it off, all of our payroll processes are fully automated so we don’t waste any time with low-level admin work.
Masspay isn’t the simplest solution, but it’s not too hard, either. The convenience and affordable pricing won over our bootstrapped startup. As the screenshot below shows, we’re growing rapidly, but we’re still small enough that we need to find and use the most efficient and affordable solutions.
Our payment philosophy
We have a few principles that we follow when hiring and arranging payments:
- Pay by the hour
- Avoid retainers
- Pay weekly
Why we pay by the hour
Almost all of our contractors are on hourly contracts and I believe that the days of fixed cost relationships are slowly coming to an end (more on why we hate retainers in a bit).
Here’s how it breaks down:
- We pay 14 people automatically via Paypal MassPay. 13 of them are hourly and one is fixed-rate.
- Two employees invoice much less frequently, so we pay them by ACH via Chase.
- Our team members are in the US (7), India (2), Philippines (2), Serbia (1), Ukraine (1), Romania (1), Turkey (1), and Bulgaria (1).
The main reason we pay by the hour is because we don’t want to pay for time that contractors aren’t working on our projects. This is the least stressful and most fair arrangement for both parties that we have found.
We build relationships with our contractors so they can work when (and where) they want to work. We just pay them for their valuable time when they work for us. This provides them a lot of freedom.
That being said, when we find someone great, we have a conversation with them. We tell them that we’d love for them to transition 100% of their time to Hubstaff work. Generally, we do this by simply scaling up their work.
We never hire someone full-time up front. Most of our contractors have one or two other clients. On average, our team members work around four to five hours a day for Hubstaff.
We have a slightly different thought process for our developers. We try to get them to work on our projects full-time in order to capture 100% of their mental activity. This is because in development it’s difficult to switch gears from project to project.
If we have a team member that we want to limit to a certain number of hours per week, we use the budgets feature in Hubstaff.
Sometimes we do this because we only have a certain amount of cash that we want to allocate. Other times it’s because we just don’t want that person running up a bunch of hours doing work that isn’t super important to our business at the current time.
Since we pay most of our people by the hour and only pay for the amount of time that is worked, all we have to do is run a simple calculation of hourly rate multiplied by hours worked.
Why we don’t pay retainer fees
Some contractors like to work on retainer. That’s fine with us, but we still ask for an hourly rate that corresponds with time tracked in Hubstaff.
For example, if a contractor asks for $2,000 a month and we agree on an hourly rate of $20/hour, we would like to see approximately 100 hours tracked in Hubstaff every month.
When we have a setup like this, we set payment frequency for once a month at a fixed rate of $2,000. In this scenario, we could use PayPal MassPay to transfer money and avoid fees (which we’ll get to in just a moment).
We avoid contracts wherein a contractor asks for a specific retainer with no accountability. We’ve seen freelancers try to work for several different clients at once and effectively double their hourly rate because they work for two clients at the same time and collect a retainer.
Retainers are awesome for the party collecting the money and really bad for the person sending the money.Retainers are awesome for the party collecting money and bad for the party sending it. Click To Tweet
I’ve personally lost several thousand dollars because I paid a retainer then never heard back from the contractor. Whenever I have a contractor ask for a retainer up front, I generally run the other direction. I know I’m about to get screwed.
The other thing that sucks about retainers is that you constantly have to feed work to the contractor. It feels like you have to work extra hard before or after a vacation because once you leave, your contractor on retainer is going to continue to get paid even if there’s no work to be done.
Why we pay weekly
We pay weekly because our contractors like it. We’d rather give them money now instead of biweekly or monthly.
Our work week runs from Monday at 12:00 a.m. to Sunday at 11:29 p.m. Once the week ends, Hubstaff automatically calculates contractor payroll and sends the funds. Contractors are paid on Monday evenings.
I hate chasing money that I’m owed. So we’re happy to give our contractors this small reward for working with us.
In all my businesses over the years I’ve always paid contractors very quickly. Partially because I hate debt myself, but also because I feel it’s the right thing to do.
How Skyrocket saved 30% on contractor fees
James Agate is the founder and CEO of Skyrocket, an SEO agency with offices in the US and UK. James was kind enough to share his experience implementing Hubstaff in his business, resulting in savings of up to 30% in contractor payroll as well as greater insight into their profitability. If you are frustrated with not knowing exactly how much time each project takes or with how expensive it is to pay your contractors, then this is a must read.
