How to pay freelancers: balancing cost with compliance

Elena Prokopets
Written by Elena Prokopets
on June 08, 2022

A card swipe, a phone tap, a button click — you hardly notice how you pay for things. 

That is unless you are trying to pay a freelancer. 

Between horrendous hidden fees, bounced transfers, and currency conversions a hefty sum can get pinched from your payment. But this shouldn’t be your case. 

In this post, we’ll show you how to pay freelancers from anywhere without worrying about compliance, costs, or speed of your payments. 

Why paying freelancers abroad is tricky

Hiring a person with a different zip code is no biggie thanks to incredible connectivity and a ton of remote collaboration tools

But payment systems are yet to catch up with the pace of remote work. So the brunt of payment complexities falls on freelancers in one way or another.

Traditional bank systems were not designed to accommodate fast, cheap, and low-cost B2B transfers. So the global average cost of a cross-border remittance remains a whopping 6.5%

Online payment tools like PayPal and Stripe partially filled that vacant “low cost” niche. But again — they are not always available to freelancers in all locations and come with extra fees. 

Cross-border complexities lead to late payments. The average settlement time for cross-border payments is 2-3 days. But for countries with limited payment infrastructure, the timelines are much longer.  

Likewise, high wire transfer costs can deter some clients from working with freelancers overseas. Especially if we are talking about one-off projects, rather than retainer work. A €56 fee (that's an actual banking fee!) for transferring a €500 payment to a Mexican freelancer is…too much. 

And even if the transfer costs are not an issue, freelance payments still tend to arrive late. 

According to a 2021 Sonovate report, a third of small and medium-sized businesses consistently miss the payment due dates because: 

  • 38% said that their funding and accounting structures aren’t set up to handle continual payments to freelancers.
  • 50% admit that late payments from their customers prevent them from paying freelancers sooner. 

Because of the above, 30% of SMEs delay payments to freelancers until the final due date, which can be anywhere between 30 to 60 days. 

Now tell me this: is that your case too? No shade if your freelancer payroll management isn’t great at the moment. Because you are already trying to get better with your payments by reading this guide, right?   

How to pay freelancers fast, cheap and compliantly

So payments to freelancers are complex because they either cost too much, take too long, or get delayed because of your cash flow issues.

While you need a good accountant to help you deal with the latter, the speed, cost, and compliance factors are way easier to address. 

When you want to pay freelancers overseas, you need to consider three things: 

  1. Tax compliance
  2. Payment terms and conditions
  3. Fast and effective payment processing

Payment compliance is important for avoiding run-offs with the tax authorities (which often mean costly fines). That’s the last thing you and your hires want. 

Likewise, payment terms are there for a reason. Everyone wants to be paid sooner than later to avoid personal cash flow issues. Plus, they are a legal obligation. While the legislature on late fees isn’t universally perfect, some countries like the UK allow freelancers to charge compensation and penalty interest on commercial debts. 

Ultimately, late payments can leave you with a bigger invoice and a busted relationship with a business partner. Neither is fun. So here’s how you can improve your freelance payroll management to prevent tax run-offs, annoying delays, and high payment fees. 

Xolo_CTA_Filler_Grid_S_1

1. Figure out your local tax rules for paying freelancers

Freelance taxation is a complex subject. Even more so when working with people from abroad. 

But as a client, you're not the one dealing with all payroll tax intricacies. That’s one of the biggest differences between an independent contractor and an employee.  

In most jurisdictions, you are not obliged to withhold or collect any employment taxes or social contributions from freelancers. The rules somewhat differ from country to country, however. In the US, you need to ask all local independent contractors to fill in the ​​W-9 form. But if you are working with Estonian e-resident companies, there’s no extra paperwork for you to stay compliant when paying freelancers.

That said, you are still obliged to properly record and report all payments to freelancers as business expenses on your tax return

Again, the requirements differ a lot depending on your country of residence (or incorporation). Check in with the local tax authorities on any special caveats. Usually, there aren’t many apart from submitting invoices in valid formats and making VAT payments on time (if these apply to you). 

2. Decide on the freelancer payment terms and conditions

Every freelancer has an established fee structure — a model of how they prefer to get compensated for their services. 

The common freelance fee structures are: 

  • Fixed price contracts. A freelancer provides a price quote for the project/set of deliverables. You agree to pay this sum upon the work delivery, based on the specified payment terms. 
  • Hourly contracts. Instead of charging per deliverable, the freelancer bills you for a certain number of hours either based on preliminary estimates or based on the time tracking done. 
  • Day rate (per diem). Some professionals charge a day rate — a fixed-price offer for working a full business day (8h) on your project. This is an alternative to hourly contracts. 
  • Full prepayment. Full prepayment prior to work delivery is a common option for retainers, subscription-styled services, and one-off, short-term assignments. 
  • Pre-work deposit. For new clients, freelancers may charge a deposit of 25%-50% to ensure their ability to pay and prevent non-payment issues. This clause is included in a freelance contract. 
  • Installment payments. This is an add-on for fixed-price projects. The freelancer breaks down the full payment amount into installments, billed on specific dates and/or when a certain milestone is reached. A common option for long-term, multi-stage projects. 

