Due to the various employee classifications that exist, the world of work has become more intricate. As a result, an increasing number of businesses are hiring freelancers, contractors, and employees to take on long-term or short-term projects within their companies. In the Germany alone, there are 1,5 million freelancers and 3,6 million self-employed professionals, and this number continues to rise. Before hiring these types of workers, it's crucial to ensure that you understand how to properly pay them.

Comparing Payment for Freelancers, Contractors, and Employees There are a few key differences in how freelancers, contractors, and employees are paid:

• Employees: Are typically paid a regular wage or salary on a fixed schedule, such as monthly or biweekly.
• Contractors: May be paid on an hourly basis or by the project, depending on the terms of their contract. They may work for a business for a longer period of time than a freelancer, but are not considered employees.
• Freelancers: Are self-employed individuals who are not affiliated with a company and set their own rates. They are often paid on a per-project basis, but may also invoice monthly if working with an organization regularly. They do not receive benefits such as healthcare or paid time off.

Paying Freelancers and Contractors: A Guide

To pay freelancers and contractors, you should familiarize yourself with these basic principles:

1. Completing and Signing Required Documentation

Before beginning any work, it is important to ensure that all necessary documentation has been signed and filled out by freelancers. This serves as a legal precaution and ensures compliance with federal and state requirements. The following documents should be obtained from freelancers:

• Contract and Statement of Work: a legally binding agreement outlining the project context, tasks, and responsibilities of the freelancer
• Nondisclosure agreement (NDA): if the work involves confidential information, freelancers may be required to sign an NDA
• Payment information: make sure to obtain the freelancer's financial information, such as bank account details or Paypal email, for payment purposes.

2. Establishing Payment Terms in a Contract

To ensure that freelancers are fairly compensated for their work, it is important to define the payment terms in a contract. This should include the payment deadline for invoices and how long freelancers can expect to wait for payment. It may also be helpful to specify whether freelancers can only send invoices after the work has been completed. Clearly communicating payment terms can prevent misunderstandings and maintain a positive working relationship.

For larger projects that extend over a period of time, payment can be based on project progress:

• A small amount can be paid upfront
• Payment can be made each time a significant milestone is completed
• The remaining amount can be paid after the project is completed

3. Managing Your Taxes

It is important to be knowledgeable about the taxation laws in your country when hiring freelancers. For instance, freelancers who provide services for German companies based in Germany are required to pay a tax rate of 19%. Additionally, it is necessary to obtain the freelancer's VAT (Value Added Tax number, for Germany is starts with DE) in order to provide accurate information to state and local tax authorities.

Efficient Methods for Paying Freelancers and Contractors

Now that you are prepared to begin working with freelancers, you may be wondering how to go about paying them. There are several payment systems commonly used for this purpose, including the following options:

1. Direct bank deposit

Direct deposit is a popular and convenient method for paying freelancers. It is particularly useful for businesses that need to make regular monthly payments to freelancers, as it does not involve any deductions from the payment. However, it is important to note that setting up direct deposit may incur a cost of between 50 and 200 euro, and it may take a few days for the payment to be received by the freelancer. 

2. Online payment tools and applications

One of the most convenient and efficient ways to pay freelancers is through the use of online payment systems and applications. These tools are particularly useful for businesses hiring freelancers, as they can be cost-effective and allow for instant payments.

3. Pay via a freelance marketplace

Marketplaces for hiring freelancers have become increasingly popular in recent years, due to the growth of the jab economy. These platforms offer various advantages, such as handling legal disputes, ensuring tax compliance, and managing freelance payment methods. They also act as intermediaries in case of any legal disputes between employers and freelancers.

Navigating Payment Options for Freelancers

When it comes to paying freelancers, there are several options available. The best method for your business will depend on factors such as transaction fees and preferences of your finance team. Additionally, whether you are hiring freelancers or contractors based in Germany or internationally will also affect the payment method you choose.

If you need assistance determining the best way to pay your freelancers and contractors, consider seeking financial consulting services from Freiberuf. If you're looking to expand your team and hire freelancers or contractors, Freiberuf is a great resource to find top talent for your business.