A lot of business owners hire freelancers and contractors to do work for them. This is a trend that’s been growing in recent years. And it’s easy to see why: freelancers and contractors offer their services at a lower rate than employees and can often produce quality results more quickly than an employee could.
You might be asking why freelancers and independent contractors would need pay stubs. It is true that they’re not a requirement at all, but it is still a good idea in some cases to get them from at least some of your clients. Here are some reasons why.
Why independent contractors might request pay stubs:
To establish a paper trail that helps them file taxes.
This is the least likely reason to get pay stubs from clients, but they are important nonetheless. Freelancers and independent contractors usually don’t have the same tax filing requirements as employees. That’s because they’re just working for themselves. However, they are required to submit a Form 1099, which reports how much money they made from an independent contractor job.
If you provide an independent contractor with a pay stub for their work completed, they will be able to submit that form with their taxes to determine how much tax they owe. This is especially important for independent contractors who don’t have W-2s to rely on. You can easily use an online pay stub maker with customizable templates to record all the necessary information.
To maintain accountability.
If you’re hiring someone to do a project for you, it’s good to have a record of the work you’ve done and what was paid. If an independent contractor starts doing poor work, you’ll have proof that it was their responsibility and not yours to solve the problem. If you’re paying an hourly rate, you might be concerned that it’s simply too low for the quality of work you’re getting.
Having a pay stub will show that you’re paying a fair wage. To keep track of what you’re paying your freelancer. It’s important to keep track of what you’re spending money on. If you’re only paying them at an hourly rate, this could quickly add up. Having an invoice helps to ensure that you’re not spending money on services that aren’t being performed.
To have evidence of hours worked and any possible overtime.
Your freelancers and independent contractors are very likely to bill for the hours they spend on your projects. But this can also include time spent waiting around for a client to get back to you. Getting a pay stub is a quick way to prove what was done and when it was done.
You should also be aware that independent contractors and freelancers who are being paid hourly can in fact qualify for overtime pay. Many lawsuits occur because of overtime pay claims. To properly calculate overtime pay for freelancers and contractors, make sure you use the Fair Labor Standards Act (FLSA).
How issuing pay stubs to contractors can benefit the business:
To help pay suppliers on a timely basis.
Your suppliers are important. Your bills will arrive as invoices, but these invoices could be in the form of bank transfer requests, Paypal invoices, or even money transfer apps like TransferWise and CashApp.
You might be relying on these invoices to help your payroll team, or importing invoices into your HR payroll software to prepare your taxes, but if you don’t have proof of payment to prove that you’ve actually received payment, you could be asked to pay back some of the tax money you’ve received. In other words, pay stubs are essential for maintaining good working relationships with your suppliers.
It helps to itemize wages earned for the pay period.
Just like pay stubs help a contractor keep tidy records of their earnings, it also helps your business do the same for taxes. If your suppliers do their jobs properly, they should be able to deduct the amount of wages that you receive in a given pay period as a business expense.
It ensures that a contractor’s time is always factored into the billing process.
If you look at the typical contractor-client contract, the majority of them don’t take into account time worked. Therefore, their accounting departments are forced to add hours to billing after the fact, which can be both costly and time-consuming.
Pay stubs help in two ways: First, they allow you to add the hours worked by a contractor directly into your billing, which makes it easier for your accounting department to take into account when calculating the bill.
Second, they ensure that you are allocating the correct percentage of your pay to your employees. It ensures that your accounts receivable department avoids credit risk.
Authored by Claire Ward, Paradigm Digital