How to Pay Independent Contractors in 5 Easy Steps

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As the internet has transformed from a medium to an economy, independent contractors are now at the center of business operations. While these workers often work as freelancers or vendors selling goods on platforms like Etsy and Amazon, they may also be working in traditional companies that have turned over their core functions to independent contractors. With this transformation comes challenges for both businesses and consumers as more people strike out on their own without relying solely on conventional jobs. This guide will teach you how to pay your contractor in 5 easy steps so that he or she can get paid quickly with minimal headaches for everyone involved..

The “how to pay contractors for home improvement” is an article on how to pay independent contractors in 5 easy steps.

Because they do not have to withhold or pay taxes, companies find that paying independent contractors is easier and frequently less expensive than paying workers. Although year-end reports are needed to record amounts paid, labor rules that include workers, such as minimum wage, do not apply.

Consider Gusto if you’re seeking for a simple method to pay freelancers. You may pay them by direct deposit, and all payments will be recorded on IRS Form 1099 at the end of the year. Furthermore, you are only charged during the months in which you pay your contractors, and even then, the fee is just $6 per person each month. Today is the last day to sign up for a free trial.

Gusto is a great place to visit.

When it comes to paying independent contractors, these are the five measures you should take:

1. Figure out how you’ll pay contractors.

It’s not difficult to pay independent contractors, but it’s not the same as paying workers. Some of the first considerations you’ll make to ensure the process runs well are how to pay independent contractors (using payroll software in-house versus outsourcing to a payroll provider) and how much to pay.

Contractors, unlike employees, are not usually paid a salary. Instead, think about whether a per-project charge or an hourly cost might be more suitable. Also, keep in mind that any money you give the contractor will be subject to taxes, lowering their net pay; if your normal base rate is below industry norms, you may need to raise it to make it appealing.

Paying Contractors

Before you begin any work, you and your contractor should agree on a payment schedule. You may already have an idea of the going pricing if you’ve engaged contractors previously for comparable work; if not, you might phone around and seek an anonymous estimate from your rivals. Contractors often charge their own prices, so be sure you’re both on the same page.

Consider the sort of job your contractor does; if it’s impossible to forecast the amount of time it will take to finish, a per-project charge seems appropriate. It’s bad for company if you can’t anticipate prices, and it might lead to a fight with the contractor if you’re charged more than you thought.

Contractor Payment Schedule

Remember to consider the duration and scope of the job as you decide how you’ll pay.

Is this a one-month project? Is the contractor going to complete it in a week?
How much daily time would your contractor be required to dedicate to the project?
Do you anticipate a speedy turnaround on a large project?

You may be required to pay a deposit or make payments at specified intervals based on your responses and the contractor’s conditions. If you’re dealing with a contractor for the first time, be flexible; some contractors have had unpleasant experiences with customers who used their services but never paid for them.

Taxes on Contractors

When negotiating a project or hourly fee, keep in mind that independent contractors must pay taxes on the money you pay them. Although you are not obligated to withhold taxes, bear in mind that the contractor will not be allowed to retain all of the money you paid.

If they live in a city like New York City, they’ll have to pay federal and state income taxes in addition to local taxes. They’ll also have to pay a 15.3% self-employment tax (12.4 percent for Social Security and 2.9 percent for Medicare). Only the first $142,800 of earnings will be liable to Social Security contributions in 2021.

Withholdings may rapidly build up to 30% or more, which is why you should pay contractors more than you would an employee. Employers pay the other half of the self-employment tax, which is referred to as the Federal Insurance Contributions Act (FICA).

You’re ready to conclude by signing a formal independent contractor agreement after you and your contractor have agreed on payment conditions, such as project due dates, needed deposits, rates, and so on. This seals the arrangement and obligates you both to follow through.

2. Obtain a W-9 Form

You’ll have your contractors fill out a W-9 Form, which contains personal information like their name and Social Security number, after you’ve decided how much and how frequently to pay them. It’s critical that all contractors fill out this form before starting work since it will be used to report their yearly earnings on Form 1099 at the end of the year.

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Before commencing any work, be sure that each independent contractor you deal with fills out the W-9 Form.

When independent contractors decline to submit their Social Security number or provide an inaccurate Social Security number on their W-9, the IRS will inform you to begin withholding 24 percent of the contractor’s income for backup withholding as soon as possible (taxes). Regardless of the contractor’s displeasure, you’d withhold and send to the tax office as directed.

Collecting the W-9 is straightforward if you utilize payroll software or a service like Gusto. Gusto will offer contractors a link to start their online accounts after you’ve added them to your account. It’ll also ask them to fill out the whole W-9 form before keeping it in the app, saving you time and money. Today is the last day to sign up for a free 30-day trial.

3. Configure your payroll system to include contractors.

You’re ready to set up contractors in your payroll system, which might be a notepad, Microsoft Excel, or payroll software, after you’ve obtained the W-9 Form. Regardless of how you handle payroll, make sure you have all of your contractors’ information on hand; this will help you avoid any problems on payday.

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These are the information you’d submit in Gusto, and if you include your contractor’s email address before saving the data, Gusto would give them an invitation to see payment and tax forms online.

