How to Organize Payment for Independent Contractors

An independent contractor is a person who works for other individuals or companies but is not bound by an employment contract to them. Several small business owners prefer to hire independent contractors over full-time employees because it allows for more flexible working conditions such as pay per project, reduces employee insurance and benefits costs, eliminates FICA taxes, and reduces IRS benefits. Moreover, hiring freelance workers allows you to terminate the professional relationship easily, unlike with full-time employees. However, there are certain things regarding payments that you should know before outsourcing any of your business tasks. Read on to learn how to organize payment for independent contractors and how to check every details to avoid documentation errors ahead, you can also check right here on AEC Inc.

W-9 Form for Independent Contractors

The W-9 form is the most important document that you need from an independent contractor. The person you hire must put their tax ID number, employer ID, and social security number. The documents of the contractor are crucial since they help in tax collection. By choosing to adopt sophisticated tax software, businesses can reduce their risk of non-compliance and potentially hefty fines. This choice also simplifies the work of accountants, allowing them to focus on strategic advisory roles rather than tedious calculations. When it comes to reliable software, stands as a trustworthy source with their diverse tax software solutions.

Payment Terms

There is no fixed rule pertaining to payment terms that you can agree on with your contractor. Some may charge an hourly rate, payment upfront, or pay after the project. You need to agree on certain terms to build a good relationship. 

Choose the Correct Payment Method

When you have collected all the necessary documentation required to process the payment for independent contractors, you need to choose an appropriate payment method. Some payment methods charge high transfer fees and others may not be supported in specific regions. Therefore, you need to agree with the chosen contractor and you can consider some of the following methods:

Payment Via Software

There are different types of accounting software solutions that can handle invoicing and payroll automatically. Once you agree with the contractor on the rate of the project, you can use the software to process the payment. The experts at Pay Stubs 365 explain that to process payment quickly and efficiently,  you can simply use specialized software that will issue payment stubs to help you keep a record of all the payments. When you choose the right software, you will realize that it is much easier than the traditional approach, as it involves just a few steps. You only need to select a template, fill in the information required, then preview and pay. However, you need to ask the contractor to provide a digital invoice that is easy to process online.  


Some people may prefer this payment option since it does not require deposit fees. However, checks are sent by post which means that they take longer to arrive. Additionally, a check also takes time to clear.

Credit Card 

You can also consider the option of paying your contractor via credit card. Credit card payments can be processed through a special app for mobile devices, but you need to make an agreement with the freelancer. 

Electronic Funds Transfer

The other viable payment option is the Electronic Funds Transfer (EFT) and this is probably the easiest method. No complicated systems or apps since this solution involve a direct transfer of money from your bank account to the contractor’s bank account. The transaction usually takes about 2 to 4 days depending on the banks involved. Some contractors may prefer this method since the money goes directly into their account. However, both banks charge transaction fees which can be expensive. The other thing that you should remember is that you should ensure that you do not take taxes before you pay your contractors. 


Compared to other payment options like checks, PayPal is faster since the entire transaction is processed online. However, you must check with the contractor first if they prefer this method which may not be supported in all parts of the globe. If PayPal payments are available, they can be a good alternative since the money transfer can take one business day depending on your region. The transaction fees are also reasonable.

Complete a Form 1099-MISC

The 1099-MISC form requires each client to state the type of payment. Contractor earnings are regarded as non-employee compensation. As the client, you must complete the form when you have paid more than $600 or more to a contractor during the year. A client should send the form to the contractor by the 31st of January every year. They should also send a copy of the 1099-MISC form to the IRS as well as the state’s income tax.

Before you hire an independent contractor, it is vital to reach an agreement on important details such as the pay rate and payment method. Contractors should complete the W-9 together with 1099-MISC forms. After that, you need to agree on payment terms with the contractor and choose the appropriate payment method that works for both of you.