James first learned about SEO while working on personal projects, but as he started getting serious results people continuously approached him for help. He started off freelancing, but as the demand grew he established his agency, Skyrocket, in 2010. Skyrocket originally offered traditional SEO consulting, but transitioned their focus to link building in 2011.
Skyrocket focuses their SEO strategy around creative content production, smart content promotion, and targeted link building. They while-label their services to other agencies and also work with entrepreneurs and founders of digital businesses to help them grow their search traffic and build their business.
Today the Skyrocket team is composed of 120 staff and contractors spread across 10 countries, with headquarters in the UK and a client support branch in the US. Getting to this point wasn’t easy, and it presented an entirely new set of problems James and his team had to tackle.
James had a large team based on oDesk (now Upwork), and over time as the team grew he became frustrated with the platform. His team often found it to be buggy and unreliable, but more importantly to James was that because oDesk charged a percentage of his spend the cost continued to increase as his team grew and this fee was becoming significant to Skyrocket’s bottom line.
When I spoke with James he said, “Here we were spending thousands a month on the platform and yet we couldn’t get proper support from anyone at Upwork. It felt like it was me on one side and the contractor and Upwork on the other because their interests were aligned, but not mine, so juicing up the time tracked made sense for both of them. When you multiply that across dozens of team members, the extra X minutes here or there really adds up.”
Beyond the support and the cost of the service, another key area of frustration for James was the lack of clarity they were given. Every week they would simply get a big bill, but it wasn’t broken down into detail so they weren’t able to determine what projects were most profitable for them, or even what projects were not profitable.
Thousands of dollars in savings each monthSkyrocket saves 30% in contractor costs by using @Hubstaff instead of Upwork Click To Tweet
Right away, the switch to Hubstaff saved Skyrocket thousands of dollars every month because instead of paying a set percentage of every project, they now were paying a low, flat fee. In addition to the cost savings, Hubstaff’s activity tracking saves them money by no longer having to pay for idle time which translated into massive savings. Overall James estimates that Skyrocket is saving up to 30% on contractor payroll when compared to Upwork.
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Furthermore, while James thought he had a good understanding of the profitability of individual services, after getting more accurate data from Hubstaff he realized that just using the average cost across all of your clients isn’t enough. Even if the cost of delivering a service should be the same, in reality the costs can vary massively.
With Hubstaff, James was able to quickly calculate what their costs have been at a project and client level allowing them to quickly identify the unprofitable projects and they even stopped taking work from a handful of clients. Focusing their efforts exclusively on profitable clients and projects has been a crucial step for moving Skyrocket forward.
James also added, “To top it all off, Hubstaff’s support has been great. Whenever we have problems we can speak to someone (and continue to speak to the same person) to get things sorted. Hubstaff understands that this is a business we are talking about so it is critical that things are sorted ASAP. Something that companies like Upwork fail to understand.”
How Skyrocket uses Hubstaff
Moving a large team to any new system is a daunting task, and it inevitably leads to questions, frustrations, and frankly some hassle. Surprisingly, there was only one day of getting the team up to speed on Hubstaff and it has been smooth sailing since then.
Hubstaff helps minimize the overhead associated with managing a remote team by making it quick and easy to access all of the data you need. Here is the 3-step process Skyrocket follows to incorporate Hubstaff into their business:
In his own words
“Hubstaff offers great support and it feels like a partner for my virtual team management, not a company there to suck me dry. I started building a virtual team because I felt it was more productive and efficient all around, but Upwork and the other platforms were starting to take me on the wrong path. Hubstaff has corrected this! I recommend Hubstaff to anybody else building a virtual team on a platform that charges you a percentage based fee.”
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How do you pay independent contractors?
There are tons of ways that you can pay your contractors, from highly automated systems to writing a check. We’ll go over the most popular here so you can get an idea of the advantages and disadvantages of each.
Option 1: payment transfer services
As long as you have an accurate way of calculating the amount you need to transfer to your contractor, this method is the winner for three reasons:
- It’s the least expensive
- It’s the best for companies that have international contractors or employees
- It’s fast and reliable
There are a number of options, but here are seven that stand out as good choices:
PayPal is a global online payment system and one of the fastest, most convenient, and popular ways to pay your remote staff. Online money transfer methods serve as electronic alternatives to traditional payment instruments like checks and money orders. Once a payment is processed, the employee’s PayPal account is immediately credited.
