Podcast

Episode: 106 |
Will Bachman:
Paying a Subcontractor:
Episode
106

HOW TO THRIVE AS AN
INDEPENDENT PROFESSIONAL

Will Bachman

Paying a Subcontractor

Show Notes

How do you pay a subcontractor?

In this episode, I try to answer that question, sharing ten years of lessons learned, covering:

1) How do you actually transfer the money, covering options including check, PayPal, wire transfer, ACH, and bill.com

2) Tax implications, W9, 1099, and ‘nexus issues’ you need to be aware of

3) What to ask your subcontractor for in terms of an invoice

4) How to track payments to subcontractors

One weekly email with bonus materials and summaries of each new episode:

Will Bachman 00:00
Welcome to Unleashed. I’m your host Will Bachman. And today I’m answering a question from a listener. I’d love to get your questions, you can record a voice memo on your phone and email it to me at unleashed@umbrex.com. And if I think I can answer it, I will do my best to do so on the show. So first, let’s hear the question, hey, well, this is deep Shenoy in Washington DC. What’s the best way to pay subcontractors? Deep? Thanks for your question. I’m gonna answer that in several parts, I’ll probably give a longer answer than you were looking for. Since there are multiple aspects to that question. So what I’m gonna talk about is number one, how to actually transfer the money to the freelancer, sort of mechanically getting the cash from you to that person. Number two, some tax implications. And this is primarily for folks in the United States. Number three, how to track the payments. And number four invoicing. Okay, so let me preface this all with a disclaimer, do not consider this legal advice or tax advice, I strongly encourage you to get a tax accountant and an attorney who can provide you professional advice on your specific situation. So I am not giving you expert professional advice, just my my own lessons large. Okay, so number one, how do you actually transfer the money to the freelancer. So you ought to select a payment mechanism that is number one, auditable, and number two convenient for both you and the freelancer. So I think that, you know, actually just handing a stack of cash would be legal, but it’s harder to audit. And that’s probably not the best. So here are several methods that I have used. And that all worked fine. And depending on, you know, your preference, and which is the most convenient. So number one, you can do a handwritten check. I don’t love using cheques myself, they can get lost in the mail, and the other person might have a delay and depositing them. So plus, there’s some delays and processing checks and funds availability. So it’s not my favorite method, but it can work. Number two you can have, you can kind of go online, and you know, with your bank account and send a kind of a bank, you have your bank, mail a physical check to the person, I really don’t love that either. Those kind of checks, I don’t love receiving those checks. When I’m you know, doing work for someone else. I’m always scared that they’re gonna get lost in the mail, and they kind of look maybe like junk mail, when they arrive, they get lost in the wrong address. So I don’t love those either, but it is a possibility. Number three, PayPal, for smaller dollar amounts, it’s super convenient for both sides. You don’t need to get account information, it’s, I think it’s fine to send a few $100 to someone, maybe who you know, edited a PowerPoint page for you or something, I would be less psyched about sending $20,000 for a consulting project via PayPal. But PayPal is pretty convenient. And I often use it for smaller dollar values. Number three, okay, let’s talk, let’s talk about bank. So there’s two mechanisms to send an electronic payment. And you may already know all of this, this was kind of news to me, it was a little bit of a mystery. So I’ll go through it in some depth. So there’s basically a wire transfer, and an AC H, which stands for Automated Clearing House. And those are similar but distinct. They work in a similar way with one key difference. So with both banks, you can go on to an online portal, and you can set up these transfers yourself. Either one of them, your ability to use this service might depend on the particular checking account type that you have with your bank. So the bank might allow you to do wire transfers and a CH maybe only wire transfers. If you have a business account, you’re probably gonna be able to do a CH is and they might charge you different amounts depending on how many you do. If you have a free personal checking account, you might not be able to do these. With a low fee business checking account, you might be able to send them pay a higher fee. If you’re paying a higher fee or having a higher balance, you might get like a bunch of free ones. So but let’s assume that you have a checking account or you do have access to both a CH automate Clearinghouse and wire transfers, and you can do both of those online. In both cases, we are going to have to get the bank routing information from the subcontractor who you are paying. And usually you need to get the following pieces of information. This is for a domestic transfer within the United States. We’ll talk about international in a minute. So you normally need to get the name on the account of the subcontractor. So if it’s business account, you want to get their business name that’s on the account. Number two, you want to get the address of the account holder, some banks will require you to put that in some, some banks might not sometimes will also ask for the address of that particular bank branch where they open their account. The things, the two things that you definitely need are the account number of the of the subcontractor at that bank, and the ABA routing number of that bank, those aren’t magic mysterious numbers person might be concerned about giving away but you know, you don’t want to publish them online. But they are