How to Pay Independent Contractors in 5 Easy Steps

This article is function of a larger series on How to Do Payroll. Heather is a staff writer and payroll specialist with several years of experience working directly with small business owners. Her expertness allows her to deliver the best answers to your questions about payroll. Charlette has over 10 years of feel in accountancy and finance and 2 years of partnering with HR leaders on freelance projects. She uses this extensive experience to answer your questions about payroll. Paying mugwump contractors is elementary and frequently cheaper than paying employees because employers don ’ t have to withhold or pay taxes. Although year-end reports are required to show amounts paid, department of labor laws that cover employees—like minimum wage—don ’ metric ton give. We walk through the five steps for paying autonomous contractors below.

If you ’ rhenium looking for an slowly way to pay independent contractors, consider Gusto. You can pay contractors through target down payment, and all payments will be reported at the end of the year on IRS Form 1099. In addition, you ’ re only charged during the months you actually pay your contractors, and even then, it ’ s only $ 6 per person monthly. Sign up for a 30-day free trial today .
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Step 1: Determine How to Pay Contractors

Paying independent contractors isn ’ t difficult, but it is different from paying employees. Determining how to pay independent contractors ( using payroll software in-house five outsourcing to a payroll service ) and how much to pay are some of the first decisions you ’ ll make to ensure the process goes smoothly .
Unlike with employees, you don ’ triiodothyronine typically pay contractors a wage. alternatively, you should consider whether an hourly or per-project price would be more appropriate, their pay rates, and any payroll taxes to consider .

Before starting any knead, you and your contractor should reach an agreement regarding pay. If you ’ ve hired contractors for like function earlier, you may already have an theme as to the going rate ; if not, you can call around and request an anonymous quote from your competitors. Contractors normally have their own rates, so you ’ ll want to ensure you ’ re on the lapp page .
besides, consider the type of knead your contractor performs ; if it ’ mho work for which it ’ sulfur difficult to estimate the ask time to complete, a per-project rate sounds ideal. Being unable to estimate costs is bad for your business and could create conflict between you and the contractor if you ’ re charged more than expected .
As you determine how you ’ ra paying, be surely to reflect on the length and size of the project .

  • Is it a month-long project? Or will the contractor finish it in a week?
  • How much time will your contractor need to devote to the project daily?
  • Are you expecting a big project to have a quick turnaround?

Depending on your answers and the contractile organ ’ mho terms, you may need to pay a down payment or make payments at predetermine intervals. If you ’ rhenium working with a contractor for the first meter, be elastic ; some contractors have had bad experiences with clients using their services without always issuing requital .
Another indicate to keep in mind when negotiating a project or hourly rate is that independent contractors pay taxes on the money you pay them. You ’ rhenium not required to withhold the taxes, but it is significant to realize that the contractile organ won ’ deoxythymidine monophosphate be able to pocket all of the money you pay .
They ’ ll pay union and state income taxes in addition to local taxes—if they ’ rhenium in an area like New York City that requires it. They ’ ll besides pay self-employment tax of 15.3 % ( 12.4 % for Social Security and 2.9 % for Medicare ). In 2022, lone the first $ 147,000 of earnings is topic to the Social Security fortune .
These withholdings can promptly add up to 30 % or more, which explains the need to pay contractors more than you would an employee. Employees pay one-half of the self-employment tax, although it ’ sulfur termed Federal Insurance Contributions Act ( FICA ), and employers pay the other one-half .

once you and your contractile organ agree on payment terms—including project due dates, required deposit, rates, and so forth—you ’ re ready to complete an official. This solidifies the cover and binds you both to deliver consequently .

Step 2: Collect W-9 Forms

once you decide how much and much to pay your contractors, you ’ ll have them complete a W-9 Form, which includes personal information, like name and Social Security number. It ’ s significant to have all contractors complete this form before beginning shape because you ’ ll practice it to report their annual earnings on form 1099 at year-end .
W-9 form.
Download W-9 Form

Pro Tip: Require each autonomous contractile organ you work with to complete the W-9 Form before beginning any ferment .
There have been rare cases when independent contractors refused to provide their Social Security number or entered an wrong Social Security number on their W-9 ; when that happens, the IRS will notify you to immediately begin withholding 24 % of the contractor ’ s pay for backup withholding ( taxes ). In this case, you ’ five hundred withhold, regardless of the contractor ’ randomness discouragement, and remit to the tax agency as instructed .
If you opt to use payroll software or a serve like Gusto, collecting the W-9 is elementary. Once you add contractors to your account, it will email them a link they can use to start their on-line accounts. It ’ ll besides prompt them to provide all of the W-9 information before storing it within the application, saving you time and money. Sign up for its detached 30-day test .

Step 3: Set Up Contractors in Your Payroll System

once you ’ ve collected the W-9 Form, you ’ re ready to set up contractors in your payroll system, which may consist of a notebook, Microsoft Excel, or payroll software. however you choose to do payroll, you need to start by ensuring you ’ ve recorded all of your contractors ’ information ; this will help prevent any hiccups on payday.

