Business owners need to pay freelancers and independent contractors differently than they pay their employees. Creating a separate process for paying non-employees can be a hassle, especially if you work with a lot of contractors. Fortunately, it doesn’t have to be complicated.
Dots provides a hassle-free and frictionless way to pay out your independent contractors and freelancers, no matter where they are. Wondering what ways there are to pay these non-employees? You have several options, with each having its own set of benefits and downsides.
However, it’s good to be familiar with all of these different payment methods, as your contractors and freelancers may prefer getting paid from one method over another. From understanding the different payment methods to selecting the best one for your business, this post will provide you with the information you need to find the perfect solution for your payment needs. Keep reading to learn more, and make sure to schedule your demo with Dots today to see how our payout API can help you.
One way to pay out your freelancers and contractors is through ACH transfers. ACH (automated clearing house) transfers are some of the most popular and cost-effective ways to send payments. ACH transfers allow money to be directly transferred between two banks using the ACH network. The sender’s bank will initiate the payment, and the receiver’s bank will transfer the funds quickly, usually within a few business days.
ACH transfers can also be set up as one-time or recurring payments, making it easy to automate payments to contractors and freelancers you work with on an ongoing basis. With ACH transfers, your contractor simply needs to share the necessary bank account info, such as routing and account numbers, and the transfer can be initiated.
ACH transfers also benefit the business due to the low cost of initiating a transfer. Other payment methods can come with high fees, while ACH transfers tend to be amongst the lowest. Many ACH processors also offer same-day ACH if you want to send funds through even faster, though the fees may be higher.
Overall, ACH transfers are a low-cost, secure, and trusted way to send money to non-employees. It’s one of the easiest and most convenient methods too.
Online Payment Systems
Online payment systems are becoming increasingly popular for businesses of all sizes, allowing you to quickly and securely pay freelancers and contractors. Online payment systems can be used with nearly any type of payment method and can typically process payments from almost anywhere in the world. Services like PayPal, Venmo, and Cash App are among some of the quickest and most efficient ways to send payments as well.
Payment systems can usually get freelancers and contractors their funds instantaneously. As soon as the transfer is confirmed or sent to the payee, they can transfer the money to their account in minutes. These online payment systems also tend to offer services like enhanced security, tax forms, reporting, currency conversion, and more.
This can make things more convenient for both businesses and freelancers. Freelancers only have to link their bank account to the online payment system and then provide a link to their online payment system account to get paid. This eliminates the need for freelancers and contractors to share their bank information.
Online payment systems also eliminate the need to build out your own payment processing system. The convenience they offer does come at a price, though, as transactions can sometimes have high fees.
Overall, online payment systems like Venmo and CashApp offer a secure and convenient way to pay freelancers and contractors promptly. They are easy to use and provide a reliable solution that can handle global payments.
Direct deposit is a great option for paying freelancers and contractors if they have a bank account. This payment method involves having their paychecks directly deposited into their bank account without needing to involve a middleman service.
Direct deposit is very convenient for freelancers and contractors since it is easy to set up. All a freelancer or contractor needs to do is provide your business with their bank information and have them fill out the necessary paperwork, which can typically be done online. Once the paperwork is filled out, you can easily transfer funds into their account without having to worry about handling any physical payments.
Direct deposit is also secure, as the funds are transferred directly from your account to theirs. This makes it difficult for any potential fraud to take place as third parties don't handle the money. Additionally, direct deposit payments are often free for both the sender and receiver. This makes it one of the most cost-effective methods for paying freelancers and contractors.
A downside is that this may be more difficult for international contractors, as currency conversion has to be considered. Also, not all countries have a robust banking structure that allows for direct deposits. It’s also worth keeping in mind that not all freelancers or contractors prefer that their funds be sent to a bank account, or they may not prefer to share that information. Also, direct deposits can be a slower way to receive payments than other methods depending on a business’s payout cycle. Freelancers may have to wait days or weeks for payments to hit their accounts.
Overall, direct deposit is a great way to easily pay freelancers and contractors. It's convenient, secure, and cost-effective. Still, it may not be the ideal solution for everyone.
Sending payments through a wire transfer is a reliable and secure way to transfer money from one account to another, either domestically or internationally. This type of payment is fast, as money can be transferred almost instantly, and it is ideal for large payments or payments to international freelancers.
When you initiate a wire transfer, your bank will send the funds electronically to the receiving bank, which will deposit them into the recipient’s account. The fees for wire transfers can vary, and they can get costly in certain scenarios. Also, depending on the receiving bank, the funds may take one to two days to be credited.
