How to Pay a Freelancer: Best Tips and Payment Options (2024)

While the benefits of hiring a freelancer are clear, figuring out how to pay them can sometimes can be a challenge. There are payment options, currency conversions, legalities and compliance, tax laws, fees, and potentially more to consider.

In this article, we'll explore the best practices for paying freelancers and tips to ensure a smooth payment process.

We’ll also discuss how the Wise Business account is a low-cost way to pay your freelancers no matter where they are.

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Table of Contents
Freelancer Contracts Prepare a well-defined contractor agreement Setting the Price Consider Payment Terms Intellectual Property Freelancer Payment Methods How to pay a freelancer - FAQ

Freelancer Contracts

Every project should begin with an agreement between you and the freelancer – no matter how short or long the project is. Not only does a contract protect both parties from potential legal issues, but it also sets clear expectations for the work to be done and the terms of payment.

Prepare a well-defined contractor agreement

A contract should include the scope of work, timeline, deliverables, changes and revisions, payment schedule/amounts, any special requirements (such as NDAs), and other conditions. It’s a foundation that shouldn’t be underestimated and is what will ensure a smooth and productive working relationship.

Writing up a legally binding contract can be a mountain to climb, especially if you’re not familiar with the specific requirements of your local laws and regulations or your contractor’s. Luckily, there are options such as using work marketplaces like Upwork or Fiverr, which have built-in secure payment platforms.

Setting the Price

Before the project can begin, you should agree on a price. This could be an hourly rate or a flat fee for the entire project. Be sure to take into account how much time and effort you’re expecting from your freelancer, as well as any additional expenses they might incur.

While you want to make sure you’re paying the contractor fairly for their time and expertise, you also need to ensure the price is within your budget. It’s all about striking a balance between quality and affordability.

Consider Payment Terms

Payment terms aren't just about how much you’re paying but also when and how. You should include payment terms in your contract that outline when the freelancer will be paid (such as after each milestone or at the end of the project) and what methods of payment are accepted (which could include PayPal, e-transfers, etc.). Let’s go over some of the most common payment terms:

Paying Upfront

Paying a freelancer upfront can give you peace of mind that the project will be completed and help to establish trust. Whether the full amount or a deposit, it’s a good option for shorter projects with a more defined scope of work (i.e., designing a logo for your business with specific design elements). But keep in mind that if there are any problems with the project (such as missed deadlines or unexpected costs), it can be challenging to get your money back unless there’s a clear stipulation in the contract.

See the Best Banks for Small Businesses >>

Paying After Completion

Paying after completion is more common for longer and more complex projects. With this option, the client pays the freelancer the total amount after the project is completed to their satisfaction. It can provide a great sense of accomplishment and satisfaction for both parties and a level of assurance for the client. It can also incentivize the freelancer to work to complete the project to the best of their abilities.

Milestone Payments

Milestone payments are like mini-deadlines throughout the project. They can help keep the freelancer on track, especially for larger projects with more defined stages. The project is broken up into specific stages or milestones, and instead of paying the full amount upfront or after completion, payment is made after each stage is completed. There’s more control and oversight of the project this way, ensuring the freelancer meets the agreed-upon deliverables at each stage.

Hourly Payment

If you’re hiring a freelancer for an ongoing project with a less defined scope of work, paying them hourly could be the best option. This way, you’ll only have to pay them for the hours they worked for greater control over the project budget. Hourly payments can carry risks, such as a lack of predictability for the final project costs, but this can be dealt with by setting limits.

Intellectual Property

Intellectual property is particularly important in projects that involve creating original work, such as graphic design or content creation. With intellectual property clauses baked into a contract, the client and freelancer can establish who owns the rights to the work created during the project and how it can be used in the future. For example, if a freelancer creates a logo for a company, the client might want full ownership and control over the logo’s design and use afterward.

Things can get a little more complicated when a project involves proprietary or confidential information like patents. This calls for clear and specific language regarding the ownership and protection of intellectual property.

Non-Disclosure Agreement

The solution? A non-disclosure agreement (NDA). An NDA is a contract requiring the freelancer not to disclose any confidential information about the project and its materials during or after completion. This helps protect sensitive data from being shared publicly, whether intentionally or accidentally.

Important forms/practices when hiring freelancers

From essential forms, such as the 1099-NEC and the W-9, to requesting invoices, these practices will help you stay on the right side of the law.