Step 4: Process Payments to Independent Contractors

After frame-up, you won ’ metric ton have much to do until it ’ second time to make the first payment. If the agreement requires a deposit before beginning work, you ’ ll need to process it immediately after frame-up .

Select the Payment Method

There are many different ways to pay your team for their cultivate. You can pay using cash ( not recommended due to miss of composition chase ), check, direct deposit, and even pay cards, which are reloadable prepay debit cards employers use to deposit wages. Be mindful of processing times ; send sediment, for exercise, requires up to four days to process .
direct deposits normally cost extra money if you ’ re not using a payroll serve and go through your depository financial institution rather ; however, if you only need to process a few payments, you can print checks online for free. Most of the best payroll software offers direct deposit at no extra charge, and some will guide you through printing your own checks using the system .
pay cards are typically offered by the larger payroll providers, like Paychex, so while the pay menu program is rid, the payroll services you ’ re required to purchase before being approved for the broadcast are normally more expensive .

Step 5: Send 1099-NEC Forms

As the end of the year approach, you should be quick to prepare 1099-NEC Forms for each contractor to whom you ’ ve paid more than $ 600 within the year. You ’ ll have to distribute a copy of the 1099 to each contractile organ along with the IRS and submit tax means ( if there are state income taxes ), and it must include the sum total you paid during the year .
Form 1099-NEC.
Download 1099-NEC Form
Don ’ t forget to keep a copy for your records, and be mindful of the Jan. 31 deadline to report any payments made during the previous calendar year. You ’ ll use the W-9 forms you collected from contractors before them beginning study ; transfer information ( such as name, address, and Social Security number ) to the 1099-NEC to ensure the year-end reports you submit to the IRS are accurate .
The 1099-NEC Form helps mugwump contractors calculate how much they owe in taxes. It besides helps the IRS track contractors from whom they should receive tax payments .

It ’ mho crucial to note that this serve will look very different if you ’ ra process payments for international contractors. You ’ ll often be dealing with international banks and rally rates and handling different forms. International contract companies are required to submit a W-8BEN-E to your business—or a W-8BEN if the contractor is operating as an individual—before getting paid .
Processing payments for external contractors can be confuse, but there are many payroll services that can help take the load off you. If you ’ ra concerned in a payroll service that can help you, check out our steer to the best international payroll services .

Laws for Paying Independent Contractors

Learning how to pay independent contractors involves understanding the legalities surrounding it. One major error some companies make is confusing employees with independent contractors. Federal law is pretty rigid in differentiating between the two ; frankincense, misclassifying can result in thousands of dollars in fines and taxes owed .
Keep in judgment that contractors control how they deliver the finished project and how much they work. The alone gene you determine is how the final product should look .

Per federal laws, your responsibilities when paying independent contractors are :

  • Sending 1099-NEC forms: Send 1099-NEC forms before Jan. 31 so contractors can report their income and file taxes. Also, submit a copy to the federal and state tax agency, if applicable. It’s also a good idea to keep a copy on hand.
  • Starting backup withholding if there’s no Social Security number: If the contractor fails to provide a Social Security number or tax identification number (TIN) or provides an incorrect one, employers must begin withholding 24% from each payment processed immediately.
  • Disregarding labor laws: This includes the minimum wage, overtime, unemployment compensation requirement, workers’ compensation, and so forth. These only apply to employees, so contractors are not covered.
  • Not withholding payroll taxes: Independent contractors don’t pay FICA taxes and instead pay self-employment taxes. Income taxes are also due, but contractors pay these when they submit their tax forms for the prior year.

many states regulate the classification of independent contractors, thus in addition to receiving fines for misclassifying on the federal level, you can besides receive penalties from your state. It ’ s a good idea to visit your state of matter Department of Labor ( DOL ) locate because some states have more restrictive classification rules for independent contractors .
For exercise, California revised its regulations in 2018 to the ABC screen that requires three factors to be met before classifying a proletarian as a contractor .

  • A: The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  • B: The worker performs work that is outside the usual course of the hiring entity’s business.
  • C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

There are numerous factors to consider when classifying independent contractors. The DOL has an opinion, as does the IRS and many states. Although there are no arduous and fast rules, If you ’ rhenium ever confused, accomplished and submit Form SS-8 to the IRS ; the IRS will review and make an official classification decision, but it could take up to six months .

We ’ ve researched payroll providers that will help you pay contractors easily. If you ’ ra interested in payroll software but need help deciding which is best for your business, check out our guide to choosing contractile organ payroll services .

Bottom Line

Determining how to pay independent contractors isn ’ t besides complex if you set up an effective system to help you track contractor and payment information. You can use a notebook, Excel, or payroll software to help, and costs range from $ 0 to $ 6 a month for one contractor .
If you ’ re looking for payroll software that supports contractile organ payments, consider Gusto. It collects all of the data needed to prepare 1099-NEC forms at year-end. It besides makes it easily for contractors to review their payments and tax documents by prompting them to set up an on-line report. In addition to giving contractors dominance of their paperwork, you save money and time by not having to print and distribute tax documents. Sign up for its 30-day detached trial nowadays .
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