4. Make the payment to the freelancer.

You won’t have to do anything after that until it’s time to make your first payment. If the agreement calls for a deposit before starting work, you’ll need to handle it right away. You have the option of paying with cash, which is not suggested owing to the absence of a paper trail, check, direct deposit, or even pay cards, which are reloadable prepaid debit cards used by companies to deposit salaries. Keep in mind that certain payment options (such as direct deposit) might take up to four days to complete.

Choose a payment method.

If you don’t use a payroll provider and instead go via your bank, direct deposits normally cost more; however, if you just need to handle a few payments, you can print checks online for free. Most of the better payroll software includes free direct deposit, and some will even walk you through generating your own checks via the system.

Pay cards are primarily provided by major payroll providers, such as Paychex, and although the pay card program is free, the payroll services you must buy before being authorized for the program are usually more costly.

In the Payroll System, enter the number of hours worked or the amount due.

Contractor payments will be calculated using an hourly rate, as illustrated below, although payroll software like Gusto can also enable you to select a flat rate if necessary.

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If you’re paying freelancers by the hour, you may input their hours worked in Gusto and the payment amount will be calculated automatically. You may also include a note to explain why the payment was made.

Depending on the payment option you choose for the contractor during the setup process, Gusto will either ask you to print a payroll check or automatically make a direct deposit after you input and save the hours worked or payment details. Because Gusto enables you to do unlimited payroll runs at no additional expense, you may repeat this procedure as many times as you need to pay contractors.

5. Fill out and mail Form 1099-NEC

You should be prepared to file 1099-NEC Forms for any contractor to whom you paid more than $600 throughout the year as the end of the year approaches. Each contractor, as well as the IRS and state tax agency (if there are state income taxes), will get a copy of the 1099s, which must reflect the entire amount you paid out throughout the year.

Keep a copy for your records, and remember that the deadline to report any payments made during the previous calendar year is Jan. 31. You’ll utilize the W-9 forms you obtained from contractors before they started working to transfer information (such as name, address, and Social Security number) to the 1099-NEC so your year-end reports to the IRS are correct.

The 1099-NEC Form assists independent contractors in determining how much tax they owe in order to prevent overpaying or underpaying. It also aids the IRS in tracking down contractors from whom tax payments should be made.

Paying Independent Contractors: The Laws

Awareness how to pay independent contractors requires an understanding of the regulations involved. Misclassifying workers as independent contractors is a common blunder made by certain businesses. Misclassifying may result in thousands of dollars in penalties and taxes payable due to federal law’s rigorous distinction between the two.

Keep in mind that contractors have complete discretion over how the job is completed and how frequently they work. The only thing you have control over is the end product’s appearance.

When it comes to compensating independent contractors, federal statutes state that you must:

Sending 1099-NECs: Contractors must receive 1099-NECs by January 31 in order to record their earnings and submit taxes. If appropriate, send a copy to the federal and state tax agencies. It’s also a good idea to have a backup.
If there isn’t a Social Security number, start withholding: Employers must immediately begin withholding 24 percent of each payment processed if the contractor fails to submit a Social Security number or a tax identification number (TIN) or supplies an erroneous one.
Disregarding labor regulations, such as the minimum wage, overtime, the necessity for unemployment compensation, workers’ compensation, and so on. Contractors are not protected since these laws only apply to employees.
Not withholding payroll taxes: Independent contractors pay self-employment taxes rather than FICA taxes. Contractors must also pay income taxes, which they do when they file their tax returns for the previous year.

Laws Governing Independent State Contractors

Many jurisdictions control the categorization of independent contractors, so you might face penalties from both the federal government and your state if you misclassify. It’s a good idea to check the website of your state’s labor department since other states have more stringent categorization standards for independent contractors.

California, for example, changed its legislation in 2018 to the ABC test, which requires three conditions to be satisfied before a worker is classified as a contractor.

A: In connection with the execution of the task, the worker is free from the hiring entity’s control and direction, both under the contract for the performance of the work and in actuality.
B: The employee does work that isn’t part of the hiring company’s normal operations.
C: The worker is usually involved in an independently established trade, activity, or company that is similar to the task done.

When it comes to defining independent contractors, there are several aspects to consider. The DOL, the IRS, and several states all have an opinion. Although there are no hard and fast rules, if you’re ever in doubt, fill out Form SS8 and send it to the IRS; the IRS will evaluate it and make an official classification judgment, but this might take up to six months.

We’ve looked at payroll services that will make it simple for you to pay contractors. Gusto is our top selection, but check out our other top recommendations in our guide to picking contractor payroll services if you’re looking for alternative solutions.

Conclusion

Choosing how to pay independent contractors isn’t difficult if you have a good system in place to keep track of contractor and payment information. You may use a notepad, Excel, or payroll software to assist you, and monthly fees for one contractor run from $0 to $6.

Consider Gusto if you need payroll software that can handle contractor payments. It gathers all of the information required to create 1099-NEC documents at the end of the year. It also encourages contractors to create an online account, making it simple for them to monitor their payments and tax paperwork. You save money and time by not having to print and send tax forms, in addition to allowing contractors authority over their paperwork. Sign up for a free 30-day trial right now.