• Have the independent contractor fill out a W-9 form: The W-9 form should always be filled out before starting work. This form will provide all contractor details, such as their name, type of business, and Taxpayer Identification Number (TIN) for tax purposes. Without it, you might not be able to accurately report payments to the IRS and could be responsible for any uncollected taxes.
• Get any backup withholdings to the IRS: Backup withholding refers to a tax withholding method in the case that a freelancer doesn’t provide a valid TIN or if the IRS notifies you of any backup withholding. The withheld amount needs to be sent to the IRS along with Form 1099-NEC, or else you’ll be stuck with penalties and fees.
• Fill out Form 1099-NEC: Form 1099-NEC is made for non-employee compensation (i.e., paying a freelancer). It will include all the contractor’s information and the total amount paid to them during the tax year. If you’ve paid your contractor more than $600 in a tax year, this form has to be filled out and submitted to the IRS.
• How to issue a 1099: To issue a 1099, a W-9 should be filled out by the freelancer. You’ll need to fill out two copies of the 1099, one for the contractor and the other for the IRS, and send them out respectively. If required in your state, you’ll also need to send a copy to the state tax department. Finally, you need to submit Form 1096 if you choose to mail your 1099-NEC to the IRS.²
• Ask for invoices: Invoices will provide both you and the contractor with a record of services done and the amount owed. Having these on file ensures accurate payment and will help make record-keeping a lot more seamless.

Freelancer Payment Methods

Now let’s get into the various payment methods that you can use to pay your freelancer. The payment method you end up choosing can make a big difference in fees, transaction speed, and convenience, especially with international freelancers - so choose wisely!

Wise Business

Wise Business is a popular payment method for freelancers that offers a low-cost way to send domestic and overseas transfers internationally. It lets individuals and businesses send and receive money in multiple currencies at the mid-market exchange rate.

There are also features such as multi-user accounts, batch payments (up to 1000 invoices can be sent in one click), and invoicing, which can streamline the payment process. Business also integrates with tools, such as Xero and Quickbooks, making bringing financial management into one easy solution easier.

Why Wise?

1. Ease of Use: 1) Sign up 2) Set up your payment 3) Pay your freelancer

2. Global Account: Make payments to freelancers in 70+ currencies

3. Low Fees: Research has shown businesses can save up to 19x by sending international transfers through Wise Business rather than PayPal.

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Wire transfer

Wire transfers are typically used as an alternative to direct deposit for international freelancers. It’s a secure method of transferring large amounts of money between bank accounts. The transfer will process within a day domestically and a couple of days if they’re located overseas. Note that wire transfers are known to be expensive and are considered more outdated than other methods.

Money orders

Money orders are quite similar to checks, except that they are prepaid.³ Their advantage over wire transfers is that they don’t reveal your bank account details and don’t require a bank account. They can be instantly accepted and converted into cash. Unfortunately, there’s typically a $1000 limit, meaning that you may have to send multiple money orders.

PayPal

There’s no doubt you’ve heard about PayPal - it’s one of the most widely popular payment methods used by freelancers around the world. Freelancers can simply link their PayPal account to their bank account or credit card and receive payments in a matter of minutes. There are many positive aspects, including invoicing and buyer/seller protection, but PayPal does charge steep transaction fees - up to 3.5% and 2.9% for card payments - which means you might have to pay extra just to cover those costs.

Learn More: How to pay contractors through PayPal

Xoom

Xoom is a member of the PayPal family. Clients can use it to send payments to a bank account, or freelancers can pick up cash at a designated location depending on the country. It’s not as widely known as PayPal, but it’s suitable for cross-border payments and only requires a Xoom-specific email address or bank details.⁴

Paper checks

Paper checks might seem outdated in the age of digital payments, but they can be a viable tangible payment method useful for keeping track of finances. Checks can take longer to process and clear and might prove complicated for international transactions.

Electronic Funds Transfer

Electronic funds transfer (EFT) are secure and convenient, where clients can transfer funds directly from their bank account to the freelancer’s bank account, typically using a third-party payment platform such as Wise. Their added benefit compared to wire transfers and checks is that they can be easily tracked and are a lot more speedy.

Direct Contracts

Although associated with Upwork, you can still use Direct Contracts to pay contractors outside the platform. You can enjoy the benefits of escrow protection, contract management, and dispute management and won’t have to pay any fees associated with the service.

Credit cards

Credit cards are a basic payment method that requires a merchant account with a payment processor such as Stripe, Square, or PayPal. Clients simply pay for services using a credit card through an online payment form or invoice. There are benefits like fraud protection, but the transaction fees are high.

