When hiring independent contractors, you need to ensure that they are managed and receive their payroll according to specific employment laws in the country they’re working in. Here, we outline how to pay independent contractors smoothly and safely.
Independent contractors do not fall under the same legal category and regulations as full-time employees. Any mistakes in contractor payments or payroll can result in paying expensive fees and fines.
Independent contractor payroll doesn’t have to be a long and arduous process. With contractor payroll services, you guarantee covering every contractor working for you with no extra hassle.
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What Does Independent Contractor Payroll Involve?
Independent Contractor Rates and Frequency of Payments
A contractor’s rate and frequency are determined by the agreement between the company and the contractor. Either a contractor receives payment per hour or a flat fee for ongoing work on a project.
Depending on their preference, contractors can be paid daily, weekly, or monthly. Often contractors prefer receiving their payment quickly, as it rewards them for the result of their work. A contractor will typically work for more than one company, so they will be more motivated to work for a company that pays them promptly and correctly.
If you are paying a contractor per project, you must be transparent about all the details of the project so the contractor can make an accurate cost estimate and offer. Failing to present the task correctly means it ends up requiring more time than expected, this can be damaging to your relationship with the contractor.
Here are some questions to consider when deciding what kind of payroll frequency to agree on:
Is it an ongoing project or a one-time need?
What is your expectation for turnaround time?
How many daily hours will the contractor need to devote to their tasks?
Independent Contractor Payroll in the US
When hiring independent contractors in the US, you must be aware of the required IRS forms.
The W-9 Tax Form
This form needs to be filled out before the contractor begins work. It asks for basic information from the contractor, such as name and social security number. This form establishes that the contractor is not an employee and that you are not required to withhold taxes for them.
A W-9 form should be kept in your database for at least four years.
If you pay a contractor more than USD600 a year, you must fill out the 1099-NEC form and report the non-employee compensation amount. This helps the IRS know what taxes the contractor will be required to pay.
The form must be sent to the IRS by January 31, and a copy has to be sent by that date to the contractor as well.
The penalty for failing to issue a 1099-NEC form on time ranges between 50-280 USD.
The Pros and Cons of Using a Payroll System Outsourcing Service for Independent Contractors
If you hire many independent contractors, you may want to consider using a payroll platform. This entirely online system can save you time and energy that would otherwise be spent working through lots of paperwork and complications.
The most crucial step is to record all the contractor’s information in the system. After that, the platform will take care of contracts, tax forms, and payments. The automated system allows the payment to be delivered immediately and without delay.
A payroll platform can also take care of 1099-NEC forms and other tax-related paperwork. It also keeps track of how much you’ve spent on contractor fees so you can make informed financial decisions about the company.
Data security and cyber fraud are potential disadvantages of using a payroll system. These can be avoided by ensuring that you partner with a safe, reliable payroll platform that is verified and compliant with local payroll laws.
Independent Contractor Payroll FAQ
Q: Can an independent contractor be paid a salary?
A salary is a regular paid wage for employees. If you pay a contractor a salary, this will likely be flagged as a misclassification error and penalized accordingly.
Q: Do independent contractors have the opportunity for overtime hours?
Work hours are determined by the independent contractor or specified in the contract agreement. You do not have to pay them overtime compensation unless agreed upon in advance.
Q: How do independent contractors pay taxes?
Independent contractors file their own taxes. The company that employs them is not required to withhold any taxes or make taxation payments for them. However, the company must fill out certain tax forms when hiring an independent contractor, as detailed in the section above.
Q: Do independent contractors count as a payroll expense?
Due to employers not needing to withhold taxes for them, independent contractors may be considered a business expense instead of a payroll expense.
Suppose a company has a payroll system in place already, though. In that case, the contractor can be added to the same system to receive their payments smoothly.
Hire and Pay Contractors Easily with INS Global
INS Global’s PEO services can help you find the right talent for your projects quickly and smoothly. We can help you hire contractors compliantly and ensure that their contracts and payroll follow every local regulation. With over a decade of experience partnering with companies worldwide, INS Global is well-equipped to handle all your recruitment needs.
Our international services and staff team are ready to help you reach your company goals, all through a single streamlined service platform. Contact us today to learn more.