Paying an independent contractor involves more than just handing over a check. You need to confirm the worker actually qualifies as a contractor, agree on payment terms before work begins, choose a payment method, and handle the right tax paperwork. Getting any of these steps wrong can create tax penalties or legal headaches, so here’s how to do it right from start to finish.
Confirm the Worker Is a Contractor
Before you pay anyone as a contractor, make sure they actually are one. The IRS uses a three-part test based on the degree of control you have over the worker:
- Behavioral control: Do you dictate how and when the work gets done, or does the worker decide their own methods and schedule? If you’re setting their hours, requiring them to work on-site, and directing their process step by step, that looks more like an employee.
- Financial control: Does the worker use their own tools and equipment? Can they take on other clients? Do they invoice you, or do you set their pay rate and reimburse expenses? Workers who absorb their own business costs and serve multiple clients lean toward contractor status.
- Type of relationship: Is there a written contract? Are you providing benefits like health insurance, vacation pay, or a pension? Is the work a core, ongoing part of your business, or a defined project with an end date?
No single factor decides the classification. The IRS looks at the full picture. If you misclassify an employee as a contractor, you can owe back payroll taxes, penalties, and interest. When in doubt, the IRS offers Form SS-8, which lets you request an official determination.
Set Up a Written Agreement
A written contract protects both sides and prevents disputes over money. Before work starts, your agreement should spell out the scope of work, total price or hourly rate, and exactly when payments are due. Three common payment structures work well depending on the type of project:
- Deposit and final payment: You pay a portion upfront so the contractor can cover materials and initial labor, then pay the balance when the work is complete. This is common for smaller projects and residential work.
- Milestone-based payments: Payments are tied to specific stages of the project, like completing the foundation, finishing framing, or delivering a first draft. Each milestone triggers a scheduled payment, which keeps both sides accountable and makes progress easy to track.
- Net terms: The contractor invoices you after completing work (or at regular intervals), and you pay within an agreed number of days. Net 15 means payment is due within 15 days of the invoice; net 30 gives you 30 days. Your contract should also state whether late payments trigger penalties or interest charges.
The right structure depends on the project. A one-time consulting engagement might use a simple net-30 invoice. A kitchen renovation might use milestone payments tied to demolition, rough-in, and final finishes. Whatever you choose, put it in writing before any work begins.
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. This form gives you their legal name (or business name), address, and taxpayer identification number, which is either their Social Security number or their Employer Identification Number (EIN). You need this information to file their tax forms at year-end. Keep the completed W-9 in your records; you don’t send it to the IRS.
Collecting the W-9 upfront saves you from chasing contractors for their tax info months later when filing deadlines are approaching.
Choose a Payment Method
You have several options for actually sending money to a contractor. The best choice depends on how often you pay contractors, how many you work with, and how much you want to automate.
Check
Paper checks are straightforward and free beyond the cost of the check itself. They work fine for one-off projects or occasional payments. The downside is mailing time and the hassle of manual record-keeping. Always note the contractor’s name, invoice number, and project on the check memo line for your own records.
ACH or Direct Deposit
ACH transfers (the same system used for direct-deposit paychecks) move money electronically from your bank account to the contractor’s. Most banks charge little or nothing for ACH transfers, though business accounts sometimes carry small per-transaction fees. Processing typically takes one to three business days. If you use a payroll or accounting platform like QuickBooks, you can often get next-day direct deposit for contractors when you submit the payment before the daily cutoff.
Payment Platforms
Services like QuickBooks Contractor Payments, Gusto, and similar platforms bundle contractor payments with tax form preparation and filing. QuickBooks, for example, charges around $25 per month for a plan covering up to 20 contractors, with a $2 fee for each additional contractor. These platforms handle direct deposits, track payments throughout the year, and can e-file 1099 forms at tax time. If you pay multiple contractors regularly, the convenience often justifies the monthly cost.
Wire Transfer
Wire transfers are fast (often same-day) but expensive, typically $25 to $35 per domestic transfer. They make sense for large, time-sensitive payments but are overkill for routine invoices.
Digital Wallets and Payment Apps
Apps like PayPal, Venmo (business accounts), and Zelle let you send money quickly. Be aware that PayPal and Venmo charge fees for business transactions, usually around 2.9% plus a fixed per-transaction fee when funded by credit card. Zelle transfers between bank accounts are typically free. Regardless of the app you use, you still have the same tax reporting obligations.
File the Right Tax Forms
When you pay a contractor at or above the reporting threshold during a calendar year, you’re required to report those payments to the IRS using Form 1099-NEC (NEC stands for Non-Employee Compensation). You send one copy to the contractor and file another with the IRS.
For payments made through 2025, the reporting threshold is $600. Starting January 1, 2026, the threshold increases to $2,000. That means if you pay a contractor less than $2,000 total during the 2026 tax year, you won’t be required to issue a 1099-NEC for that contractor.
The filing deadline for 1099-NEC forms is January 31 of the following year. So for payments made during 2026, your forms are due January 31, 2027. You must provide copies to your contractors by the same date. You can file paper forms with the IRS or e-file, and most payroll platforms handle the filing automatically.
One important note: you don’t withhold income tax or payroll taxes from contractor payments. Contractors are responsible for paying their own income tax and self-employment tax (which covers Social Security and Medicare). This is one of the key financial differences between contractors and employees.
Paying Foreign Contractors
If you hire a contractor who lives outside the United States, the tax paperwork changes. Instead of a W-9, you collect Form W-8BEN from the contractor. This form certifies their foreign status and determines whether any tax treaty between their country and the U.S. reduces or eliminates withholding requirements.
Without a valid W-8BEN on file, you’re generally required to withhold 30% of the payment and send it to the IRS. If the contractor’s country has a tax treaty with the U.S., the withholding rate may be lower or zero, but you need the completed form to claim that reduced rate.
For the actual transfer of funds, international wire transfers and platforms like Wise (formerly TransferWise) or PayPal are the most common options. International wires typically cost $35 to $50 per transfer, and the contractor may also pay a receiving fee on their end. Specialized transfer platforms often offer lower fees and better exchange rates than traditional bank wires.
You generally don’t issue a 1099-NEC for foreign contractors who performed all their work outside the U.S. The W-8BEN serves as your primary documentation instead.
Keep Clean Records
For every contractor you pay, maintain a file that includes their completed W-9 (or W-8BEN), the signed contract, all invoices, and proof of payment. If you’re ever audited or face a worker classification dispute, these records are your defense. Most accounting software lets you attach invoices and receipts to transactions, which makes this easier than managing paper files. Keep contractor records for at least four years after the tax year the payments were made, which matches the IRS audit window for most situations.