How To Pay Independent Contractors In 2024
If you, like many other business owners, make use of contract labor (such as independent contractors or freelancers), you need to understand the best ways to pay these professionals for their work.
Choosing the right payment method for independent contractors will help you get projects completed on time, keep your clients happy, and ensure good working relationships with the independent contractors you hire.
In this article, weāll cover the top 8 methods of paying independent contractors (also known as 1099 contractors). Weāll go over the pros and cons of each method, as well as the key considerations business owners should make when deciding how to pay their contractors. Letās take a look.
Key Takeaways
- There are several common methods businesses use for paying independent contractors and freelancers.
- Some payment methods offer advantages like enhanced security, while others offer faster payment processing or lower transaction fees.
- Every business will have different needs to consider when deciding how to pay its contractors.
- Businesses should consider processing time, transaction fees, ease of use, accessibility, record-keeping, and tax implications when choosing a method for paying independent contractors.
Table of Contents
- Checks
- Wire Transfers
- Credit Cards
- Direct Deposit
- ACH Payment
- PayPal
- Accounting Software
- Cash
- Factors to Consider When Paying Contractors
- Conclusion
- Frequently Asked Questions
1. Checks
Personal checks are a simple and familiar way to pay your contractors. Just grab your checkbook, fill out the relevant information, and send it to the independent contractorāsimple as that.
While their simplicity makes checks a great option, there are also a few downsides. For one thing, it takes time for a physical check to get delivered and processed before the funds are transferred. The check takes time to arrive in the mail, and there will often be a hold on the funds for 2 to 5 business days before the check clears, potentially leading to delays in payment for the independent contractor.
eChecks are an alternative optionāalthough they still take a few days for banks to process, you can email them to your independent contractor, meaning they wonāt have to wait for their payment to arrive in the mail.
2. Wire Transfers
Wire transfers are a fast, reliable way to pay independent contractors almost anywhere in the world. While an international transfer may take a few days to go through, domestic wire transfers usually clear in 24 hours, making wire transfers one of the quickest ways to pay a 1099 contractor.
Wire transfers have some downsides, however. For one thing, both the sender and recipient of a wire transfer will usually incur a fee. For domestic transfers, the sender will have to pay a fee of $20 to $30, and the recipient will pay a fee of $15 to $20. These costs are even higher for international transfers. Also, itās very difficult to reverse a wire transfer in case of a dispute or mistakeāespecially for international payments.
Between the fees and risks of wire transfers, itās suggested to use them only when time is of the essence.
3. Credit Cards
Credit cards can be another quick, reliable way to pay a contractor. Many business owners opt for credit card payments because they offer additional layers of security for the sender, keeping your banking information private and separate from your independent contractor payments.
Credit cards also offer extra assurance in the form of dispute resolution. Because credit card payments are made with a line of credit versus your actual money, itās much easier to initiate a dispute or reverse a mistaken payment. Many credit card companies offer comprehensive protection for their clients (some even offer zero fraud liability), making them an attractive option for paying freelancers and contractors.
On the other hand, youāll likely need a merchant account with your bank (and will have to pay transaction fees) to pay an independent contractor via credit card, meaning this isnāt always the best option.
4. Direct Deposit
Direct deposit is one of the most common ways to pay employees, contractors, and freelancers alike. Itās simple to set up direct deposit for freelancersāyou just need to get banking information from each independent contractor, and then set up the deposit arrangement with your own bank. After that, payments are sent directly to your contractorās account.
Direct deposits are great for freelancers you send recurring payments to since you just have to set up the direct deposit payments a single time to pay them in the future.
Direct deposits are also a very secure way to make payments, and the funds are usually available to the recipient within 1 to 2 business days. Overall, direct deposit is a great option for paying freelancers with little to no downside.
5. ACH Payment
Automated Clearing House (ACH) payments are a form of bank deposit payments commonly used for employers and their staff. But they work just as well as a method to pay independent 1099 contractors.
ACH transfers are simple to set up, and once youāve done so, you can continually pay the same independent contractor without having to collect more information. This makes ACH transfers ideal if youāre working with the same contractors ongoingly. ACH payments are also paperless, making them relatively secure for both the sender and the recipient.
Banks will sometimes charge a fee to the sender for processing ACH payments (sometimes as high as $10 per transaction), but this varies greatly depending on your financial institution and any arrangement youāve already negotiated with them.
6. PayPal
As the worldās leading online payment platform, PayPal is a very common method for business owners to pay independent contractors.
As the sender, you simply need to link your bank account to your PayPal business account. This lets you transfer funds directly to your independent contractorās PayPal account, which they can use directly from PayPal or transfer into their regular bank account. Of course, this has a downsideāall your contractors must have a (free) PayPal account of their own for this method to work.
Bear in mind that PayPal charges fees for merchant and business accounts in some regions, but not all. Double-check the relevant fees in your region before using PayPal as your main payment method for freelancersāthese costs can add up over time.
7. Accounting Software
There are many great options on this list, but contractor accounting software has many added benefits as a method of paying contractors. These include automation, integrated record-keeping, and cross-compatibility with other financial service platforms.
