Whether you’re hiring a freelancer or a contractor to work remotely, there are some things you need to know about how to pay remote contractors.
Today’s economy demands that small businesses stay agile and flexible. Outsourcing is more accessible than hiring full- or part-time employees and an excellent option for a company that needs more hands but doesn’t require full-time employees.
As the outsourcing trend gains popularity, businesses are starting to realize how hiring remote contractors means not worrying about benefits, payroll taxes, office space, and other overhead costs.
But it’s not all smooth sailing. How to pay remote contractors can be tricky if you’re new to outsourcing.
What is a Remote Contractor, and Why are They Different Than Employees?
A remote contractor is a person who works for a company but doesn’t have an office or other physical presence. They are self-employed and can work from anywhere, like a home office or a coffee shop. Most companies hire remote contractors for individual projects or tasks, but some also hire them regularly.
Remote contractors differ from traditional employees because they’re not on the payroll, don’t get employee benefits, and are responsible for declaring their own earnings and filing taxes.
Remote contractors can be especially valuable if you need an expert for an important project or task but don’t want to invest in onboarding or training for a new employee. This is a common practice for one-off projects or if the activity doesn’t equate to a full-time resource. Another typical instance is needing someone for specialized work that requires more expertise to support your regular employees.
Essential Factors for Knowing How to Pay Remote Contractors
The number of remote contractors is growing. Technology has enabled people to work from anywhere, people around the globe are becoming more and more skilled, and companies realize the opportunities hiring remote contractors presents.
But if you’re going to hire and maintain accountability with remote contractors, there are a few things you need to know.
Backup Withholding Taxes
Many states require employers to withhold taxes from independent contractors within their borders. This practice is often referred to as backup withholding. Some states require it, and some don’t. Understanding your state’s rules before you start working with any remote contractors can save headaches on the back end.
If not required by law, tax filing options can help prevent you from being subject to backup withholding penalties. Where required by law, learn how much tax to withhold and on what schedule (monthly or quarterly).
They’ll Need to Fill Out a W-9 Form
The W-9 form helps collect:
- The contractor’s taxpayer identification number,
- Where they will declare their tax status (if any).
Ensure the contractor has provided their Social Security (or EIN – employer identification) number so you can match it up with the information on their W-9 form (if they didn’t send one along with their proposal).
Before doing anything else, you must ensure that your contractor has filled out this form. The IRS even provides an online version so companies can access it anytime they need it.
If you hire remote workers, you may be required to send them a 1099 form. This form is for self-employed individuals and independent contractors who are not your company’s employees. The IRS uses this form to track all payments made to these individuals over the year.
1099 forms are documents that report income to the IRS and help contractors report their earnings on their taxes. Any contractor you paid $600 or more (including salary, commissions, bonuses, etc.) must receive these forms shortly following each calendar year. The form also informs the IRS how much you paid them over the year.
Create Payment Terms
When and how will you pay your contractors? Will payments be made weekly, monthly, or in installments based on project milestones?
When deciding on payment terms, consider the amount of work involved and how long it will take for you to receive results from the contractor.
How you should pay depends on your cash flow and the type of work. Paying installments over time may make sense for high-value projects, and you can anchor these installments to periods, delivery of certain work packages, or specific milestones.
In most cases, however, your cash flow is best served by paying a lump sum at the end of a job.
Your business’s cash flow is often the most significant factor in determining how much money you should offer. But don’t neglect your contractors’ needs. Can your contractor afford to wait until a lengthy project is complete before receiving payment? Could you?
Agreeing on a payment scheme that works for you is one aspect of enabling the contractor to do good work.
Still Struggling with How to Pay Remote Contractors?
Savvy entrepreneurs want to get projects done quickly and efficiently, which is why people opt for hiring remote contractors.
But sorting out how to pay remote contractors can be a complex question.
Some tools, like payroll software, can help. For example, they might allow you to automatically track contractor hours and generate paycheck stubs and 1099s for each worker. But for these to work well, you typically need a basic understanding of what should happen in the process.
If you don’t know where to start when it comes to how to pay remote contractors, Founder’s can also help. Contact us today, and our team of experts can get you moving in the right direction.