Working with independent contractors is becoming increasingly common. There are millions of workers participating in the gig economy. A 2022 survey by MBO Partners found that there were 64.6 million independent workers in the United States.
Working with independent contractors includes figuring out how to pay them. The options you choose may determine which contractors you can work with.
Independent contractor vs employee
Let’s start with the basics. Independent contractors are paid an agreed upon amount for the completion of a set project or set hours of work—typically on a short-term basis.
Often, independent contractors are individuals who operate as their own business.
This differs from employees who work for a business on an ongoing basis for a set wage or salary.
While it’s the business’s responsibility to withhold payroll taxes and remit them for the employee, they don’t have the same obligation with independent contractors. Instead, independent contractors are responsible for reporting their self-employment income and paying the required taxes.
Employment laws don't apply in the same way to contractors. The terms of engagement are outlined in the contract, meaning how you work with contractors can vary on a case-by-case basis.
Laws regarding paying independent contractors accurately
While paying independent contractors comes with less reporting and responsibilities than an employee, there are still laws and requirements that need to be adhered to.
The biggest responsibility you have when paying independent contractors is providing IRS Form 1099-NEC to any contractor who was paid more than $600 in the calendar year.
Form 1099-NEC is used to report non-employee compensation. The business is responsible for filing two copies: one to the contractor and one to the IRS.
The purpose of Form 1099-NEC is for the IRS to verify what people report as self-employment income.
To ensure the 1099-NEC is filed correctly, you must request a Form W-9 from the contractor at the start of the engagement. A completed Form W-9 contains what you’ll need to complete the recipient information on Form 1099-NEC.
5 ways to pay an independent contractor
Paying contractors can be done in a variety of ways, but what payment options you offer depend on what your roster of independent contractors accepts.
It’s best practice to have a preferred payment method, but have the flexibility to meet the needs of your contractors, who often request digital payments.
Below is a table comparing 5 of the most common options with a more thorough breakdown further down.
1. Cash
Cash is still one of the most tried and true ways of making a payment, but it has its drawbacks.
For starters, cash works best if you’re in the same area as your contractor. As the world moves increasingly online, you’re likely working with contractors in other cities or even countries.
It’s also difficult to get exact amounts in cash. You might find yourself lugging around a mix of bills and coins just to settle a single invoice.
And if you lose cash, it’s gone for good. With checks or electronic payments, you have protections where you can cancel payments if something goes wrong.
2. Checks
Checks have the second longest history of payment methods after cash, tracing back to 9th century traders.
Their use continues to this day because it’s a convenient way of sending an exact amount to someone. Whether it’s by mail or handed off directly, it’s easy to get someone paid while having the funds automatically taken from your account.
However, checks also have valuable information on them that can be used to commit fraud.
The numbers running along the bottom of a check include the routing number, account number, and check number. A cunning fraudster can take that information and request fraudulent payments from the associated account.
Banks are smart to this and are taking steps to protect account holders from check fraud. While the risk shouldn’t stop you from using checks, it’s important to stay informed so you can catch a fraud attempt before it happens.
You can take an extra step to protect yourself by using a digital check instead of a paper check.
3. ACH payments
ACH stands for Automated Clearing House, an electronic network that connects banks across the United States for easy electronic payments. Banks submit transfers to the ACH network and it’s “cleared” regularly with all transfers being processed.
An example of an ACH payment is a direct deposit. The same network that helps you pay employees can be used to pay independent contractors.
There are two types of ACH payments: ACH credits and ACH debits.
ACH credits are a “push” transaction, meaning the sender initiates the payment and “pushes” the funds to the recipient’s bank account.
In contrast, ACH debits are a “pull” transaction. In these instances, the receiver initiates the payment by “pulling” the funds into their bank account (with the sender’s permission).
Since ACH payments are bank-to-bank transfers on a secured network, they have bank-grade security. However, you should still be mindful of who you provide your banking info to.
