A Guide to Paying Independent Contractors

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The sharing economy has been disrupting traditional business models and levelling the playing field between businesses and workers. Especially for small businesses, the lack of overheads and inventory has enabled them to be agile and lean, as they channel these resources towards generating more value for customers.

The COVID-19 pandemic is proving to be a wake-up call for businesses to tap on the legions of freelancers ready and waiting with the skills that they need. Some have called this the “freelancer new normal,” and that businesses are moving towards new hybrid models for their staffing needs.

That said, this article provides a crash course on outsourcing work to freelancers, its implications on your business operations, and addressing some FAQs pertaining to paying freelancers.

Who is an independent contractor?

An independent contractor, also known as a freelancer, is someone contracted to deliver a good and/or service for another business who is a nonemployee. While independent contractors are not considered employees, their service delivery is usually tied to terms of a contract they have negotiated with the business.

The contract typically does not direct the contractor’s means of getting the work done, but what outcomes are expected by a stipulated deadline. Also, there is no hard and fast rule to how the contract is negotiated- ranging from something as specific as a full-fledged written contract, or as loose as broad, generic advice and assistance provided verbally or virtually.

Despite the flexibility of such arrangements, the distinction between a regular employee and an independent contractor is an important one as the misclassification of one for another has dire consequences. The business may ultimately be liable or in breach of statutory requirements for failure to provide mandatory benefits entitled to an employee (See: Singapore: Legal issues commonly faced by freelancers and self-employed individuals).

Key business aspects controlled by the business owners/payers

In this regard, the Inland Revenue Authority of Singapore (IRAS) lays out the primary factors that distinguish an independent contractor from an employee:

Factors Determining StatusIndependent ContractorEmployee
Exposure to financial risk
  • Financially liable if contractual obligations are not fulfilled.
  • Liable for expenses incurred related to the operation of your workspace and/or hired helpers.
  • Not financially liable for the business’ loss if the contract between business and client is flouted.
  • Not liable for expenses incurred by the business.
  • Not in the position to realize business’ profit or loss.
Payment received
  • Paid a fee on a per-job basis.
  • Has the right to negotiate/set a price for your good or service.
  • Paid a regular (whether it’s by the hour, week, or month).
  • Paid overtime or bonus.
  • May receive commission based on the nature of the job.
Level of control
  • No superior overseeing you.
  • You control your own hours of work to fulfil your job obligations.
  • Free to accept or refuse work.
  • Free to hire other people to do the work you have agreed to undertake, but at your own expense.
  • Overall work environment (e.g. who instructs you, how, when and where the work is carried out) directed by the business.
  • Specified working hours.
  • Usually not allowed to subcontract work to another person.
  • Training on how to do work is usually provided.
  • Able to provide suggestions to the business, but business has the final word.
Flexibility to service more than one person/business
  • Able to provide the same services to more than one person/business at the same time.
  • Able to advertise and maintain a visible business location.
  • Need to obtain permission from the business if you wish to do work for other persons/businesses.
Note: Some employees can work for more than one employer at any one time.
Provision of necessary tools, equipment and machinery required
  • Responsible for the costs of repair, insurance and maintenance to the tools, equipment and machinery.
  • You retain the right over the use of your assets.
  • The business supplies most of the tools and equipment required to do your work.
  • Business is also responsible for the repair, maintenance and insurance costs.
  • The business retains the right of use over assets provided to you.
CPF contribution and other benefits
  • You do not receive any protection or benefits from the business.
  • You provide your own medical and insurance coverage.
  • You are required to contribute to your own CPF Medisave account.
  • You are required to pay the employer’s CPF contribution to your workers.
  • Entitled to benefits that are normally only offered to employees (e.g. employer’s contribution to CPF, medical and vacation leave, medical reimbursement, group accident and health insurance, etc.).

Source: IRAS’ “Am I an Employee or a Self-Employed?”

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Rules for paying contractors

Aforementioned that a verbal agreement is just as valid as a written one, but it is still recommended to put the details of the pay in writing to establish clarity of what’s been agreed by the parties involved and avoid difficulty when proving a case in a lawsuit.

