Should you use paper checks, direct deposit, or an online tool designed specifically for paying contractors?
In this guide, we'll walk you through the best practices for paying freelancers and independent contractors. Whether you're starting a creative agency, building an e-commerce business, or something else, we've got you covered.
The difference between paying freelancers vs. employees
Before we dive into the details of how to pay freelancers, it's important to understand the key differences between paying independent contractors vs. traditional employees.
Typically, full-time employees are paid through a payroll service. They receive a salary or hourly wage, and their employer withholds taxes from each paycheck. On the other hand, freelancers are responsible for paying their own taxes and usually invoice you for services rendered. They may also have multiple clients and complete freelance work on a project-by-project basis. Freelancers manage their own taxes and juggle multiple clients as self-employed professionals, so many also look for solid banking for the self-employed to keep business and personal finances separate.
Do I have to withhold taxes when paying freelancers?
No, when paying freelancers, small business owners do not have to withhold taxes.
Freelancers are classified in the U.S. tax code as 1099 contractors. What does this mean? Well, when you hire a freelancer, you're not hiring an employee but engaging a self-employed individual or entity to complete a specific task or project.
That means they fall under the "1099" category, named after IRS Form 1099-NEC—the form businesses use to report nonemployee compensation (payments to independent contractors). (This replaced the old 1099-MISC box 7 starting with the 2020 tax year; 1099-MISC now covers other payments like rent and royalties.) It's the freelancer's responsibility to manage their taxes directly with the IRS, unlike regular employees whose taxes you would need to withhold from their paychecks.
Remember that as a business owner, you're required to issue a 1099-NEC to any freelancer you pay above the annual reporting threshold. That threshold is $600 for 2025, and it rises to **$2,000 for payments made in 2026 and later** (indexed for inflation after 2026) under the 2025 tax law. When you choose a payment platform for your freelancers, you might want to look for an option that will help you automatically generate these 1099 forms during tax season.
Essential steps before paying freelancers
Before you send out any payments to freelancers, proper onboarding is crucial. By collecting a few key pieces of information at the start of your relationship, you'll avoid future tax complications and bookkeeping headaches.
Here are a few items that every business owner needs before paying a new freelancer:
A signed contract: Your contract with a freelancer should include the project scope and timeline, as well as an NDA (Non-Disclosure Agreement). This will protect your business and ensure everyone's on the same page about the work and what's expected.
Clearly defined payment terms: Your contract should include a page or section about payment terms, like upfront deposit requirements or fixed fees. Make sure you've also clearly defined if freelancers will be paid per project or based on an hourly rate.
The freelancer's signed W-9 form: This form will give you the freelancer's taxpayer information, so you can issue a 1099 form at the end of the tax year. Be sure you collect this form before paying freelancers—otherwise, you might end up in a last-minute crunch when 1099 forms are due in January.
Payment information: Collect the freelancer's payment details, whether you choose to pay them via your PayPal account or collect their direct deposit information.
Invoices: Freelancers should provide an invoice for their services. The invoice should include details like the nature of the work, the project rate, and the total amount due. Make sure you clearly communicate when you expect to receive their invoice (at the end of the project, on a monthly basis, etc.).
Relay (that's us) is an online business banking and money management platform. Business owners can open multiple business checking and savings accounts with no monthly maintenance fees. Then, they can securely request freelancer payment information (like banking details) and W-9 forms without leaving the Relay platform.
This offers a secure and streamlined alternative to requesting your freelancer's information via email or phone. Plus, it means you can manage your cash flow and freelancer payments all in one place.
How to pay freelancers: 8 payment options to consider
Some freelancers only accept certain types of payment methods, like credit cards or ACH payments. However, in most cases, independent contractors will accept whichever payment platform your small business prefers.
Here are the most common freelancer payment methods available for small businesses.
1. Direct deposit
Direct deposit is a fast and convenient way to pay your freelancers directly from your business bank account. Direct deposit eliminates the risks of lost or stolen checks, ensuring that your freelancers receive their payments securely and on time.
Plus, if you're already utilizing a payroll platform for your employees, you can easily extend its use to set up direct deposit for your freelancers. This makes direct deposit a great payment option for businesses that regularly run payroll for other team members.
How much does it cost? Direct deposit isn't always free. The cost varies depending on your bank or payroll provider, with some offering this service at no charge while others may charge a nominal fee per transaction.
2. Same-day or next-day ACH
Automatic Clearing House (ACH) payments are a convenient way to pay freelancers on a recurring basis, especially if you're paying monthly retainer fees. ACH is an electronic funds transfer (EFT) system that allows for fast and secure payments directly from your business account to the freelancer's bank account.