PayPal charges a nominal fee for every transaction and uses advanced data encryption and anti-fraud technology to reduce risks of online fraud.
Hubstaff offers a PayPal integration so you can pay a contractor automatically.
There are two main ways to transfer money in PayPal:
Masspay is the key to our saving so much money on contractor payroll every year.
Two features make it such a great tool for paying contractors online:
First, you can pay a huge number of people at the same time by uploading a file with their email addresses, payment amounts, and currencies. And we can download this file directly from the Hubstaff time tracker, so it only takes a few minutes.
That save us tons of time on admin tasks every week.
Second, the fees are incredibly low. You pay per line item (transaction) in text file I mentioned above. If the receiver is in the USA, you pay 2% of the payment, but that 2% is capped at $1.
That means if I pay a contractor in America $2,000, we don’t pay $40 in fees (2% X $2,000), we only pay $1. That’s a huge money saver.
For international payments, the cap is $20 instead of $1, so it can get a little more expensive.
Of course, we could save a bit of money by changing our payment schedule to once per month. This would take better advantage of the fee caps. But we think the fees are worth getting the money to our contractors sooner.
Two things you should know about MassPay:
You need to have a large enough PayPal balance to cover the payment. It won’t be automatically deducted from your bank account. And getting MassPay set up can be a bit of a hassle. So be ready for that.
This is the traditional way of using PayPal. You enter the payees one-by-one into a web interface and process the payment. You don’t need to keep a balance in your account, and the payee pays the fees.
Fees are 2.9% + $0.30 per transaction in the US, and 3.9% + exchange fee for international payments.
Below is a section of Hubstaff’s income statement for June 2015, taken from our accounting software. As you can see, we spent $27,637.43 for our contractors. You can see more of our numbers live at Baremetrics; Hubstaff is a completely transparent company.
As you can imagine, paying those higher fees would put a big dent in our bottom line.
I’ll be sharing the exact method that we use to automate our payroll further in the article, but first let’s go through a brief summary of other contractor payment options.
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Payoneer provides online money transfer and e-commerce payment services in 200 countries and is a registered Member Service Provider of MasterCard. Freelancers holding a Payoneer account can receive funds through their bank account, e-wallet, or via a reloadable prepaid debit card, issued through MasterCard. The debit card can be used at ATMs or points-of-sale.
Hubstaff integrates with Payoneer.
The biggest benefit to Transferwise is the lack of hidden exchange fees. If you’re paying contractors around the world, you could be paying a lot of extra fees for changing one currency into another. Transferwise does away with all of that.
PayPal has been the best for us.
Of the services that we’ve tried, Paypal has stood out as our best fit. (Though PayPal customer service is absolutely terrible. We recommend requesting an assigned representative.)
Support aside, PayPal is awesome because it’s supported in most countries and it’s very reliable. It works; your contractors will get their money and they’ll get it fast.
Over the years, I’ve processed about 10 million dollars through PayPal (I used to have a company that operated solely on Paypal) in both sent and received payments, and I’ve never run into a problem like payments being sent twice or someone not receiving a payment.
This track record and reliability is the simplest reason why they’re the winner for me. It’s also relatively easy to get money in and out of PayPal, as long as you have a verified account.
Escrow is widely regarded as one of the most secure online payment solution for contractors. The employer places the agreed amount for the job in escrow. The funds are released once the work has been handed over and authorized by the employer. This method protects both the employer and employee.
There are a number of ways you can use escrow, but Escrow.com is probably the easiest. Be aware, however, that fees can be very high and stack up quickly.
Another fast and convenient way to pay remote workers, although the fees are a bit higher. The company has extensive global presence, allowing clients to transfer money to their employees located anywhere in the world.
With Western Union, you can make payments online, over the phone, or in person via one of the company’s thousands of agents. Fees vary depending on the location of both parties and the type of transfer (online or via an agent).
6. Cash wire transfer
Wiring cash to your contractor is another safe method, but it can take days to complete a cash transfer. The client orders the money transfer in a bank which sends a code to the employee’s bank, so funds can be released. Both sides pay a service fee.
7. Payroll apps
Payroll apps manage your business’ payroll requirements and ensure that your remote team is paid accurately and on time. They make all the necessary calculations based on a minimal input from the employer (only wage info and hours) and do not require comprehensive knowledge of payroll legislation or systems—all complex calculations are done by the software.
Payroll apps can also fill out employment tax forms and remind you when it’s time to file them. These apps save time, reduce administrative costs, and drastically reduce the probability of errors.