Some of these payment terms to put in writing may include but are not exclusive to:

  1. Pay rates – Project-based or hourly rate.
  2. Payment amount – How much to be paid?
  3. Frequency of being paid – Monthly, bi-monthly, as soon as the work is completed, etc.
  4. Payment method – PayLah, cash, bank account transfer, etc.
  5. Occasions where additional payments are made to the contractor
  6. Measurable KPIs to achieve before getting paid – Meeting deadlines, meeting a certain quality or standards, etc.
  7. Subcontractors allowed?
  8. What if-s: Work not done on time, payments not made on time, unacceptable work

Ways to pay contractors

In this section, we delve into the different payment options for businesses and independent contractors.

Payment MethodProsCons
Debit/Credit card
  • Don’t have to worry about payment bouncing.
  • Ability to do it virtually and conveniently.
  • Requires contractors to also use a payment solution that allows for credit/debit card payments.
  • Need to pay a transfer fee.
Cheque
  • The default and still the most common payment option used by big businesses.
  • Time is taken to mail the cheque.
  • Risk of a cheque being lost, damaged or stolen.
  • Difficult to track payment status.
  • Payment takes a few days to process.
  • Risk of cheque bouncing and then needing to pay a reprocessing fee.
Bank transfer/direct deposit
  • Transfer fees are borne by the business/payer.
  • Payment processing is secure and fast.
  • Payment takes a few days to process.
SaaS payroll software
  • Payments can be automated and scheduled, so no late payments.
  • Access payment status for all vendors on the dashboard.
  • Payments are integrated with the books via the accounting software.
  • Relatively low transfer fees.
  • Payment processing is secure and fast.
  • Contractors feel reassured knowing that reputable payment options are used within the software.
  • Seamless integration requires the business to onboard the full package of features offered by the SaaS software.
PayPal
  • Allows business to tap on overseas independent contractors.
  • Reliable option of payment, easy to set up and it’s free.
  • Known to be a secure platform.
  • Need to pay a transaction fee.
Google Pay, PayNow, etc.
  • No transaction fees.
  • Allows you to store all of your credit/debit cards in a digital wallet.
  • Security risk is still ambiguous for Google Pay at this point.
Cash on delivery
  • Payment is immediately settled for both.
  • Reliable option of payment.
  • Handling and counting cash can be troublesome.
  • The inconvenience of coming down to collect cash in person.
Pro-Tip:   Eliminate the need to manually import and export invoicing data to your accounting software. Spenmo is integrated with Xero, Quickbooks, SAP, Netsuite among others.

You should be able to pay your contractors in whatever way you want to, and also consider that cash is still a legal tender. However, it is important to note that the business should keep some form of documentation, such as an invoice, that is acknowledged by both parties once payment has been made.

Outsourced work is after all expenses incurred, whether it’s for indirect (e.g. landscaping for office) or direct revenue generation (e.g. proofreading and copywriting a marketing piece to go out). Henceforth, it is advisable to keep proper records of these cash payments to justify any corporate tax deductions moving forward.

How much should you pay a contractor upfront?

The internet is mixed when it comes to whether you should pay an independent contractor before the work is completed and if yes, how much the deposit should be. Depending on the nature of the contracted work and the relationship with the client, it is up to you when you think it would be appropriate to pay upfront or after the work is completed.

For instance: For an interior design and renovation project which can take weeks and months to complete, it is possible to stagger your payments based on the progress rather than to provide a lump sum payment at the beginning. However, if the project sum is too small or the period of work completion is too short, this category of contractors usually do not ask for payment upfront.

Consolidate your contractor payments at ease with Spenmo

Are you spending a lot of your time recording and tracking the different invoices from your suppliers and freelancer staff?

Fret no more, as you can simply forward your bill payments to Spenmo- be it 1 or 1000s. Our system scans the invoice and carries out the payment with your digital wallet that you top up on your dashboard. Also, track the status of payments for your respective contractors easily on the dashboard.

Automate invoice payments with Spenmo

We understand the need to be sustainable as you expand your presence abroad- business operations or needs-wise. For international contractors, make the cheapest transfers with 0% FX markup (P.S. You get the rates that you see on Google).

At the end of the year/financial period, access all of these transactions on your dashboard and sync it up with Xero, or export it out as an Excel to the accounting software that you’re currently using:

Spenmo Transaction Report

Automate your payments with Spenmo

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