on the bottom of every check. So I mean, anytime you write a check to somebody, they’re getting those two things, account number and ABA routing number. And, let’s see. So you can have the person send you a voided check or you know, photo of a voided check. Or they can just give you those two numbers in an email. And let’s see the name of the account holders bank. And sometimes it asks for a phone number of the person’s bank. For for both acth and wire transfer, you’ll have to add this info to a pay. And beware that in some cases, the the routing number might be different if you’re doing a wire transfer versus an A ch. So keep that in mind. So sometimes the they’ll have like one AB routing number, if you’re doing a wire transfer and a different routing number if you’re doing an A ch. Now, what’s the difference, the difference between a wire transfer and a CH is that a wire transfer is done as an individual transaction. And in relatively real time, within a couple hours of you initiating a wire transfer, the info is transferred between your bank and the subcontractors bank, and the money gets transferred the same day. A wire transfer is expensive, and your bank will probably charge you some fee. Unless you have a super awesome checking account. They might charge 25 or 30 bucks, maybe even more. And the subcontractors bank is going to charge her on the incoming side usually a fee as well for an incoming wire transfer. I don’t know exactly how it works. But it some seems like sometimes there might even be some human intervention that you know, that kind of verify the information. I don’t know exactly. But the key is that wire transfer, it’s sort of done real time individually goes through on the other hand, and acth works on a batch process. So the bank stores up all the AC H’s that happened over the course of the day. And then all the banks get together at night, as far as I could tell, and they process them in a massive batch. And then the fees for an AC h are typically much lower. And AC h you can specify at least with some banks, if you want it to be a next day, AC H or a three business day AC h so my bank charges me $10 if I want to do a next day AC H and if I want to do a three business day a CH it’s $3. And I get to do a certain number of three day a CH is for free. So as an example, so, um, you probably want to reserve wire transfer to situations when the freelancer like absolutely needs the money that day. And because otherwise, you’re gonna have to pay, you know, 30 bucks or so on each side. Now, for international transfers with your bank, I think you probably need to do a wire transfer. So for international wires, instead of the ABA routing number, you’ll need to get a swift number, sw IFT, which is an acronym for something. And then otherwise, it pretty much works works pretty much the same, you will, you know, put in a swift number and that usually calls up the person’s bank name and you put in account number and their address and so forth. The fee for an international wire transfer might be higher might be 40 or $50. Um, and then if you’re going to be sending a payment, and the recipient will be receiving it in different currency, then be forewarned that your bank may be charging a pretty hefty currency conversion fees, it may be as high as 3%. So another option for international transfers is to use a third party service. Some people I know use FX or two that’s Oh fx.com or transfer wise and the currency transaction currency. transaction fees are lower, maybe like 1% of the total. So with those services, you go online, give them access to your bank account, and then you’ll have to put in the bank info of your recipient. The first time use the service there’s a bunch of KYC or know your customer type of business. It’s a bit of administrative hassle it took me actually a couple hours To go through it all and get it all set up. But after that, it’s I found it pretty smooth and I use one of those services. Now yet one more method of sending payment is a service like build.com. b, I ll calm and there may be other ones, but I do use bill.com. And I think it’s pretty great. So the way bill comm works is you connect bill comm to your bank account. And then any freelancers or subcontractors that you want to pay, you invite them and they get to set up a free account with Bill Comm. And a freelancer can put in her bank account info directly into build calm, she doesn’t need to provide that info to you. And the bill comm platform provides much more functionality than your online bank account probably does. You can for example, have your bookkeeper or accounts payable person or assistant enter invoices ahead of time, and then you can see all those invoices lined up. And you can connect it directly to QuickBooks. So it’s all tied together, you can so you can have someone else enter invoices, and then when you’re ready to pay them, you can go ahead and approve them pay and initiate payment. So that allows you to have sort of to person control, if you don’t want your bookkeeper to actually be able to release the payments and you want to control that. But you don’t want to have to go through the hassle of entering them yourself. It’s it’s the system and then it provides a lot more kind of reporting. And you can click on individual vendors and see all the payments that are, you know, teed up and have been paid. So it’s a much more kind of robust way of seeing all the payments that are going on. not free. But it’s not crazy expensive. It’s you know, something like 40 or $50 per user per month. And you probably want to have at least you probably need to two users, in most cases, if you’re going to have your bookkeeper logging in and you logging in. So if you’re sending out a lot of payments, and want to be able to track them a lot easier. Bill comm is great, if you’re just paying you know, one or two subcontractors per month, then it’s it’s definitely not not worth the trouble. All right, let’s