Paying an independent contractor starts with collecting a W-9 form, choosing a payment method, and tracking what you pay so you can file the right tax forms at year’s end. Unlike employees, contractors don’t have taxes withheld from their checks, so the process is simpler on a per-payment basis but comes with specific reporting obligations you need to get right.
Confirm the Worker Is Actually a Contractor
Before you pay someone as a contractor, make sure they genuinely qualify as one. The distinction matters because misclassifying an employee as a contractor can trigger back taxes, penalties, and interest from both the IRS and your state labor agency.
The federal test looks at whether a worker is economically dependent on your business (making them an employee) or truly in business for themselves (making them a contractor). Two factors carry the most weight: how much control you have over how the work gets done, and whether the worker has a genuine opportunity for profit or loss based on their own initiative and investment. A web designer who sets their own hours, uses their own equipment, serves multiple clients, and bills per project looks like a contractor. Someone who works exclusively for you, follows your schedule, and uses your tools looks like an employee, regardless of what your contract says. The actual working relationship matters more than the paperwork.
When those two core factors point in different directions, secondary factors come into play: how much specialized skill the work requires, how permanent the relationship is, and whether the worker’s role is integrated into your core production process. A short-term engagement requiring specialized expertise leans toward contractor status. An ongoing, open-ended role performing your business’s primary function leans toward employment.
Collect a W-9 Before the First Payment
Ask every U.S.-based contractor to fill out IRS Form W-9 before you pay them anything. The W-9 gives you the contractor’s legal name, business name (if different), address, and taxpayer identification number, which is either their Social Security number or an Employer Identification Number. You need this information to file tax forms later, and it’s much easier to collect upfront than to chase down months after the work is done.
Keep W-9s on file. You don’t send them to the IRS, but you should have them ready in case of an audit or if you need to verify a contractor’s information at tax time.
Choose a Payment Method
You have several options for actually getting money to a contractor, and the right one depends on how many contractors you pay, how often, and whether any are overseas.
- Direct deposit (ACH transfer): The most common method for recurring contractor payments. Processing typically takes one to four business days depending on your bank or payroll platform. Fees are minimal, often under a dollar per transaction through a payroll service.
- Paper check: Still a valid option, especially for one-time or infrequent payments. No transaction fees beyond the cost of the check itself, but slower and harder to track.
- Payroll and contractor management platforms: Services like Gusto, QuickBooks Payroll, and Square Payroll handle direct deposits and can automate 1099 filing at year’s end. Some offer next-day direct deposit. Deel supports 15-plus payment options including PayPal, Wise, and cryptocurrency, which is useful for international contractors. These platforms charge monthly fees but save significant time if you’re paying multiple contractors regularly.
- Payment apps and digital wallets: PayPal, Venmo (business accounts), and similar services work for smaller or less formal arrangements. Be aware of transaction fees, which typically run around 2.9% plus a flat fee for business payments.
- Wire transfer: Best reserved for large one-time payments or international transfers where other methods aren’t practical. Domestic wire fees usually run $15 to $30 per transfer, and international wires can cost $35 to $50 or more.
Whatever method you use, keep records of every payment: the date, amount, what it was for, and how it was sent. This documentation protects you at tax time and in case of any disputes.
Set Clear Payment Terms Upfront
Before work begins, agree on the 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 standard for many businesses, but contractors often prefer Net 15 or even payment upon receipt. Spell these terms out in your written contract or statement of work.
Your contract should also cover whether the contractor submits invoices or you initiate payment on a set schedule, what expenses (if any) are reimbursable, and what happens if a deliverable is late or incomplete. Clear terms up front prevent awkward conversations later.
Understand Your Tax Reporting Obligations
When you pay a contractor $2,000 or more during a tax year, you’re required to report those payments to the IRS on Form 1099-NEC. This threshold increased from $600 for tax years beginning after 2025, and it will be adjusted for inflation starting in 2027. You must send a copy of the 1099-NEC to the contractor and file a copy with the IRS, both by January 31 of the following year.
A few important details about 1099-NEC filing:
- The $2,000 threshold applies per contractor. If you paid one contractor $1,800 total for the year, you don’t need to file a 1099-NEC for them. If you paid another $5,000, you do.
- Report payments to individuals and most unincorporated businesses. You generally don’t need to file 1099s for payments made to C corporations or S corporations, with some exceptions for legal and medical services.
- You can file electronically or on paper. The IRS encourages electronic filing, and if you’re filing 10 or more information returns, electronic filing is required.
- Contractor management platforms can handle this for you. Most payroll services that support contractor payments will generate and file 1099-NEC forms automatically, which is one of their biggest selling points.
You do not withhold income tax, Social Security, or Medicare from contractor payments. Contractors are responsible for paying their own taxes, including self-employment tax. The one exception: if a contractor hasn’t provided a valid taxpayer identification number (via the W-9), you may be required to withhold 24% of their payment as backup withholding and remit it to the IRS.
Paying International Contractors
When you hire a contractor who lives outside the United States and isn’t a U.S. citizen or resident, the tax paperwork changes. Instead of a W-9, you’ll collect Form W-8BEN, which certifies the contractor’s foreign status. The contractor submits this form to you whether or not they’re claiming a reduced withholding rate under a tax treaty between the U.S. and their home country.
For independent personal services specifically, the contractor may instead file Form 8233 to claim an exemption from withholding. Without proper documentation, you’re generally required to withhold 30% of the payment and send it to the IRS.
On the practical side, paying international contractors involves choosing a method that works across borders. Wire transfers are the traditional route but carry higher fees. Platforms like Deel, Wise, and PayPal are popular alternatives that convert currency and move money at lower cost. Some platforms also handle the compliance side, collecting the right tax forms and tracking withholding obligations so you don’t have to manage it manually.
You typically don’t file a 1099-NEC for payments to foreign contractors for work performed entirely outside the United States. The W-8BEN and any associated withholding reporting (Form 1042-S) replace the 1099 in those situations.
Keeping Good Records
For each contractor, maintain a file that includes their W-9 or W-8BEN, your written contract or agreement, all invoices, proof of payment, and copies of any 1099-NEC forms you filed. Keep these records for at least four years after the tax year they relate to. If you’re using a contractor management platform, most of this documentation is stored and organized automatically, but it’s worth verifying that you can export your records if you ever switch services.