Paying an independent contractor starts with collecting the right tax form, choosing a payment method, and reporting what you paid to the IRS at year’s end. The process is simpler than running payroll for employees, but it comes with specific requirements you need to follow to stay compliant. Here’s how to handle it from start to finish.
Collect a W-9 Before You Pay Anything
Before you send a contractor their first payment, ask them to fill out IRS Form W-9. This form gives you their legal name, business name (if applicable), address, and taxpayer identification number (either a Social Security number or an Employer Identification Number). You need this information to file your tax reports at year’s end.
Keep the completed W-9 in your records. You don’t send it to the IRS, but you’ll pull from it when you prepare the contractor’s 1099 form in January. If a contractor refuses to provide a W-9, you’re required to withhold 24% of their payments and send that amount to the IRS as backup withholding.
Make Sure the Worker Is Actually a Contractor
Misclassifying an employee as an independent contractor can result in penalties for unpaid payroll taxes, back wages, and benefits. The IRS looks at three categories of evidence when determining whether a worker is a contractor or an employee.
- Behavioral control: Does your company control how and when the worker does their job? If you dictate their schedule, require them to work on-site, or train them in your specific methods, the IRS is more likely to view them as an employee.
- Financial control: Does the worker have their own business expenses, use their own tools, and have the opportunity to profit or lose money on a job? Contractors typically invoice for completed work rather than receiving a regular paycheck.
- Type of relationship: Is there a written contract? Does the worker receive benefits like health insurance, vacation pay, or a pension? Is the work they perform a core, ongoing part of your business? Employee-like benefits and an indefinite relationship point toward employment.
No single factor decides the classification. The IRS looks at the full picture, weighing the extent of your right to direct and control the worker. If you’re unsure, you can file Form SS-8 with the IRS and request a formal determination.
Choose How to Send Payment
You have several options for actually getting money to a contractor. The right choice depends on how often you pay them, whether they’re local or remote, and how much you want to spend on transaction fees.
Check or Direct Deposit
Writing a check costs almost nothing beyond the price of the check itself, and many small businesses still use this method for local contractors. Direct deposit through your bank (ACH transfer) is faster, often free or very low cost, and creates a clean digital record. If you go the ACH route, you’ll need the contractor’s bank account and routing numbers.
Payment Platforms
Digital platforms like PayPal, Venmo for Business, Zelle, and Square let you send payments quickly using just an email address or phone number. Fees vary by platform and transaction type. Square, for example, charges 2.6% plus 15 cents per in-person transaction on its free plan, and 3.3% plus 30 cents for online transactions. On a $1,000 payment, that online fee works out to about $33.30. Some platforms offer lower rates on higher-tier plans that come with monthly subscription fees.
Who pays the processing fee is a matter of agreement between you and the contractor. Some businesses absorb the cost, while others specify in their contract that fees are deducted from the contractor’s payment. Spell this out before work begins to avoid surprises.
Wire Transfers
Bank wire transfers are fast and reliable, especially for large payments. Domestic wires typically cost $15 to $30 per transfer, and international wires can run $35 to $50 or more depending on your bank. For regular, smaller payments, wires are usually more expensive than necessary.
Set Clear Payment Terms in Your Contract
A written contract protects both sides and removes ambiguity. Your agreement with a contractor should cover the payment rate (hourly, per project, or retainer), when invoices are due, and how quickly you’ll pay after receiving one. Net 30 (payment within 30 days of the invoice date) is common, but many contractors prefer Net 15 or even payment upon completion.
The contract should also specify what the contractor is delivering, who owns the finished work, and how either party can end the arrangement. This written agreement supports your position that the worker is an independent contractor rather than an employee, since having a contract is one of the relationship factors the IRS considers.
Track Every Payment During the Year
Keep a running record of every payment you make to each contractor. Note the date, amount, method, and what the payment was for. Accounting software like QuickBooks, FreshBooks, or Wave can automate this if you connect your bank account or payment platform. Even a simple spreadsheet works for businesses with just a few contractors.
Accurate records matter because you’ll need exact totals when tax reporting season arrives. They also support your business expense deductions. Contractor payments are generally deductible as a business expense, which reduces your taxable income.
File Form 1099-NEC by January 31
If you pay a contractor $600 or more during the calendar year, you must file Form 1099-NEC (Nonemployee Compensation) with the IRS. The deadline is January 31 of the following year, with no automatic extension. You also send a copy of the 1099-NEC to the contractor by that same date so they can use it to file their own taxes.
You can file 1099s electronically through the IRS FIRE system (Filing Information Returns Electronically) or through tax software and payroll services that handle the filing for you. If you file 250 or more information returns, electronic filing is mandatory. For smaller volumes, you can still file paper forms by ordering them from the IRS, but e-filing is faster and reduces errors.
Payments under $600 to a single contractor don’t require a 1099, but the contractor is still responsible for reporting that income on their own tax return. You should still track these smaller payments for your own records and deductions.
Paying Contractors Outside the United States
If you hire a contractor who lives and works in another country, the tax paperwork changes. Instead of a W-9, you’ll collect Form W-8BEN from the contractor, which certifies their foreign status. This form tells you whether a tax treaty between the U.S. and the contractor’s country reduces or eliminates withholding requirements.
Without a valid W-8BEN on file, you’re generally required to withhold 30% of the payment and remit it to the IRS. If the contractor qualifies for a treaty exemption, they may also need to file Form 8233, which specifically covers exemptions from withholding on compensation for independent personal services.
For the actual transfer of funds, international wire transfers and platforms like Wise (formerly TransferWise) or Payoneer are popular choices. These services often offer better exchange rates than traditional bank wires and charge lower fees. Be clear with your contractor about which currency you’re paying in and who absorbs the conversion cost.
What You Don’t Withhold
Unlike employees, independent contractors handle their own taxes. You do not withhold federal income tax, Social Security tax, or Medicare tax from a contractor’s pay. The contractor is responsible for paying self-employment tax (which covers Social Security and Medicare) and making quarterly estimated tax payments to the IRS on their own.
This is one of the main financial differences between hiring a contractor and hiring an employee. You save on payroll taxes, workers’ compensation insurance, and benefits costs, but the contractor prices their services to account for those self-employment expenses. The one exception is backup withholding at 24%, which kicks in only if the contractor fails to provide a valid taxpayer identification number on their W-9.