Unlike direct deposit, you can usually send next-day and same-day ACH payments right from your business banking platform. That means you don't need to purchase a separate platform (like payroll software) to set up this payment option for your freelancers.
How much does it cost? ACH is one of the cheapest ways to send money to freelancers. For example, Relay offers standard next-day ACH with no per-transaction fee on every plan. On Relay's Scale plan, the first 10 same-day ACH transfers each month are included, then $1 each (same-day ACH is $5 on Starter and $3 on Grow).
3. Wire transfer
If you're hiring a freelancer outside of the United States, you might not be able to set up direct deposit or send an ACH payment. In this case, some business owners choose to pay freelancers via an international wire transfer. You should be able to send a wire transfer abroad through your bank, but you can also use platforms like Payoneer and Wise.
Plus, you can send domestic wire transfers to freelancers within the United States. However, both types of bank transfers can come with steep fees, so it might not be the best payment solution for every business.
How much does it cost? An international wire transfer can take 2-5 business days to complete and cost upwards of $50 per transaction, plus currency conversion fees. Domestic wires are a bit faster and cheaper, but still less convenient than ACH and direct deposit.
With Relay, wire fees drop on higher plans: domestic wires are $5 on Grow and Scale ($8 on Starter), and international wires range from $1.50 (local-network currencies—EUR, CAD, AUD, GBP—on Scale) to $20–$25 over the SWIFT network. See Relay's full pricing.5
5International payment services are provided by Community Federal Savings Bank ("CFSB"), a federal savings bank chartered in the United States. These services are facilitated by Nium, Inc., which operates under a program sponsored by CFSB. Relay provides access to these payment services through its platform.
4. Credit card payments
Freelancers may send you an invoice through Stripe, QuickBooks Online, or another invoicing software. In this case, you can choose to pay them directly with a credit card.
Though credit and debit card payments are convenient for both parties, the freelancer receiving the payment may be responsible for paying the transaction fees associated. Be sure you ask independent contractors about their preferred payment method before defaulting to this option.
How much does it cost? Credit card processing fees vary depending on the bank, credit card company, and payment platform. However, many platforms (like Stripe) charge rates around 2.9% + $0.30 per transaction—again, the freelancer will usually be responsible for paying any processing fees, not you.
5. Peer-to-peer payment platforms
Peer-to-peer (P2P) payment platforms like PayPal and Venmo are great for paying freelancers who prefer to receive payments into a digital wallet. If you're doing a smaller project with a freelancer or don't expect to work with them long-term, these platforms can also be very convenient—typically, all you need to send money is the other person's username, phone number, or email address.
If you're paying freelancers internationally, PayPal is also particularly convenient. Just remember to keep detailed records and receipts of any payments you make.
If you're working with multiple freelancers or have an ongoing working relationship with a contractor, P2P platforms aren't the best option. Since transactions are processed within an app, it can be challenging to keep track of your payments. This can make tax compliance and bookkeeping more complicated than it needs to be.
How much does it cost? There's usually no fee for a business to send money through a P2P payment platform, but your freelancer may incur a charge when receiving the money. Be sure to check the specific fees for the platform and communicate with freelancers before sending any payments.
6. Freelance marketplaces and management systems
If you're hiring freelancers through marketplaces or management systems like Upwork and Fiverr, payment is usually facilitated through the platform. This means you don't have to worry about setting up direct deposit or sending wire transfers—they handle everything for you.
However, not every independent contractor works on these platforms, so you might not be able to rely on them for every freelance project.
How much does it cost? Marketplaces and management systems usually charge a percentage of the transaction or project fee as their service fee. This can range from 5% to 20%, so be sure to research and factor in these fees when budgeting for your project.
7. Accounts payable automation platforms
If you have a large number of freelancers to pay, managing payments can quickly become overwhelming and time-consuming. That's where accounts payable automation platforms like Melio and Bill.com come in handy.
These platforms specialize in streamlining the payment process for businesses, making it easier to pay multiple freelancers at once and track all your payments in one place. They often offer features like automatic invoice matching, digital approvals, and payment scheduling to make the process more efficient.
How much does it cost? Accounts payable automation platforms typically have a monthly subscription fee, plus transfer fees for each payment made through the platform. However, these costs can be worth it for businesses with high volumes of payments to manage. Be sure to compare different platforms and their pricing structures before choosing one.
Relay's Grow plan ($30/month) includes accounts payable tools built for small businesses. With it, you can:
Automatically import bills from QuickBooks Online or Xero
Review, approve, and pay all bills from one dashboard
Automate single or multi-step approval rules for bill payments
Pay multiple bills to the same vendor in a single batch
Pay multiple bills to different vendors in one workflow
Auto-sync paid bills as "paid" back to your general ledger
These features can majorly simplify freelancer payments—plus, they'll help you pay your team on time, avoid late fees, and speed up bookkeeping.
