Payment by Fees: Everything You Need to Know

Payment by fees is a compensation method designed for independent professionals who provide services without maintaining a formal employment relationship. It’s a key arrangement for freelancers, consultants, advisors, and specialists who work on projects or specific tasks. This guide will walk you through its main features, tax obligations, benefits, and what to keep in mind when drafting service contracts.

What Is Payment by Fees?

It’s the compensation an independent professional or freelancer receives for the services they provide autonomously. Unlike a salary, there is no employment subordination: the worker retains full freedom to set schedules, methods, and work conditions, while also being responsible for reporting and paying their own taxes.

Key Characteristics

• Professional independence: The service provider works autonomously, without direct supervision.
• Project-based services: Applied to specific projects, consulting, design, legal services, and more.
• Tax responsibility: The professional issues invoices or fee receipts and pays their own taxes (income tax, VAT, or others depending on the country).
• No employment link: It does not include employment benefits such as paid vacation, bonuses, or social security—unless separately agreed.

Advantages and Disadvantages

For the Company or Client

Advantages:

• Flexibility to hire specialized talent on a per-project basis.
• Savings on payroll, social security, and labor procedures.

Disadvantages:

• Less control over schedules and work methods.
• Risk of misclassification if the contract resembles an employment relationship.

For the Professional

Advantages:

• Greater autonomy to set rates, choose clients, and select projects.
• Ability to work with multiple clients at once.

Disadvantages:

• Responsible for bookkeeping, taxes, and social security contributions.
• No traditional employee benefits like paid leave or vacation.

Tax Responsibilities

Independent professionals are responsible for invoicing and reporting taxes in the country where they provide services. For example:

• Mexico: VAT (16% in most cases) and progressive income tax (ISR).
• Colombia: Registration as an independent worker with DIAN, plus health and pension contributions.
• Argentina: Registration as monotributista or self-employed, plus income tax.

Each country has its own invoicing and tax rules, making it essential to understand local requirements or hire an accountant for support.

Payment by Fees vs. Salary

AspectPayment by FeesSalaryEmployment relationshipNo subordinationEmployer–employee contractTaxesPaid by the professionalWithheld and paid by employerBenefitsNo benefits or paid leaveIncludes statutory benefitsFlexibilityHigh: professional sets schedules and methodsLow: subject to company policies

Service Contracts

Even though no employment relationship exists, a clear written contract is essential to protect both parties. It should include:

• Fees: Total amount or hourly/project rate, and payment method.
• Payment method: Bank transfer, digital platforms, cryptocurrency, etc.
• Service description: Scope, deliverables, and conditions.
• Deadlines: Start date, milestones, and completion.
• Additional clauses: Confidentiality, intellectual property, penalties for breach.

Tip: Ask for an advance payment when working with new clients to ensure mutual commitment.

Examples of Professionals Paid by Fees

• Lawyers and accountants for specific advisory services.
• Architects and engineers for defined projects.
• Medical specialists for private consultations.
• Freelance designers, writers, and developers.
• Marketing, tech, or HR consultants.

Rights and Precautions

Although independent professionals are not employees, they have the right to receive the agreed payment and can take legal action if not honored. If the arrangement starts showing signs of an employment relationship (fixed hours, direct supervision, workplace imposed), it may be reclassified as an employment contract, requiring the client to provide full labor benefits.

FAQs About Payment by Fees

1. Do I need to register to issue invoices?
Yes. In most countries you must register with the tax authority (e.g., RFC in Mexico, DIAN in Colombia) to issue valid invoices.

2. Do I have to charge VAT?
It depends on the country and type of service. In Mexico, for example, VAT is 16% except for certain exemptions.

3. Can I work with multiple clients?
Yes. That’s one of the main advantages of payment by fees: the freedom to serve several clients at once.

4. What if I don’t get paid?
You can file a legal claim through labor or civil courts, depending on local law and your contract.

Payment by fees is an excellent option for those seeking flexibility and autonomy—whether it’s companies hiring specialized talent or professionals managing their own time and rates. However, it also brings more tax responsibility and requires formal agreements.

Ready to structure your business safely and comply with U.S. legal requirements? At Openbiz, we help you create your company and set up administrative and tax management, so you can work with independent professionals—or as a freelancer—with complete confidence. Let’s build your business foundation together with expert support.

‍