Cloud-based accounting software, such as the platform offered by FreshBooks, is a great way to offer flexible, simple-to-use payment solutions to your contractors and independent freelancers.
Our payroll software is designed for small businesses and makes it simple to pay an independent contractor just as you would an employeeāperfect for ongoing arrangements with freelancers.
With FreshBooks, you can pay your team of contractors directly from your account in just 5 clicks. Access unlimited payroll runs, automatic payroll tax filing (if applicable), direct deposit, and tax formsāall from within your FreshBooks accounting software. Plus, FreshBooks automatically files your independent contractor payments with your other finances, categorizing it as an expense and automatically generating all relevant tax forms and data for later.
8. Cash
Despite all the more high-tech options on the list, cash remains a possible way to pay independent contractors that you interact with personally. Cash has its benefits: Itās tangible and physical, it canāt bounce like a check, and it doesnāt need to be processed by a bank before it can be spent.
Some contractors might prefer to be paid in cash, but itās considered a risky move for businesses. Paying in cash often means no paper trail, leaving you open to the risk of a tax discrepancy or even an audit. This also makes it possible for freelancers to evade some taxes or make mistakes when reporting their business income, which can lead to more questions and challenges at tax time. Though not technically illegal, itās often advised not to pay contractors in cash.
If paying in cash, consider, at the minimum, obtaining a cash payment receipt signed by the contractor.
Factors To Consider When Paying Contractors
There are plenty of options when it comes to choosing the best method to pay an independent contractor. Here are a few key factors to consider before making your decision.
Payment Processing Time
Certain payment methods, such as direct deposit, checks, ACH transfer, and PayPal payments can be subject to payment processing delays. In some ongoing arrangements where trust is established between the business owner and the independent contractor, this may not be an issue, but it can be a concern for new contractors or one-off projects.
Transaction Fees
If you use a lot of contract workers in your business, youāll need to consider the fees associated with each payment. Fees for credit card payments, PayPal transfers, or wire transfers may seem reasonable at first, but they can add up to a significant sum over time. Opt for lower-cost options if youāll be making consistent, ongoing payments to freelancers.
Ease of Use and Accessibility
Choosing an easy-to-use payment method (such as bank deposit or ACH transfer) helps make life easier when you pay contractors. Certain payment methods also make the funds more readily accessible for the contractors, which may be important in order to maintain good working relationships with your freelance team.
Record Keeping and Documentation
Itās essential for businesses to keep good records of all payments made to freelancers for both tax purposes and to maintain good financial accounts.
Itās recommended that you choose an online payment method that makes it easy to keep organized documentation of all payments. Certain methods, such as accounting software, make it much easier to keep thorough records of each time you pay contractors.
Tax Implications and Compliance
Good financial records go hand in hand with organized tax information and compliance with all tax laws. Itās recommended to choose a payment method that makes it simple to keep track of the tax obligations of paying freelancers.
Accounting software is a great option since it can automatically generate tax forms and other important data to ensure full compliance for your business.
Conclusion
Thereās no one-size-fits-all answer on how to pay contractorsāevery business will have to look at their specific needs to find the best option for them. Certain situations require different payment methods. Some contractors may have personal preferences on how theyāre paid. In any case, some time and research on the subject will help you make the right call for your business.
If youāre looking for a flexible starting point for contractor payments, FreshBooks accounting software is a great option. With automated payroll and built-in tax prep tools, itās a fast, easy way to pay contractors and keep your business running smoothly. Try FreshBooks for free!
FAQs About How To Pay Contractors
More questions about how to pay contractors in a secure, reliable, and efficient way? Here are the most commonly asked questions about payment methods for independent contractors and freelancers.
What are normal payment terms for contractors?
Normal contractor payment terms usually concern how theyāre charging for work (e.g., hourly, price per deliverable, etc.), the currency theyāll be paid in, the payment methods they accept, the payment schedule (e.g., whether payment is due in advance, upon delivery, etc.), and the payment due date.
Should contractors be paid upfront?
You may need to pay an independent contractor before they begin work. This might be a deposit (such as 50% of their total fee) to ensure the company remains communicative while the contractor is working. Some contractors may demand the entire payment upfront, but this varies by industry.
How long do you have to pay a contractorās invoice?
You have until the agreed-upon payment due date to pay your contractorās invoice. This date will be indicated on the invoice itself or in the statement of work and depends on the specific contractorās payment policies. Paying after this date will likely result in late fees.
Can you 1099 someone you paid cash?
Yesāin fact, youāre required to provide a 1099 to an individual or corporation if you paid them more than $600 in a tax year, whether that payment was made in cash or with another method. Failing to do this can result in penalties from the IRS.
What is the safest way to pay a contractor?
Direct deposit is the most secure way to pay a contractor. This avoids payment being routed through email or physical mail, going directly into the contractor’s bank account, which provides fewer vulnerabilities in security. You can usually set up a bank deposit with your financial institution or use it through accounting and payroll software like FreshBooks.
About the author
Sandra Habiger is a Chartered Professional Accountant with a Bachelorās Degree in Business Administration from the University of Washington. Sandraās areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.
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