Option 2: traditional payroll services
I used these services for years with traditional employees. We used a service called Paychex. Their cost structure is something like $50 a month per employee, which isn’t bad because they take care of all your tax forms and filings. ADP is the largest of these solutions.
Currently, some of the hottest startups operate in this space. Justworks and Zenpayroll are a few popular options. The reason is because this is a large pain point and services like Paychex are behind in technology.
The downside is when it comes to international transactions. Most of these services have no clue how to pay independent contractors and employees overseas. Here’s Zenpayroll’s answer for how to handle international contractors. In short, they don’t handle international contractors and they don’t seem to have any plans of doing so.
For a company like ours, with 9 out 16 contractors being international, this just doesn’t work.
Option 3: accounting software
With Xero, I can accomplish in 30 minutes what used to take me four to five hours. As someone who values time above all else, Xero gets my highest recommendation. Most of this type of accounting applications have online payroll features built in, usually with some integration for ADP’s payroll service.
Option 4: freelance marketplaces
Going through a freelance marketplace like Upwork or Freelancer is an obvious choice for paying contractors online.
They allow you to charge payroll to your credit card and transfer the money to your contractors. They also keep necessary reports for taxes and support weekly budgets. This makes the entire process very convenient.
The downside of using Upwork is that they take 5%–20% of payroll. For a company like ours, that’s just too much. It would be $2,700 a month just in fees.
You read that right. By using the Hubstaff + Paypal integration, we add $32,400 for the bottom line of our company.
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A common misconception when outsourcing is that Upwork is free and that the contractor pays the fees.
The truth about fees on Upwork and other marketplaces
Here’s why that thinking is incorrect:
Freelancers know that Upwork will take a percentage. So they can (and probably should) raise their hourly rate to offset this payment.
Freelance marketplaces also often have set payment schedules, which can get inconvenient if you want to pay contractors on your own timetable.
Perhaps the biggest problem with freelance marketplaces is alignment issues. Freelancers are paid when they track time in their tracker, so they have an incentive to keep that time tracker rolling unchecked by idle time warnings.
Keeping their timers running without remote employee monitoring tools can also make freelancers look more active, even if they aren’t doing any work.
So, if an employer notices mediocre work taking up hours of time, they can get suspicious and potentially reduce the budget, which will also lower the revenue the marketplace makes. It’s a complicated cycle that we’d prefer to avoid.
How we use Hubstaff to pay our team
We use our own service, Hubstaff, to pay our contractors. Why? It’s cheap, automatic, accurate, and we invested a lot to build it well. We built Hubstaff specifically to pay contractors overseas and solve the pain point of limited or flawed online payroll options. There are two ways to pay your team in Hubstaff.
Method 1: manual team payments
The manual payment option allows you to go into Hubstaff, mark team members as “paid,” and then process the payment in your chosen platform. All you have to do is set the rate for a contractor, the date range you’re paying for and hit “Make Payment” on the bottom right of the screen.
After you mark these users as paid for that date range, you’ll have to process the payment with your chosen payment solution. This can be done through the regular PayPal web payments option above, MassPay, or any other system that you want to use.
Once you process the payment and mark your team as paid, you can export the payment for Paypal MassPay, Payoneer, Excel, or Quickbooks. Here’s how it looks:
Hubstaff will also keep reports for your records, so you can come back to view the payment, payment dates, who made the payment, and the amounts. Here’s how that looks:
The Hubstaff manual payments option is the most flexible option that we provide. Here are the highlights:
- You can use any payment system you want to use.
- If you have a pay rate set for the user, we keep track of the amount you owe them. We also keep track of the amount that you’ve paid them.
- If you’re using the regular PayPal web payments option, PayPal will send the payment to your contractor and you are not required to maintain a balance in PayPal. It will draw from your credit card or bank account.
Method 2: automatic payroll
For automatic payments, we currently have three supported payment options; Paypal, Payoneer, and Bitwage.
With Hubstaff’s automatic payroll option, payments will be processed without any work required on your part. The first step is to connect Hubstaff to your payment account.
Then set up each contractor with his or her own specific payment settings.