go on to kind of collecting information from your, from your subcontractor. So in terms of you know, tracking how much you’re gonna pay them. So I have an email template, and I sent it out right at the beginning of the project. So where I ask subcontractor, right, when we start, I get their w nine. And that’s, you know, for us audiences, internationally, I’m not sure what it is. But w nine is basically asking for the name of the entity, either their name or their business name. And the if it’s if they’re getting paid personally, their social security number, if they’re getting paid as a business, their employer identification number, and I my email template beginnings sends out instructions on how we’re going to set up payment. So you know, for me, in my case, it’s bill Comm. But if you’re going to be paying them, you know, via a CH let them know that and ask for their bank account info, and then I send out an invoice template. So a little bit more on that later. After no w nine is you know, sensitive information, personal information. So you want to have a secure way for that person to provide it to you and you want to you know, check with sort of it and, you know, an IT professional on sort of the the way to kind of maintain that personal information, super confidential and secure. And I suggest that you test your payment set up right at the beginning of a project by sending just a nominal payment amount to your subcontractors, they don’t wait until you’re actually trying to pay the person at the end of the project, if that’s when you agreed to pay them. If you’re gonna send a CH payments, for example, it is possible that you know the subcontractor sent you the wrong number or that you kind of fat fingered it and put the number in wrong. So, um, so I like to test it out. So you could I suggest that you send some nominal amount of money, and that you pick a number that will catch the freelancers attention. So if you send a some round number like $10, it could easily get missed as some bank fee or some random credit. So I sinned $14.94, which is an odd enough number, that when the subcontractor sees it on her bank statement, she’ll ask yourself, now what was that for? And I email explain that the year 1494 was the year that Luca pacioli published the first recorded description of the double entry bookkeeping, bookkeeping system, so totally geeking out on that. And it seemed like an appropriate reference for setting up payment. So I hope you’ll have some fun with this. Pick your own date that has some meaning to you. I also tell the freelancer like look, buy a cup of coffee for a friend, I’m not going to deduct it from from their invoice. So it’s just kind of a nice way to start a project and prove to them that you’re, you know, set up payment and get everybody comfortable so that when you pay them for the full amount it goes through without any problem. Okay, let’s talk about tax implications a little bit. And again, I’m not giving tax advice. My first recommendation is if you are going to be paying subcontractors, you should definitely definitely, definitely get a Professional Tax Advisor to prepare your taxes. Like if you’re in the US, and you’re paying a subcontract in the US typical approach is that you’d issue a subcontractor a 1099, in January, documenting for the IRS all the fees you paid to this individual over the year. In order to pair that 1099, you’re going to need a W nine from the subcontractor, which we mentioned before, and it’s apparently not sufficient just to have them like email you their social security number and say use that, you know, the IRS might actually to see and want to actually see the actual form itself. So my recommendation lesson learned for me, is to get that w nine before you send the person the first payment, you don’t want to have to go to the person in January the last minute and try to collect a bunch of W nines. I guarantee you, your subcontractors will be much more responsive to your requests for paperwork, when they are waiting to get paid. Next, discuss Nexus issues with your tax advisor. And that’s Nexus ne x us. If you are located in one state, and you’re paying a subcontractor in another city or state, there is a chance that you’ve established a business Nexus in that other state and you need to pay state tax there or even city tax there. Now, this is not necessarily going to increase the total state taxes that you need to pay, since you’ll probably be able to offset the amount paid to some other state against the income taxes in your own state. Unless you’re one of those lucky individuals that lives in a state with no income tax, and then you’re gonna have to start paying some for other states. And the rules on this are complex, and I rely on my tax advisers. So this is not tax advice. I don’t know if I mentioned that. If you’re paying an international subcontractor, then definitely sorted out ahead of time with your tax advisor. And taxes, just keep this in mind as well. Taxes work on a cash basis is my understanding. So if a subcontractor, let’s say does some work in November, and you receive funds from the client, so you send that invoice on December 1, and you receive funds from the client on December 31 2018, let’s say and then you pay the subcontractor on January 3 2019. And the money, then the money that you received from the client in 2018, will be 2018 revenue to you. And you can’t write off that subcontractor expense in 2018. It’ll be 2019 expense. So the payment to that subcontractor expense for 2019. So that could that would increase your taxes this year, and decrease your taxes next year in a nice way. But be aware that that you might want to take take some steps, particularly towards the end of the year to make sure that you’re getting the subcontract payments out in a way that aligns of when you’re receiving the revenue. So how to track payments to subcontractors. So this may sound totally obvious. But in my first couple years