How to Pay Contractors: 5 Ways To Pay Independent Contractors

There are a lot of benefits for a business to outsource work to an independent contractor or freelancer, sometimes also referred to as a 1099 contractor. A 1099 contractor is the same as an independent contractor—someone who works but doesn’t have an employer. Using independent contractors can be cheaper than hiring an extra set of employees since you don’t have to withhold taxes. But what’s the best way to pay independent contractors that you hire?

You look into the frequency contractors get paid and account for this when drafting the agreement with your chosen independent contractor. Will this be a single, one-off project? Can it get completed in less than a week? Or will it be a month-by-month invoiced rate for an ongoing job? Depending on how you set up these terms according to your needs, your payment method for your independent contractor can vary greatly. 

Here’s What We’ll Cover:

Things to Consider When Deciding How to Pay Contractors
5 Best Ways to Pay an Independent Contractor
Conclusion
Frequently Asked Questions

Things to Consider When Deciding How to Pay Contractors

Before you decide the best way to pay 1099 contractors from your business, there are some other factors you need to consider. One of the most important is your business’s tax needs. 

Independent contractors file their taxes using a 1099 form, which is used to report payments from parties that aren’t employers. Likewise, you’ll need to report your payments to contractors on a 1099 NEC form. Preparing the necessary documents for paying a 1099 contractor is a fairly simple process, but ensuring all information is accurate and that independent contractors are appropriately classified, is of the utmost importance. Any discrepancies in your tax information can lead to complications during tax time, so double-check everything for mistakes.

You should also determine the number of contractors you will hire and how frequently they will get paid. Doing this will help you forecast expenses and cash flow for the future of your business.

How many contractors do you need to hire? One? A few? A whole team? Planning ahead when hiring your contractors can help save you time with payroll processes. You can ensure you have the necessary tax forms organized and adequately track relevant hours.

Once you have a sense of all that information, you can decide which payment method to use, determine how the contractors will get paid, and how frequently payroll services will happen. The best way to pay contractors in a way that works for everyone is to first discuss details with the contractor you will hire. Also, be sure to look and see if there are any transfer fees, processing fees, or other payments to be aware of.

5 Best Ways To Pay an Independent Contractor

Understanding how to pay contractors is one of the most important parts of engaging additional help for your business. The best payment method for contractors depends greatly on your business and the type of contractor you’re looking to hire. 

One payment method might work well for one business but might not work at all for another. That’s why it’s so important to look into the frequency you will need to pay contractors and how many you will hire in order to find a solution that works for all parties.

Here are the 5 best ways to pay independent contractors.

1. With a Check

A personal check is a simple, tried, tested, and fairly cheap way to pay your contractors. With checks, you don’t need to download an app or sign up for a payment transfer service. Simply grab your checkbook, fill out the relevant information, and send it to your independent contractor. Checks can be a reliable form of payment, but they also have a few downsides to be aware of.

One of the biggest downfalls is the time it takes for a check to get delivered and processed. A paper check takes time to get mailed to the contractor. And then after it gets deposited, there will often be an additional hold until the check clears. This hold can lead to delays in payment for your contractor. Some checks that are mailed might end up being lost, in which case you might have to stop paying the original check and reissue the check to your contractor, causing more delays and more work (and fees). 

That said, eChecks have become more and more common over the years. They work exactly the same as a paper check, they’re just digital. You would email the eCheck to the contractor, and they can deposit it directly to a linked bank account.

Your independent contractors will still have to wait 2-5 business days for the hold on an eCheck to clear. But this is still a definite improvement over the time it takes for a paper check to arrive in the mail.

In summary, checks are a simple, reliable option for paying independent contractors, but they come with the downside of a slow payment process. Checks tend to work best to pay independent contractors only hired once or sporadically. If regular, recurring payments are needed, another form of payment might work better.

2. Wire Transfers

Sending payment through a wire transfer is one of the quickest ways to make a payment. It could take a little bit longer if you have to send money to international contractors. But domestic transfers can oftentimes get processed within 24 hours of the payment being sent.