One potential downside of a wire transfer is that they are irreversible. Therefore, ensuring all information is accurate before submitting the transfer request is essential. Additionally, wire transfers are only suitable for one-time payments, not recurring ones.
Overall, if you are sending a payment to an international vendor or freelancer or sending a large sum, a wire transfer is one of the most secure and effective ways to transfer money quickly and easily.
One of the oldest and most reliable methods for paying freelancers and contractors is by check. Even though it may not be the most modern payment option, it still gets the job done.
When paying via check, the first step is to ensure the address printed on the check is correct. Double-check with your freelancer or contractor that their address is correct before printing and mailing out the check. Once the check is printed, you can send it out to them either via post or through a secure courier service.
To ensure your payments are secure, you should also use tamper-proof envelopes or sealed bags to protect your checks from being lost or stolen in transit. Additionally, you should also add tracking numbers to keep track of your payments.
One advantage of paying with checks is that it allows freelancers and contractors to deposit their payments directly into their bank accounts, giving them more control over their finances.
Of course, checks aren’t without their downsides. For one, they’re the slowest payment method on this list. You have to send them through the physical mail, and then the freelancer or contractor has to deposit it in their bank account once the check is received. Also, checks can bounce, which can cost fees and frustration for the freelancer.
Checks also tend to be less secure than other payment methods. While you can track your envelope, there’s no real-time tracking. You may get a rough estimate of when the check will be delivered. However, even if a check is delivered exactly when expected, you won’t know for sure when the recipient will cash the check.
For the most part, checks are best saved for one-off payments and only if specifically requested. While they do work, they’re not usually ideal.
Overall, checks are a good option for paying freelancers and contractors if they prefer an offline payment option. Although there are other online payment options available, sending a check might still be the best solution for certain projects or contracts.
What’s Right for My Business?
It’s not always an easy decision to choose which payment options are right for your business. There are numerous factors to consider. Here are some of the things you should think about when determining which payment method is right for you:
- Payment frequency — Think about how often you’ll be paying freelancers and contractors. If payments are going to be frequent and recurring, you may be better off using methods that simplify recurring payments and batch payments. Online payment methods and ACH transfers are great for this.
- International payments — If you’re paying a lot of international freelancers and contractors, it’s best to choose payment methods that make international payments easy. Online payment services often offer currency conversion and other conveniences to make international payments easy. Global ACH transfers can also be helpful here.
- Tax forms — Remember, freelancers and independent contractors pay their own taxes. But you’re still responsible for generating the proper forms and making sure to classify non-employees properly. Some payment methods allow you to automate tax compliance. With other methods, you’ll be responsible for sending out these forms and classifying these non-employees yourself.
- Number of contractors — The more contractors you hire, the more resource-intensive it can be to send out their payments. If you have to write a check or initiate a wire transfer for hundreds of contractors, your accounting department is going to be needlessly overworked. Some payment methods are more convenient for businesses that need to pay a higher number of contractors.
- Fees — Remember, fees will vary depending on your payment method. While online payment systems may have high fees, they have other conveniences that might make them worth the cost. On the other hand, low-fee options may not have the capabilities you need. It all depends on the demands of your business. Offering a mix of payment methods is also an option.
- Implementation — Sometimes it can be difficult to implement a payment method into your payment processes. While a freelancer may prefer to receive a check, it's not necessarily something you have to offer. Also, offering multiple online payment systems can be a hassle too, as your developers will have to build out these payment workflows. It’s usually good to offer a mix of payment methods, but ensure each one makes sense for your business.
- Contractor preference — Of course, you don’t have to leave the preferences of the people you’re paying entirely out of the equation. If you find that the majority of your contractors prefer one type of payment method, it may be worth considering.
Ultimately, the right payment option for your business will depend on your specific needs and situation. Consider the above factors carefully to find the best payment solution for your business.
Simplify Your Payouts With the Dots API
With Dots, you can offer multiple payment methods and automate payouts without dedicating extensive time or resources. Dots makes it easy to simplify your payout infrastructure and manage multiple rails in one central location. With Dots, you can easily offer new payment rails in minutes, letting your freelancers and contractors get paid the way they want to. Dots also automates tax collection and compliance, and generates your tax forms, covers your KYC & KYB compliance, and ensures your payouts are secure.
Ready to learn more about the Dots platform and how it can help your business? Schedule your demo today.