How Do Contractors Typically Get Paid? Payment Methods and Legal Guidelines

Contractors receive payments through direct deposits, checks, payroll services, or online transfers, following legal and tax regulations. Proper classification, documented agreements, and compliance with IRS reporting ensure smooth transactions and avoid penalties.

By Brad Nakase, Attorney

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Table of Contents

1. How should you pay a contractor?

2. Employee vs. Independent Contractor

3. How to Pay Independent Contractors: 6 Easy Steps

4. Regulations Ensuring Fair Compensation for Independent Contractors

5. Dangers of Incorrectly Classifying Workers or Independent Contractors

6. In Conclusion

How should you pay a contractor?

There are a lot of forms and rules that go along with managing wages, which can make it hard to pay independent contractors. You can take a look at this payment guide for independent contractors to help you pay them more easily and stay in line with federal rules. You may also hear independent contractors referred to as 1099 workers, named after Form 1099 that is used to report income to the IRS. By understanding how to properly pay 1099 employees, you can steer clear of the consequences of noncompliance.

Aside from outlining the differences between employees and independent contractors, this article also provides information on legal and tax responsibilities, how to pay independent contractors, and suggestions for determining payment rates and frequency.

Employee vs. Independent Contractor

The purpose of hiring an independent contractor is to finish a temporary job. Not only is this type of employee not bound to a set schedule, but they also have complete autonomy over how they carry out their responsibilities. They also supply their own equipment for the job. In addition, they do not qualify for benefits like health insurance, paid sick leave, or vacation time because they are not considered permanent employees.

On the other end of the spectrum, an employee is required to carry out continuing responsibilities for the company in a manner that is dictated by the company’s policies. They could be given the space and tools they need to do their jobs. Not only that, they get their paychecks on time and get to reap the perks that the company offers to its workers. Furthermore, you may look at the IRS’s rules for identifying workers.

How to Pay Independent Contractors: 6 Easy Steps

There is no need to worry about benefits administration or tax calculations when paying independent contractors. You should, however, pay close attention to the steps you take when compensating contractors for the work they do.

Here are the main points to keep in mind when you need to know how to pay a contractor who is not an employee.

Workers Need to Be Categorized

You have to be sure a person is an independent contractor before you can pay them. The same goes for 1099 workers. When trying to figure out if an employee is an independent contractor, the IRS says that companies should look at these things:

Actions: Verify if your employer has any say over the worker’s performance.
Money: Think about the worker’s money and how you handle it, including who pays them and who provides them with equipment and supplies.
Type of relationship: Think about how you and the employee interact with regard to things like written contracts, continuing employment, and employee perks.

Employees are considered independent workers if they have control over the above things. Still confused about a worker’s classification? Send in Form SS-8 to the IRS. Within six months of receiving your application, the IRS will assess it and provide you with a formal categorization. Also, be sure to research any specific regulations in your state’s code, like California’s new AB5 statute, that you may be required to adhere to.

Establish Payment Terms and Period

If you’re working with an independent contractor, rather than paying them a salary, you should negotiate their pricing per project or per hour, as well as the frequency of payment.

Compensation for Contractors

Prior to the contractor beginning any work, you should settle on a payment schedule. Rates for comparable work and past hiring might give you a good idea of what to expect. Next, you should compare these with the quotations that the contractor has given you.

Keep in mind that any money you spend to an independent contractor will go toward their taxes. It doesn’t take long for federal and state income taxes to add up to 30% of their pay, so you might want to pay them more than you would an employee who earns benefits.

Regularity of Contractor Payments

It is common practice for contractors to send out invoices monthly or even quarterly. But many contractors would to have payment periods that are more regular, such as weekly payments. Companies and contractors can better manage their cash flow if they get payments more often. Before you start processing payments, make sure you and your contractors have a plan in place.

Get a filled-out W-9 form

An independent contractor must fill out a W-9 form once you have agreed upon payment terms and rates. Details like the employee’s name and SSN are part of this federal tax form. To ensure that you are prepared to submit Form 1099 reports for their earnings at the end of the year, have them fill out this form before they begin working for you.

If you want to save time on paperwork, you may employ payroll services. Simply invite the contractors to use your service and share the link with them via email.

Determine Costs

Since there are no withholding taxes, it is straightforward to calculate compensation for independent contractors. If a contractor charges by the hour, they must keep meticulous records of the time they have worked, down to the minute, as well as the services rendered. In this sector, using time-tracking software helps to eliminate errors. Then, reimbursement is based on the total number of hours worked.

Regardless of the amount of time the contractor spends on certain activities, costs for per-project rates are fixed in advance. Organizations might choose to pay 25% in advance and the remaining balance upon completion of the project.

Handle the contractor’s payment

Online banking, payroll, checks, and even cash (not advisable due to the absence of a paper trail) are all viable options for paying independent contractors.