Venmo

Think of Venmo like an online wallet. Freelancers can create an account and simply provide their usernames to clients to receive payments directly to their accounts. But since Venmo is typically for peer-to-peer payments, it’s not exactly designed for business transactions with the account missing certain business features.

Work marketplaces

Work marketplaces such as Upwork, Freelancer, and Fiverr let you completely bypass the complications of other payment methods and work through the platform’s payment system. While they typically charge a fee or commission on each transaction, the convenience and security are unmatched. You can also handle project management and payments in one centralized location.

Setting up your account

• Upwork: To sign-up as a client on Upwork, you will need to create a profile, post a job, and set your budget and timeline. Freelancers can then apply to your job posting, or you can search for freelancers to hire for the project. Clients can select from three billing methods: credit or debit card, PayPal, or a US bank account.
• Fiverr: On the other hand, Fiverr requires clients to create a profile and search for freelancer Gigs based on what they’re looking for. Payment methods include credit cards, PayPal, or Fiverr credits.

Paying for hourly contracts

While there aren’t hourly contracts on Fiverr, Upwork offers weekly billing, recurring weekly billing, and manual payment or bonus for any extra expenses you want to tag on.

Paying fixed-price contracts

Fiverr and Upwork both have fixed-price contracts. On Upwork, you can pay all at once or use a milestone structure. On Fiverr, you simply pay the cost of the project upfront.

Upwork Payment Protection

Upwork Payment Protection is a fantastic extra level of security that you’ll want and need when paying freelancers. For both hourly and fixed-price projects, funds are kept in escrow until both parties are happy with the work produced.

Refunds and disputes

In the unfortunate event of a refund or dispute, both platforms make it easy to deal with the process. To request a refund on Upwork, clients have 180 days from the date of payment to do so.⁶ The freelancer can issue a full refund, partial refund, or decline completely. If they decline, you can dispute the charges. On Fiverr, they have what’s called the Resolution Center for cancellations and disputes.⁷ Clients and freelancers deal with disputes on their own and not through customer support.⁸

How to pay a freelancer - FAQ

Interested to learn more? Here are some of the most commonly asked questions about paying freelancers:

Which payment method is the best for freelancers?

Each freelancer-client contract will have a suitable payment, depending on preference and the circumstances of the transaction. Regardless of what you choose, it’s recommended to always choose a secure payment platform, so both parties are protected and there’s an easy way for you to track payments.

What is the best payment method for international freelancers?

When it comes to international freelancers, the best payment methods are fast, secure, and cost-effective. While there are several payment methods available, like PayPal, wire transfers, and credit cards, Wise is a top option.

Wise Business offers low fees, competitive exchange rates, and fast transfers. It also supports multiple currencies and allows clients to send money to freelancers in over 70 countries. Funds are transferred directly to the freelancer’s bank account with ease, eliminating costly currency conversions and wire transfer fees.

Which is the best platform for hiring freelancers?

The best platform for you will depend on your needs and preferences as a client. Both Upwork and Fiverr are popular and well-established platforms that offer a range of services, from copywriting and design to programming. Upwork is suitable for a range of nuanced projects of different sizes, while Fiverr is known best for its simplicity for smaller and more straightforward projects.

How do contractors and freelancers differ from employees?

Contractors and freelancers work independently of a company and provide services to clients on a project basis. They are usually hired for a specific project or task rather than being part of an ongoing employment relationship. The company won’t be responsible for their taxes or benefits, and they will have to deal with expenses themselves.

Learn more:

How to hire independent contractors abroad in 8 steps

Hiring foreign workers as a US company: solutions, steps, and FAQs

Upwork vs Freelancer: Which Is Best For You? (2023)

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Sources:

1. https://www.trustpilot.com/review/wise.com
2. https://www.irs.gov/pub/irs-pdf/f1096.pdf
3. https://www.investopedia.com/terms/m/money-order.asp
4. https://www.upwork.com/resources/how-to-pay-freelancers
5. https://www.xoom.com/money-transfer
6. https://support.upwork.com/hc/en-us/articles/211062088-Request-a-Refund#:~:text=If%20you%20would%20like%20to,365%20days%20ago%2C%20contact%20support.
7. https://www.fiverr.com/support/articles/360010452597-Using-the-Resolution-Center?segment=business
8. https://www.fiverr.com/content/payments-terms-and-conditions#:~:text=In%20most%20locations%2C%20purchases%20on,may%20apply%20in%20certain%20locations