8. Paper checks
While not as common, some freelancers may still accept paper checks. However, this method can be time-consuming and come with additional costs such as postage fees. It also requires the freelancer to physically deposit the check, which could delay payment.
How much does it cost? Ordering checks from your bank can cost as much as $20-$50 per box, and postage fees vary depending on the weight of the envelope. Additionally, some banks may charge a fee for processing paper checks. Overall, this option may not be the most cost-effective or efficient for either party.
Tips for streamlining freelancer payments
It can be overwhelming to figure out how to pay freelancers on top of all your other responsibilities as a small business owner. If you can find a way to simplify your processes, however, you'll be able to avoid late fees, reduce human error (like incorrect payment amounts), and improve your relationships with freelancers.
Plus, prompt payment shows respect for freelancers' work and time, which will help you attract and retain quality contractors. In the long term, this will help you save on costs and boost your bottom line.
Here are a few tips for streamlining the way you pay freelancers:
Use one payment method consistently: Instead of juggling multiple methods, stick to one that works best for your business and your freelancers. This will make it easier to keep track of payments and streamline your bookkeeping.
Use automation tools: Use platforms that let you automate direct deposit and ACH transfers—like the accounts payable automation tools we mentioned earlier. They'll help you schedule payments ahead of time and in some cases, allow you to collect W-9 forms.
Make the most of your accounting software features: Programs like QuickBooks Online, FreshBooks, and Wave usually offer features for tracking and managing freelancer payments. Even better, they'll help you automatically generate 1099s and other reports for tax season.
Communicate clearly and often: Make sure to communicate with your freelancers about payment methods, schedules, and any changes ahead of time. This will help avoid confusion or misunderstandings.
Remember, paying freelancers promptly and accurately is not only the right thing to do, it's also crucial for maintaining positive relationships and keeping your business running smoothly.
What's the best payment method for freelancers?
Paying freelancers can seem like a daunting task, but with the various payment methods and tools available, it doesn't have to be. Ultimately, the best payment method will depend on your business needs and the preferences of your freelancers.
Relay is an online business banking and money management platform that marketing agencies and other small businesses love using to pay freelancers. With Relay, you can:
Request and manage freelancer payment details and W-9 forms
Set up and schedule recurring payments
Send standard next-day ACH payments to freelancers with no per-transaction fee
On the Grow and Scale plans, use accounts payable tools and lower-cost domestic and international wires; Scale includes 10 same-day ACH transfers each month
Relay also lets you open multiple business checking and savings accounts with no monthly maintenance fees, issue up to 50 virtual and physical debit cards3, and simplify bookkeeping with QuickBooks Online and Xero integrations.
Ready to simplify freelancer payments with Relay? Open a Relay account to get started. Agencies juggling several clients on top of freelancer payments can find a similar approach on Relay's agencies banking page, which covers how to keep spending organized by category, like income, taxes, and contractor payments.
3The Relay Visa® Debit Card is issued by Thread Bank, Member FDIC, pursuant to a license from Visa U.S.A. Inc. and may be used anywhere Visa debit cards are accepted.
Frequently asked questions about paying freelancers
How do I pay international freelancers?
Online payment platforms like PayPal can provide a convenient method for paying international freelancers. These platforms usually offer currency conversion and swift transfers, ensuring a smooth payment process. Additionally, they provide competitive exchange rates for international payments.
Are freelancer payments tax deductible?
Freelancer payments are usually tax-deductible business expenses, whether you pay them through a money transfer, a credit card, or some other method. Keep detailed records of all payments made to freelancers, including their invoices and your payment receipts. These records will help you accurately report your expenses during tax time and maximize potential deductions.
Should I have a contract in place before paying a freelancer?
Yes, it's always best to have a written agreement in place outlining the scope of work, payment terms, and other relevant details before starting any freelance projects. This protects both parties and ensures that expectations are clear from the beginning.
How do I pay a large number of freelancers at once?
Pay a large roster the same way you'd run bills: batch them through an accounts payable workflow instead of sending one-off transfers. Import each contractor's invoice, apply an approval step if you want a second set of eyes, then release the whole batch as standard ACH in one action—so paying fifty freelancers takes about as long as paying one. The keys to doing it without the admin burden are collecting every W-9 up front, keeping payment details on file, and using a tool that syncs each payment back to your books automatically. On Relay, the Grow and Scale plans add batch vendor payments, multi-step approvals, and QuickBooks Online or Xero sync for exactly this.
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