The options you can set are:
- Payment Method: Automatic or Manual
- Pay Period: Weekly, Twice per month, Bi-Weekly, or Monthly
- Rate Type: Hourly or Fixed
- Pay Rate: Open to whatever hourly rate you agree on
Once all your users are set up on the automatic payroll system, you’ll see a page that looks like this:
This page shows you the settings for each of your contractors.Automating your payroll will save time and energy that you can use to grow your business. Click To Tweet
Once this is set up, Hubstaff will process the payments automatically on the schedule that you have set for each contractor. You can access a record of your payments in Hubstaff just like with the manual method. The only difference is that the Method will show as “Automatic.”
We have a complete Automatic Payroll support document on our support site so you can learn more about the system.
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What about taxes?
Since all of our people are hourly contractors with other clients, we send them 1099s. I run a simple report in Hubstaff or Xero that shows me how much money I paid them for the year. I only do this once a year and it doesn’t take more than 30 minutes of work to run all the reports and process my team’s 1099s.
One of our secrets is that we use a service called Greatland, which will send your contractors a physical copy of their 1099, store a digital record for you, and file a copy for only $5.95 per contractor. All you need to do is have a system that keeps track of how much you paid each contractor for the year, plug that number into Greatland and hit submit.
This convenience is great for us and the service is important to our business because it’s important to stay on top of your taxes, even if you’re a remote worker. There’s no accountant needed for this process, but an accountant can also do this for you pretty cheap (usually around $100 per contractor).
Since we’re based in the United States, we only have to send 1099s to US-based contractors. We don’t file anything for the majority of our international team.
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How start paying contractors with Hubstaff
Now that you’ve seen how much time, money, and effort we save by automating our payments, you’re probably wondering how you can do it yourself.
Here’s everything you need to know to get started.
Contractor payments are the final step in the remote work process. To streamline your business process, it would be best if you used the same platform for paying contractors as you use for managing them.
If you want to organize your entire workforce using a single dashboard and service, Hubstaff is an optimal choice. Hubstaff is a time-tracking app that provides remote staff management, integrating services like time tracking, reports, timesheets, invoicing, proof of work, and payroll. This convenient tool can teach users how to pay a contractor online, automatically and on time, every time.
As an employer, you’ll have complete control and detailed insights into the entire work process, regardless of the team size, allowing you to see exactly what you’re paying for.
Hubstaff’s desktop app provides thorough and effective time tracking by taking periodic screenshots and recording activity levels (calculated based on mouse movements and keyboard strokes), and keeping you informed about the activities of your team members every step of the way.
While time is being tracked, the app automatically generates detailed timesheets and comprehensive reports filtered by project, worker, or date. You can view paid and unpaid time and pay your employees based on selected date ranges.
For your convenience, Hubstaff can also manage your payroll through the Automatic Payment and Payroll feature, allowing you to process payments accurately through PayPal, Payoneer, and Transpay. All you need to do is set up your team, select your payment preferences, and relax. You simply pay contractors based on the time tracked with Hubstaff.
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To access Hubstaff’s payroll feature, select the Organizations tab in the top menu, followed by the Payroll tab, to set a new payment account via your preferred method of payment.
- If you use PayPal to compensate your remote workers, just enable payments for them. Hubstaff’s automatic payroll through PayPal currently requires PayPal MassPay ($1 fee/worker).
- If you choose Payoneer as your method of payment, your workers will have to add their payment accounts.
- Once you complete this step, you are all set to make payments.
View a step-by-step guide to setting up automatic payments on Hubstaff and learn how to pay a contractor the simple way.
Hubstaff now includes payment rates for each of your team members. The rate is in USD (more currencies to come), and is the hourly rate.
When you hit the Edit button, you’ll get a screen that looks like this:
Once you set the rate, the screen will look like the one below. It means that the rate is now set for Jack West.
How to generate files for employee payments
Here’s a quick start guide to using Hubstaff to generate files for paying contractors.
This is the main Team Payments screen that allows you to see how much each employee is owed and allows you to set their rates. You can mark the users as “Paid” on this screen which will then create a “past payment” file.
This is the confirmation screen after you “mark as paid.”
Once you’ve confirmed the payment, Hubstaff will send you to a download page. You will be able to download the CSV or Paypal file at this point. You can also take the CSV and edit slightly to match the format of your preferred payment system.
This is the page that allows you to view and download all past payment files. You then import these into your accounting systems or payment processors to process the payment.
Managing contractor time with add, edit, and delete options
You can add, delete or edit time from the time sheets page as shown below or from the activities page.
Click on Timesheets on the top menu, then you’ll see the new options on the right hand menu.
Want to see how it’s all done? Check out the video below: