Direct Deposit for Contractors and Freelancers: Is It Worth It?

Technology has certainly changed how everything in business and in life operates, hasn't it? We don't have to leave our phone to pay the mortgage, order groceries (and have them arrive!) or even have conversations with other likeminded individuals. Even most paychecks arrive via electronic methods these days ... unless, of course, you are a freelancer or contractor.

For freelancers or contractors, the bank still beckons to deposit checks, and it often takes at least a day to clear. Do you remember what that hassle was like? But some companies are using direct deposit for independent contractors to make payroll easier – both for the people doing the books and for the individuals doing the work.

Social Media Strategist Aliza Sherman Risdahl of Conversify! says that her company made the switch to direct deposit for their team of social media consultant contractors using Key Bank's direct deposit vendor payment plan. It costs the company about $10 a month, but she says that is made up for in time saved. "While the cost would be less to mail paper checks in terms of postage, the time savings is well worth it," says Risdahl. "Our bookkeeper sets up payments and triggers them at the end of each month upon receiving invoices."

The switch made sense for Risdahl's company and for the people working for it as independent contractors.

"As a virtual company, we've set out to do business startup differently. We want to leverage all the electronic services and solutions out there to be flexible, cost-effective and time-efficient. By using direct deposit, we are leveraging a service already available through our new corporate bank (we recently changed corporate banks to get better customer service and service offerings). Anything we can incorporate to increase efficiencies, save money, and keep overhead down is just smart business in this day and age," says Risdahl.

Are you considering a switch?  Here's some tips to get you started:

1. Look into your options: Checking with your corporate banking institution is a good place to start. Do they offer a vendor payment service? If not, is it time to change banks to take advantage of newer services? Risdahl also suggests checking out Software-as-a-Service options such as Workaday or Paycycle.

2. Do it if it makes sense for your situation: If you have an ever-changing array of contractors or freelancers that you work with, then direct deposit probably isn't a good option. However, if you have longer contracts (three months or more, for instance), then it can be worth the effort. David Yeghiaian of Unique Business Solutions, LLC set up direct deposit for his contractors who were engaged for more than six months through his payroll firm, ADP. "Depending upon the payroll firm you use, it may also make sense for any contractor or freelancer receiving more than $600 as the company then has to send a tax form at the end of the year (and many payroll companies do this if they are on the direct deposit system). If not, this is typically done manually or through one’s own accounting system (either way takes more time than through the payroll company)," says Yeghiaian.

3. Be careful: The term contractor or freelancer means that you pay for results. But if you have independent workers who are being managed on how tasks get done, then they might be really employees. To learn about the difference between a contractor and an employee, check out this page on the IRS website to educate yourself to make sure that you are classifying them correctly. After all, you wouldn't want to be doing anything illegal. Right?