A Guide to Paying Independent Contractors
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 Status||Independent Contractor||Employee|
|Exposure to financial risk|
|Level of control|
|Flexibility to service more than one person/business|
|Provision of necessary tools, equipment and machinery required|
|CPF contribution and other benefits|
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:
- Pay rates – Project-based or hourly rate.
- Payment amount – How much to be paid?
- Frequency of being paid – Monthly, bi-monthly, as soon as the work is completed, etc.
- Payment method – PayLah, cash, bank account transfer, etc.
- Occasions where additional payments are made to the contractor
- Measurable KPIs to achieve before getting paid – Meeting deadlines, meeting a certain quality or standards, etc.
- Subcontractors allowed?
- 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.
|Bank transfer/direct deposit|
|SaaS payroll software|
|Google Pay, PayNow, etc.|
|Cash on delivery|
Is it legal to pay contractors in cash?
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.
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:
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