With 1.57 billion independent contractors and freelancers globally, the contingent workforce is thriving. In fact, The World Bank estimates that almost 47% of workers worldwide are self-employed, and evidence suggests this market is yet to hit its peak. In fact, the freelance workforce has an estimated worth of $1.5 trillion and is set to grow at a CAGR (Compound Annual Growth Rate) of 15%.
This trend might be unsurprising, given that independent contractors are essential for organizations. Why? Because they often:
- Offer a particular skill or expertise helpful for plugging skill gaps within your team/project.
- Step in at the last moment, giving organizations greater flexibility.
- Offer potential cost savings because independent contractors are responsible for providing their own equipment and aren't entitled to benefits like paid holidays.
Against this backdrop, finance departments face the challenge of paying non-salaried workers correctly and on time, irrespective of location.
However, a survey conducted by the Independent Economy Council found that a worrying 74% of self-employed workers aren't paid on time.
So, how can businesses better manage the monetary aspects of their contingent workforce?
Let’s take a look.
The Process of Paying Independent Contractors: Where to Start?
International companies working with independent contractors dispersed worldwide must adhere to different compliance and classification regulations pertaining to the countries their contractors operate from.
Needless to say, if finance departments fail to manage this properly, issues will arise. To nip this in the bud, putting your best foot forward from the get-go is essential, starting with correctly classifying your workers.
Let's look at this in more detail:
As we've alluded to, organizations have to comply with employment regulations, including correctly classifying independent contractors and employees:
So, what constitutes an employee or an independent contractor?
An employee is someone you’ve hired to work for your business for a set number of hours either remotely, in the office, or in a hybrid work environment. You’re responsible for paying them a pre-agreed monthly or weekly salary via payroll. You determine the scope of their work, how the work is completed, and provide the necessary equipment.
In contrast, an independent contractor or freelancer is self-employed. They provide services and/or goods for clients and set their own pay rates in agreement with the business they're working with. Freelancers often specialize in particular expertise and use their own work equipment. Together, the freelancer and their client collaborate to agree on what needs delivering and when. Freelancers also typically control where, how, and how long they work.
They don't receive workplace benefits and pay their own insurance and taxes. Freelancers also aren't paid via payroll.
For the US, this means distinguishing between an independent contractor often referred to as 1099 or the worker is a W2 as the type of classification. Make sure to classify your worker correctly as misclassification can often refer to extremely high fines. In the UK, if a contractor is fully self-employed, they're classified as working outside IR35, whereas working inside IR35 means they will be taxed at source.
In addition, contractors are required to sign contracts like:
- For the US, a SOW (a statement of work that includes the project's needs, deliverables and timelines, work location, and payment terms).
- In the UK, contractors may have an independent contractor agreement outlining the scope of work, deadlines, and payments.
- Compliance-related documents, for example, contractors may be asked to sign an NDA or IP agreement.
In addition to the above compliance-related documents, the following information needs to be gathered during the onboarding process:
- The basics: contractor name, email, phone number, address
- Business information: Business name, business type
- Billing information: contractor VAT number, bank account details
Invoice and Timesheet Collection
Finance teams also need a system to manage incoming invoices from independent contractors. The same goes for organizing timesheets, especially if you need a workflow in place to approve timesheets before an invoice can be paid.
Paying Independent Contractors Globally
Your company may have a range of ways they wish to pay contractors, including FX trades and different currencies. Whatever your preferred option, it's essential to be transparent about payment methods and timeframes.
How Are Finance Teams Keeping Up With a Growing Freelance Workforce and Its Challenges?
Finance teams already manage weekly and/or monthly employee payrolls. Then, when you add paying independent contractors into the mix, finance teams could face a series of struggles.
With that said, here are a few things to look out for when paying freelancers/independent contractors:
Pay and timescales: In the US and UK, contractors are usually paid hourly or per project deliverable. Independent contractors aren't entitled to holiday, sickness pay, or overtime. Typically, contractors are paid monthly (or according to whatever timescale agreed with the contractor). Usually, finance teams need the following information to process payments correctly:
- The contractor's name and address.
- The agreed fee.
- Payment terms
- The payment's due date
Tax: While freelancers and independent contractors are responsible for paying their own taxes, finance teams need to be aware of a few tax-related issues. For example, in the UK, freelancers with an annual turnover of £85,000+ must register for VAT and charge VAT for their services. Consequently, a business may pay them more in the short term. However, presuming your business is also VAT registered, you should be able to claim the VAT back.
Forms: Finance teams need to ensure all relevant paperwork is completed. For example, in the US, companies must send the IRS a 1099 form by January 31.
Benefits: Finance teams must pay independent contractors any employee benefits they're owed, such as National Insurance contributions in the UK and retirement or pension payments in the US.
Compliance issues: As mentioned above, different countries have their own rules and penalties regarding worker classification. So, suppose a business hires freelancers located in several countries or continents. In that case, the rules may differ in each. For example, if a business incorrectly classifies an employee as self-employed in the UK, they're liable to the Inland Revenue for employer and employee NI (National Insurance) contributions and tax. In the US, if an employer incorrectly classifies a contractor as an employee, they face tax fines.
Expenses: Contractors are responsible for providing their own equipment, not the client.
How Can Finance Teams Keep Up? A Freelance Management System (FMS)
Although there are many different ways for paying independent contractors, for companies wanting to manage the entire process in one system consistently while maintaining a good experience for contractors, their best option is a freelance management system like Bubty.
So, here are just some of Bubty's features for optimizing a few of the processes outlined above:
Bubty offers automated registration and onboarding forms that make it quicker and easier for you to collect and store contractor information, run bank verification, a KYC check, sign contracts, ID verification, and more.
To help ensure you're correctly classifying workers, Bubty has in-built compliance reporting technology that can be custom-set to different areas.
Bubty’s automated smart contracting tool automatically drafts a signable contract based on the project terms you agree upon.
As we've already hinted at, you can manage all necessary forms during the onboarding process, including the 1099 forms needed in the US. With Bubty, you can store and organize all compliance-related and financial documentation within a secure cloud-based repository, avoiding the constant back-and-forth emails with your contractor.
You’ll also benefit from our contract signing tool and integrated chat functionality. Both are useful in defining your business's relationship with the contractor and avoiding misclassification.
Invoice and Timesheet Collection
Based on the project's timeline, Bubty automatically notifies the independent contractor to upload their timesheet and generates an invoice.
All you have to do as a financial controller is approve (or bulk approve) these invoices.
Alternatively, Bubty enables you to set up a two-way invoice approval system if your business requires it.
Paying Contractors Globally
Bubty facilitates payments in 190+ countries in 130+ currencies and offers different funding options for paying freelancers/independent contractors. These vary in control, risk, pay, and fees and are outlined in the table below:
Pay freelancers directly using your preferred payment method, such as direct transfers or credit cards.
At the start of each pay run, Bubty advances your funds and then invoices you monthly (this includes processing fees).
Pre-fund lump sums to your Bubty wallet to immediately pay freelancers.
By this, we mean an Agent of Record service, i.e., Bubty partners with AOR facilitators. Together, they act as the agency of record for talent payments.
Overall, it’s clear that when tackling the complications faced in classifying and paying a large pool of independent contractors globally, the best way to meet those challenges is to use a freelance management system.
The beauty of an FMS like Bubty is that it's an all-in-one platform that can be tailored to suit your global multi-currency freelance network. Everything is visible and managed centrally from your customizable client dashboard.
If you want to learn more about how Bubty can assist your business, why not book a demo today