You’ll see the above fee terms proposed in a price quote and then documented in the freelance work contract the two of you sign. 

The second thing you need to pay attention to are the payment terms — a due date by when the payment is expected. This term is spelled out in an invoice. 

The standard freelancer payment terms are:

  • Due upon receipt (net zero) — you need to make a payment on the same day 
  • NET 7/15/30 — the payment due by the specified date (i.e. within 7 days) 
  • EOM — payment due by the end of the month (i.e. every 30/31st) 

Most freelancers prefer shorter due dates to optimize their billing and reduce admin work. 

But clients often push for longer deadlines because of admin overheads on their end such as lengthy payment approval process, payment setup complexities, etc. 

And this builds up the bane of every freelancer's existence — late payments. 

Research from IPSE shows that freelancers spend an average of 20 days a year chasing late payments. 43% are forced to write off at least one unpaid piece of work from such nightmare clients

So be a Punctual Polly and pay your freelancers on (or ahead!) of time! But how do you do that? 

Xolo_CTA_Filler_Bulb_L_2

3. Manage freelancer payroll like a champ with the right tools

The best way to ensure that you are paying your freelancers on time (and without exorbitant costs) is to use online payment tools. There are plenty of options to choose from.

For one-off, same-day payments:

 

These tools work great if you need to occasionally pay subcontractors for their services. Also, many freelancers use these apps to invoice their clients. 

But there are two major cons:

  • Varying fees. PayPal has ludicrous currency conversion rates and extra fees. Stripe and Payoneer require a longer account setup process. Wise doesn't have the functionality to request payments from non-users. Also, when you use Payoneer or Wise, you'd be paying directly to the freelancer's bank account — local or foreign — so the wire fees are on you.
  • Scalability. If you want to create and retain a freelance team, payroll management with the above tools will get messy quickly since neither of them was designed for this purpose. 

 

If your goal is to run a distributed team, upgrade to a freelance payroll management platform.

Freelancer payment platforms

Standalone freelancer payment platforms emerged as a bridge between customers' and freelancers' accounts.

Think of a freelance payment platform as a virtual office hub. Apart from automating freelancer payroll management such solutions also help with onboarding, promote legal and tax compliance, and assist with day-to-day team management.  

Popular features of freelance management platforms include:  

  • Payroll management — bulk payments, payment schedule, payment reminders
  • Integration with your bank and accounting software for financial management 
  • Easy document  management — invoices, projects details, contracts, etc 
  • Automated legal and tax compliance, based on your jurisdiction  
  • Multi-currency payments payment processing 
  • Affordable, transparent payment fees
  • Secure and compliant data storage 
  • Extra freelancer hiring and onboarding functionality 

By using an online freelancer payment solution you can stay compliant, and have a clear overview of your payment obligations and schedules (to prevent cash flow issues of your own). Plus keep the payment speed blazing-fast! 

Xolo_CTA_Filler_Grid_L_1

How Xolo can simplify your freelancer payroll management

We got started with a mission of making it easy for anyone, anywhere to start freelancing without worrying about taxes, compliance, and payments. 

Now, we want to help even more people profit from the freelance economy by hiring the amazing talent we support. 

That’s why we’ve built Xolo Teams — a platform that helps you hire, onboard, pay, and manage freelancers from any location. 

You choose who you want to work with — we make sure they get paid on time according to all tax and compliance requirements. No gimmicks or hidden fees. 

  • Free sign up for clients and freelancers 
  • 5% flat fee per freelancer payout 
  • VAT-free payments to European freelancers
  • AML and KYC, done for you to prevent any mishaps 

 

At the end of the day, the talent marketplace is competitive. You are picking freelancers, but they are also sizing you up. Being a “late-payer” bares you from working with the best talent. Because 56% of freelancers say they will only work with businesses that pay their contingent workers on time. So it's time to become one! 

Note: The information contained in this document is for guidance only and cannot be considered financial, legal or tax advice.

How to pay freelancers

About Elena

Elena Prokopets writes content for tech-led companies & software development businesses, marketing to them. Her empathy for the customer, expertise in SEO, and knack for storytelling help create content that ranks well and drives industry conversations.

Elena uses Xolo Leap so she can focus on her solo B2B content writing business without stressing over the compliance and admin overhead.