From W-9s to 1099s: How to Pay an Independent Contractor
- Remote Working & Freelancing
A comprehensive guide on how to pay an independent contractor, including understanding 1099 tax documents and W-9 forms.
A quick note: Here at Contra, we prefer “Independent” or “freelancer” over “contractor.” These terms highlight a sense of community and empowerment for the individuals rather than the time-limited and economic connotations bound up in the word “contractor.”
The job market is evolving at lightning speed, and hiring Independents is an increasingly popular way to fill on-site, remote, and hybrid roles. Self-employment is an increasingly popular way for talented professionals to ply their trade while remaining flexible — but what exactly is independent contracting? We’ll explore the ins and outs of hiring, including how to pay an independent contractor, so you can stay ahead of the curve.
What is an independent contractor? 👔
Unlike a conventional full-time or part-time employee, independent contractors — or Independents, as we like to call them — work for themselves and may provide services to multiple clients simultaneously. Typically, they’re contracted for a specified amount of time or a number of projects.
Independents submit invoices for their work and are subject to self-employment tax, meaning businesses do not deduct tax from their payments. That said, companies operating within the United States must accurately classify Independents in order to comply with U.S. Department of Labor and Internal Revenue Service regulations.
Understanding 1099 tax documents and W-9 forms 📁
Hiring an Independent requires an understanding of the necessary forms. If it seems overwhelming, don’t worry — we’re here to help!
Use the 1099 employee tax form to report any payments made to non-employees, including freelancers. This form is required for any non-employee payment more than $600; the only exception is if your business entity is not an S corp or C corp. A 1099 reports income to the IRS, so taxes are owed on these payments.
Another important federal tax form is the W-9, an independent contractor agreement between your company and the freelancer. It states that the Independent is a non-employee and is not subject to tax withholdings on their compensation. Before you begin work with an Independent, they must complete a W-9.
Understanding the 1099 and W-9 forms and their different uses is critical when establishing a legal working relationship with Independents and paying them on time. If you're unsure how to issue a 1099 or W-9, the forms are available via the IRS’s website.
A step-by-step guide to independent contractor payments 🧾
Paying Independents may seem complicated, but it doesn’t need to be a headache. Unlike traditional employees, independent contractors submit invoices to get paid, and business owners do not deduct income taxes from their payments. These steps will help you pay Independents with minimal confusion:
Classify your worker 🗃️
Accurate payment begins with precise classification. Ensure you’ve classified the Independent as such (not as an employee). Remember, Independents are self-employed workers typically hired for short-term projects.
Set a rate and payment frequency 🗓️
Collaborate with the Independent to settle on payment terms that work for both of you, including rate and frequency. This may involve weekly, monthly, or quarterly invoicing and payment. Rates may be hourly or per project.
Collect a W-9 form 📝
Before you can pay them, the Independent must complete and return a W-9. This form is important for federal taxes and requests the Independent’s name, Social Security number, and other essential information. Be sure to keep it in your records.
Calculate and process the payment 🧮
Calculate the amount owed to the Independent according to the terms you agreed on in the first step. Independents who bill hourly should report the hours worked per project or overall in the relevant time frame. For Independents who bill per project, pay the amount that was agreed upon after subtracting any upfront fees or deposits. Use one of the methods described in the next section for payment processing.
Use a general ledger sheet 📒
Create and maintain a general ledger sheet to track Independent payments. This is especially useful if your payment tool (if you use one) doesn’t provide nitty-gritty details. A general ledger sheet organizes information about the Independents you work with, including tracking their earnings, pay rates, commission percentages, and more.
Prepare 1099 tax documents 📬
If you pay an Independent more than $600 throughout the tax year, you must prepare and file a 1099 tax document. This lets the IRS know what you are paying out so they can accurately assess your company’s taxes. Submit the form electronically or by mail.
4 ways to pay an Independent 🤑
There are several ways to pay Independents; your chosen method depends on what works best for your business. Here are the most common ways to pay Independents accurately and on time:
Commission-free on Contra 💸
Browse, hire, manage, and pay Independents on the Contra platform. Because we don’t take commission, Independents always get 100% of what they’re owed. If you’re wondering how to become an independent contractor, Contra helps with that, too, over on our blog!
Through payroll 💲
If your small business uses a payroll system, include Independents in the process for quick and easy payments. Many payroll software systems let you upload a spreadsheet with payment data to make bulk payments. The spreadsheet will contain details like worker ID numbers, full names, payment amounts, and notes for each Independent. Some payroll platforms allow API integration, ensuring seamless operation.
Via direct deposit 🏦
Direct deposit is a fast and secure way to pay Independents. The ACH network moves money electronically into Independents’ bank accounts, requiring permission from the Independents, plus details such as their bank account number, routing number, and account type. You’ll also need to know if it’s a one-time or recurring transaction.
You can gather this information through an ACH authorization form, such as DocuSign. Online accounts payable solutions, such as Bill.com, can also be used to make direct deposits, but these platforms often impose fees or other drawbacks.
By check ✅
Many Independents prefer electronic methods, but paper checks are still a viable (albeit an increasingly less common) option for paying contractors. Tracking your payments is essential if you choose to pay via check. Keep a log of information, such as the Independent’s name, address, pay rate, payment date, and hours worked.
When it’s time to pay the Independent, you can cut a check and mail it to them or, if they’re based nearby, ask them to pick it up.
Hire an Independent with Contra’s help 🤝
Head to Contra to find the perfect Independent for your project. Our commission-free platform allows you to manage your contracts and payments in one place while ensuring Independents receive what they deserve. Browse our Discover feed to get started. Are you an Independent? Join our Slack community to chat with like-minded professionals, or use our brand new Portfolio feature to create a digital portfolio powered by the information in your Contra profile. Our blog also contains valuable tips to help you find freelance jobs!