Don’t Make These 5 Mistakes When Paying Contractors or Remote Workers

by / ⠀Entrepreneurship / June 12, 2020
man handing four twenty dollar bills
You can’t manage and pay contractors and remote workers the same way you manage and pay in-office full-timers. Fail to adjust, and your company could lose money. That’s not to mention drops in productivity or the possibility of getting in dicey situations with regulators or people looking to get paid. Nontraditional work arrangements can trip up even the most experienced businesses. Geography matters. Remote work provides incredible benefits, but just because something has advantages doesn’t make it better across the board. When your employees live in different states and countries, you must stay on top of your management and payment processes. It’s the only way to prevent small errors from snowballing into big problems and bad feelings. Contract work comes with freedom and flexibility, both for employers and workers. But it also comes with a host of legal headaches. Businesses must avoid overstepping their authority if they wish to keep the contractor relationship valid. Further, businesses paying contractors must make sure to do so in full and on time to avoid earning a bad reputation with freelance talent. Proper management of both remote workers and contractors, whether remote or in-house, requires a multifaceted approach. You need buy-in from executives, good payroll software, managers invested in the well-being of their nontraditional teams, and a strategy with plenty of room to maneuver. To accomplish all that, you must not only practice good habits, but also learn to avoid bad ones.

5 Missteps to Avoid When Paying Contractors

Stay vigilant to avoid these common financial mistakes when paying contractors and remote workers:
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1. Failing to clarify expectations

Remote employees and contractors don’t have the luxury of easy access to every company resource. They can’t pop in to ask quick questions or stay updated through the grapevine of hallway gossip. Communications tools for outside workers fill some of the gaps, but nothing fully replaces constant in-person contact. Develop a system to communicate with remote and contract workers about exactly when and how the company will pay them. Provide clear guidelines for how to address concerns. Designate a point person within the organization’s payroll department to handle complaints. If you want your workers to deliver on time, you must hold up your end of the bargain.

2. Overlooking local regulations

Businesses with employees in a variety of locations must take extra care to follow regulations and tax laws. Some states don’t charge income tax, while others charge varying amounts. You may also be responsible for state unemployment insurance taxes and local income taxes, in addition to standard charges for Social Security and Medicare.  When it comes to regulations, what you don’t know can hurt you. Companies with team members in other countries may have to follow different laws when firing workers. Some nations have different rules about the definition of a contractor. The last thing your business needs is a lawsuit from a disgruntled employee half a world away — or an angry letter from a foreign government’s tax collections agency. Take the safe road by consulting an expert for any region in which you plan to hire workers. 

3. Not informing workers of tax responsibilities

You can’t get in trouble for failing to tell contractors that they need to save their own money for self-employment income taxes. However, you can earn major props with your contract workforce by taking a proactive stance regarding their financial well-being. Send out regular reminders to contractors about their earnings to help ensure they have enough saved to make quarterly payments. If you have any expat remote employees in foreign countries, help them identify local resources to avoid getting on the bad side of the law in unfamiliar territory. Of course, the employees aren’t the only ones responsible for taxes. Don’t overlook your own responsibilities for payroll taxes for your remote workers. Keep tabs on your status with pandemic-related payroll tax assistance programs, and double-check your calculations to ensure you don’t get stuck with a big bill down the road.
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4. Neglecting recordkeeping duties

Payroll errors directly hurt your bottom line — and your credibility with your employees. It’s important to keep detailed records using your payroll software and regularly review your reports to identify and correct any inconsistencies. You may discover things like incorrect pay rates or hours, errors in classifying employees, or tax miscalculations — all of which could cost you if regulators come calling. No one needs paper files in 2020 (unless your industry falls under special regulations), so don’t be shy about moving important payroll and HR data and records to the cloud. Store digital files securely, and use a consistent naming convention to ensure easy access to old records. 

5. Classifying workers incorrectly

Misclassification of workers has become a hot topic in the age of the gig economy. California recently sued Uber and Lyft for classifying drivers as independent contractors, claiming the ride-share companies’ employee relations violate a new state law. Big companies are far from the only ones misclassifying contractors, though. Every company that depends on contract labor can fall into the same trap. The consequences of misclassifying workers can include stiff financial penalties, so don’t treat workers as contractors in the name of short-term convenience. Your workers could sue, regulators could make an example of your company, or both. Not only would such a situation cause massive monetary damage, but your brand may also never recover if the public believes you mistreated workers in the name of profit. You may have the best intentions, but if you misclassify workers, you won’t get a chance to explain that to the people who walk away. With all their challenges and advantages, remote workers and contractors represent the future of the global workforce. The freelancer population will continue to grow, and remote work arrangements — catalyzed by the COVID-19 pandemic — will become a common expectation for top talent in every industry. Stay on the good side of the law — and your workforce — by making sure you handle payment of your teams appropriately.

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About The Author

Editor in Chief of Under30CEO. I have a passion for helping educate the next generation of leaders. MBA from Graduate School of Business. Former tech startup founder. Regular speaker at entrepreneurship conferences and events.

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