It’s worth looking into the fees that come with wire transfers. The fees could add up fast depending on how often you send payments. Both the sender and receiver usually get hit with a fee, which varies between domestic and international wire transfers.

If you are sending small and routine payments, the fees that come with sending a wire transfer might not make the most sense. Look into the frequency you will need to pay contractors to better understand the best payroll system for paying freelancers and other independent workers.

3. Direct Deposit

Using direct deposit payments is one of the most common ways to pay employees, contractors, and freelancers. All you need is the relevant bank account information from the contractor, and payment is sent directly to their account. If you want to learn more about the process of setting up direct deposit, follow our guide on How to Set Up Direct Deposit for Employees.

Direct Deposit can be a good option if you regularly send payments or use accounting software to automatically send recurring payments. Plus, transfers are completely paperless and secure. Depending on a financial institution’s rules, most direct deposits are available for your independent contractors just 1-2 business days after they are sent. There are various tools and software that can help ease up the process. You can follow our guide Direct Deposit Payroll Software where we have compiled a list of top software to help you choose the right option based on your business needs.

4. PayPal

An online payment app like PayPal is a great option for business owners to pay contractors. You simply link your bank account with your PayPal account to transfer funds. Once you have funds in your PayPal account, you can send them directly to the recipient.

The recipient will then receive the funds in their own PayPal account. They can use PayPal to make purchases with available funds, or they can transfer the funds directly to their bank account. You should look into whether or not there will be any processing fees for business transactions, as these charges can add up when paying contractors repeatedly.

5. Accounting Software

There’s another way to deal with paying contractors—cloud-based accounting software, such as the one offered by FreshBooks. In partnership with Gusto, we offer a flexible, easy-to-use payroll solution designed for small businesses that seamlessly integrates with FreshBooks. With unlimited payrolls, automatic tax filings and payments, direct deposit, and much more, there’s never been a simpler way to pay your contractors.

The other great benefit of using accounting software to pay independent contractors is how all payments are automatically filed with your other finances. FreshBooks automatically categorizes payroll as an expense and will seamlessly generate all tax forms and data you need for the tax season. 

Conclusion

When it comes to understanding how to pay contractors, no perfect solution will work for every company and independent contractor. And when you consider that you may have to pay a contractor in more than one payment method, it becomes clear why research on the matter is so important. Some contractors have different preferences or only accept payment in a certain way. This can make things a little tricky, but the good news is that there are several options out there for you.

Understanding the tools and resources available to you can help you make the right decision. Use one or more of the five payment methods outlined above to pay your independent contractors. They provide a range of flexibility to help make sure contractor payments are made for the work they complete without delay.

Did you enjoy reading this guide? Head over to our payments category for more content.

FAQs on How to Pay Contractors

Do you have more questions about paying your contractors in a secure, reliable, and efficient way? Here are the most commonly asked questions about payment methods for independent contractors and freelancers.

What is the safest way to pay a contractor?

Generally speaking, direct deposit is the most secure way to pay a contractor. This avoids payment being routed through email or physical mail, which provides fewer vulnerabilities in security. You can usually set up direct deposit with your financial institution or use it through accounting and payroll software like FreshBooks. 

What are typical payment terms for contractors?

When hiring an independent contractor or freelancer, it’s common for them to provide their payment terms. These include their pricing strategy (hourly, per-project, etc.), the currency to be paid in, their preferred payment method, and the details of their billing schedule (when/how often they expect to be paid).

Is it normal to pay a contractor half up front?

It’s not uncommon for contractors to ask for some payment up front, but half of their estimate can be excessive. Before agreeing to up-front payment terms, look into your contractor’s industry to learn about its standards. You may also be able to negotiate, such as paying for materials up front and paying the balance in installments according to project milestones.

How long do you have to pay a contractor’s invoice?

Normally, the contractor will include a payment due date on their invoice (or in the statement of work or contract), which will indicate the timeframe in which you must pay the invoice. If you wait until after this date, you’ll likely be liable to pay late fees. 

How much can you pay an independent contractor without a 1099?

For payments of $600 or less, you don’t need to fill out and send a 1099 form to the contractor. For any amount higher than $600, however, a 1099 form is required by US tax law.

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