ACH payments have some limitations. For example, banks limit how much you can send with them. If you’ve tapped out your max amount, you won’t be able to make any more ACH payments until that limit resets.
The ACH network is also only cleared on business days. While a transfer might take 1–3 business days to hit the recipient's account, if it’s sent on a Friday or before a holiday, that ends up being closer to a full week before the money is received.
If you’re working with independent contractors internationally, you’ll have to find a different payment method. The ACH network only includes American banks.
4. Wire transfers
A wire transfer is similar to an ACH transfer, however it doesn’t use the ACH network to process a transfer. Instead, international secure networks like Fedwire or SWIFT process the transaction with banks working together to settle the payment.
Wire transfer processing times vary depending on where the money is going. A domestic wire transfer can be completed in as little as 24 hours, while international wire transfers can take up to five days.
While they have a similar ease of use to an ACH transfer, the costs are often higher. Wire transfers are more costly for banks since there isn’t an easily accessible infrastructure to process payments on, and they pass those costs onto the sender.
5. Online payment solution
It’s possible for independent contractors to use third party payment platforms to take payments. For example, they may accept payments through PayPal or their invoicing solution like Wave.
When the contractor uses one of these platforms, the business will need to pay using a credit card or connected bank account.
While these platforms typically have processing fees, those costs are imposed on the contractor, not the business. They pay a fee on every transaction for the convenience and dependability of using the payment platform.
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Leverage automation to pay independent contractors and file 1099s with ease
Figuring out contractor payments doesn’t have to be a pain. The accounts payable solution you use can expedite the process with flexible payment options that work for your contractors.
BILL helps you capture, approve, and pay invoices all in one platform. Whether it’s an ACH transfer, credit card payment, paper check, echeck, or international wire transfer, you have the ultimate flexibility to make whatever payment your contractor prefers.
In addition, as part of BILL Accounts Payable, 1099 Filing lets you collect, create, and file your 1099s directly with the IRS, all in one place. It’s the simple 1099 solution. Give it a try, and you’ll wonder how you did it any other way.
Paying independent contractors FAQ
How is an independent contractor paid?
An independent contractor is paid based on the unique terms of their contract.
Some contractors may request a specific payment method or schedule they want to be paid on. They may work on an hourly rate or per project basis.
Should I pay an independent contractor with cash?
While it’s possible to pay an independent contractor with cash, it has some risks.
Cash is best used when you can hand the money directly over to the contractor. If cash gets lost in the mail, there’s no protection to recover it, unlike a check which can be canceled.
It’s also inconvenient to get cash, especially in exact amounts. Unless you have cash on hand or you’re close to a bank, you’re dedicating time to getting the cash and coordinating with your contractor to give it to them.
Is it safe to pay a contractor with a check?
Lots of businesses confidently pay contractors by check, but there can be hesitation from both the business and the contractor.
For the business, their bank information is clearly written on the check. That’s a serious vulnerability if there’s any lack of trust in the contractor.
For the contractor, they don’t want to be left in the lurch if the check bounces.
The better the relationship, the more confident both sides will be in payments by checks.
Who is responsible for filing independent contractors’ taxes?
Independent contractors are responsible for filing their own taxes. They report their total earnings to the IRS and pay self-employment taxes, a combination of social security and Medicare, and federal income taxes.
The only tax obligations businesses have are filing Form 1099-NECs if they cross the payment threshold of $600 per contractor in the calendar year. One copy is provided to the contractor and another is submitted to the IRS.
While contractors will use Form 1099-NEC as part of their tax filing, the business doesn’t file or pay any taxes on the behalf of the contractor.
How much can you pay an independent contractor without a 1099?
Once a business pays a contractor $600, or more in a calendar year, they’re responsible to provide a Form 1099-NEC to both the contractor and the IRS. But if you don’t pay contractors more than $600 in the calendar year, you have no forms you’re required to submit.