as a consultant of paying subcontractors, I didn’t have a great tracking system in place. During the year, I figured I just sort of sorted out when it came time for taxes. So at the end of the year, I had to go through all of my canceled checks and sort through old invoices to cross check everything and it was a massive administrative effort. I haven’t found a great software tool that does this easily. I’m sure there are ones out there. But for my purposes, I use a simple excel sheet or Google Sheet. So in the sheet, I just have one flat file where I enter each invoice that I send to a client as one row. And the columns are would be the following. So you know, what’s the name of the client company? What’s the charge code of the project? What’s the name of the project? What’s the invoice number, and the system that I use case you’re you know, wanting to come up with a system for invoice numbers is I use year, year, month, month, and then a four digit number for the invoices in that month sequentially. So for example, the 23rd invoice I sent out in September 2018 would be one eight for 2018 1809 for September, and then 0023 So 180900 to three, I find this more helpful than just numbering invoices sequentially from like one to, you know, 5000 or something. Because if I look at an invoice number, I immediately know, you know when I sent it out, and but it’s also a unique number. So if I get above 9999 invoices, then that would be kind of my own y2k problem. But a big good problem to have, I suppose. Um, let’s see, office obviously include is a column the amount of the invoice the date I sent the invoice and I only fill in that column when the invoice has actually been sent out. And I copy my accountant bookkeeper on that so like my bookkeeper can also double check the fact that I actually sent it because it’s a pretty much of a disaster if you think you sent an invoice and then you’re a month later you realize why you didn’t get paid and because you didn’t send the invoice. So drag that the date I received payment for the invoice and that’s helpful when you’re going back to make sure that all your invoices have been paid. If a subcontract is getting a portion of this invoice, then I have columns for the name of the subcontractor, obviously, the professional fees to the subcontractor, the expenses to the subcontractor, and therefore the total dollars do subcontractor, the date, I paid the subcontractor, the method I use to pay the subcontractor, either a CH, or bill comm or international wire transfer, or FX or PayPal or whatever. And the tax year, that payment will be included, which during the year is obviously pretty obvious. But then towards the end of the year, like I mentioned gets a little confusing. If there are multiple subcontractors getting paid at one invoice, the way I do it is I just have multiple rows, one row for each subcontractor. Okay, so then. So again, there’s maybe some great software out there, but just the simple excel sheet works perfectly fine for me, I don’t really need anything more than that. And it’s an incredibly handy tool, um, invoices from subcontractors. So if you only have one subcontractor, you don’t need to worry that much about providing with the invoice template, you know, they can just sort of send whatever they normally do. But if you’re having multiple subcontractors on a project, you probably want to provide them with an invoice template, maybe in Excel. So you can copy and paste their inputs into your invoice to the client. And that’s, that’s what I do. So if you’re billing each member on a daily rate basis, then you could create a template where they have, you know, one row for each for each week, and one column in which they list the days they worked and another column in which they total up the days. So that will help you, you know, kind of just compile all the inputs from your subcontractors. And then on expenses, what I asked people to do is, I say, give me a one file that includes a PDF of all your expenses. And the first page or first one or two pages should be an itemized list of all those expenses, you know, date, the amount and where it was, what was, you know, was it one star was a hotel or whatever. And then copies of all the receipts that are above $25. And I recommend to people that they use expensify, to do this, which is a fantastic tool of that whole episode on expensify. It allows you to use your phone to just snap a photo of a receipt or to forward an email receipt to your account. And then you can very easily create a simple report for it all. It’s, it’s transformed my life and taken away a big pain point. So I say use expensify. So send me this Excel file with just your hours and the total expenses, and then send me a expensive, then send me a single PDF with all your expenses. And if you don’t use expensify, but you just want to, you know, use track them in Excel with a list and, you know, take take pictures of them all and, you know, scan it like as long as it’s a single PDF, that’s fine with me. So that’s how I get the invoices. So this is probably deep, longer answer than you were looking for on how to pay people. But there’s a lot of lessons learned in it. And I hope you found this helpful. And if you did find it helpful, I hope that you might share this with two or three people that you think you know, would also find it helpful. Again, I’d love to answer your question. If you got one, record a voice memo with your question and email to me at unleashed@umbrex.com. And you can start it by saying, you know, Hey, my name is Will I’m from a storia and here is my question. And if you visit umbrex.com slash Unleashed, you can sign up for our weekly Unleashed newsletter. You’ll get a copy of a transcript of each episode. You get notified of each episode, and you also get some other bonus features. Usually a book recommendation and some other tips. So thank you for listening

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