Online Payroll Deposits

Think about using a payroll app or software that assists with contractor payments if you’re dealing with several contractors. As a contractor, you may set up an account on the site and connect it to your funded account. This makes it easy to send payments by storing information like their full name, worker identification, payment rate, and payment times.

The Direct Deposit Method of Payment

Here, payments are made electronically via networks of automated clearing houses (ACHs). The following information is required in order to pay a contractor electronically: routing number, account number, account type, and the kind of transaction (recurring or one-time).

Paying with a Check

To make a payment by check, you must keep track of the following details: the name of the contractor, the amount due, the total number of hours worked, the payment rate, and the date of payment. After that, either write up a check and send it to the contractor’s address or put it somewhere safe where they can pick it up.

Get Your Form 1099 Ready

Companies must disclose any payments made to contractors in excess of $600 over the previous year to the Internal Revenue Service by January 31. Help the Internal Revenue Service (IRS) keep tabs on your tax obligations using the 1099-NEC form.

The gathered W-9 papers can provide you with the contractor’s name, SSN, and address. Distributing and assisting with the submission of 1099 forms to the IRS is another useful feature of payroll solutions.

Regulations Ensuring Fair Compensation for Independent Contractors

To learn how to pay an independent worker, you need to know the rules that apply. The proper way to compensate an independent contractor can be found in applicable federal and state statutes. Here are some examples of federal laws:

The deadline for submitting Forms 1099-NEC to the Internal Revenue Service is January 31. Not only should you retain one copy, but you should also submit one to the appropriate federal and state tax authorities.
If an independent contractor takes too long to provide their social security number or tax ID, you are required to begin withholding 24% of their income right away.
There could be further regulations that states impose on companies. There are fines and punishments for breaking these rules, so you should definitely follow them.

Dangers of Incorrectly Classifying Workers or Independent Contractors

Companies that misclassify workers as independent contractors or don’t file the right forms on time can be fined based on the size of their business and the length of time they were doing so. The following are some of the penalties:

A maximum of $1,000 for each employee who is mistakenly categorized
Settlement of up to three percent of the misclassified worker’s wages
Full payment of owed FICA taxes
$50 for each W-2 form that hasn’t been filed
Up to one year in jail

Payment methods for independent contractors are likewise governed by state law, which also establishes fines for violations. So, for example, in Virginia, the maximum fine for a company’s first default is $1,000, and for successive violations, the maximum fine is $5,000. Further penalties include a one-year ban on some government contracts and a two-year ban for repeat offenders.

Follow federal requirements and check out your state’s DOL website for business-specific legislation to stay out of trouble.

In Conclusion

If you pay close attention to the process, which includes correctly categorizing personnel, filling out documents, and noticing variations, paying an independent contractor can be straightforward. Your company may hire as many independent contractors as it needs without worrying about fines and penalties for noncompliance.

Have a quick question? We answered nearly 2000 FAQs.

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How Do Contractors Typically Get Paid? Payment Methods and Legal Guidelines

How should you pay a contractor?

Employee vs. Independent Contractor

How to Pay Independent Contractors: 6 Easy Steps

Regulations Ensuring Fair Compensation for Independent Contractors

Dangers of Incorrectly Classifying Workers or Independent Contractors

In Conclusion

What Is a Pay Stub and Why It Matters for Employees and Employers

What Are the Proper Steps to Fire Someone in California?

How Long Does a Misdemeanor Stay on Your Record in California?

How Do I Prepare a Script for Firing Someone?

What Is Involved in a PAGA Lawsuit?

What Are the Rules for 10-Minute Breaks?

Can I Work Six Hours Without a Lunch Break?

What Can I Do If My Employer Didn’t Pay Me on Payday?

What Qualifies as a Hostile Work Environment in California?

When Is a Doctor’s Note for Work Required in California?

What Does California Law Say About Final Paycheck Rules?

Can an Employer Deny a Doctor’s Note?

How Much Can You Sue an Employer for Misclassification?

How Serious Is an EEOC Complaint?

Do You Have Sample Letters for Termination of a Contract?

What Is a WARN Notice in California?

What Is FICA and How Does It Impact Payroll Taxes?

What Is At-Will Employment and How Does It Impact Employee Rights?

Employers Should Exercise Caution When Terminating Employees After Disability Leave

What Is FUTA? 2025 Rates and How to Calculate FUTA Tax

What Is the Difference Between a 1099 Contractor and an Employee?

How Do Contractors Typically Get Paid? Payment Methods and Legal Guidelines

What Is the Definition of a Non-Exempt Employee?

Can Union Representatives Be Present at Disciplinary Meetings?

What Is an FTE (Full-Time Equivalent)?

What Are the Signs of Unfair Treatment at Work?

What Is a Statutory Employee on a W-2 Form?

What Laws Protect Employees From Workplace Bullying?

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