A Simple Guide For How to Pay Independent Contractors
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How to Pay Independent Contractors

How to Pay Independent Contractors

October 31, 2022

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Key Takeaways

  1. Independent contractors don’t require employers to pay taxes or withhold a part of their payroll on their behalf.
  2. However, different regions and countries may class contractors differently, requiring companies to be aware of all the labor laws that may affect them.
  3. A PEO and EOR services provider can manage all employee and contractor admin requirements on your behalf, minimizing the time you need to spend on day-to-day operations.
Summary

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.

 

What Does Independent Contractor Payroll Involve?

 

Paying independent contractors is different than paying full or part-time employees as they don’t receive a salary. Instead, companies pay them either per hour or per project. The hourly rate and frequency must be in a work contract before beginning a project.

Another vital factor to consider regarding payroll for independent contractors is taxation. While you do not need to withhold taxes like for employees, there are still steps to take regarding the contractor’s taxes.

You must classify an independent contractor correctly when handling their payroll. Misclassification errors, such as the contractor being treated as an employee but not receiving employee benefits or payroll services, will result in high fines and penalties from both the tax system and employment laws.

You can read our article here for more about the distinction between employees and independent contractors.

 

Independent Contractor Rates and Frequency of Payments

 

An independent contractor agreement determines pay rate and frequency 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, contractor pay periods can be 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. If you fail to present the task correctly and 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 turnaround time for a contractor’s work?

·      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 all necessary IRS forms.

 

The W-9 Tax Form

This form needs filling out before the contractor begins work. It asks for basic information from the contractor, such as name and social security number. These processes establish that the contractor is not an employee and that you don’t need to withhold taxes for them.

You should keep a W-9 form in your database for at least four years.

 

The 1099-NEC

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.

A 1099-NEC 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.

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 payment delivery immediately and without delay.

A payroll platform can also take care of 1099-NEC forms and other tax paperwork. It also keeps track of how much you spend 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. However, companies can avoid these issues by ensuring that they partner with a safe, reliable payroll platform that is compliant with local payroll laws.

 

Independent Contractor Payroll FAQ

 

Q: Can an independent contractor be paid a salary?

A salary is a regular wage for employees. If you pay a contractor a salary, this will likely become a problem as its a misclassification error and authorities may penalize it 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 this is in their agreement.

Q: How do independent contractors pay taxes effectively?

Independent contractors file their own taxes. The company that employs doesn’t need to withhold any employment taxes or manage payroll for them. However, the company must fill out certain tax forms when hiring an independent contractor.

Q: Do independent contractors count as a payroll expense?

Due to employers not needing to withhold taxes for them, independent contractors are a business expense instead of a payroll expense.

Suppose a company has a payroll system in place already, though. In that case, you can add the contractor to the same system so they receive their payments smoothly.

 

Hire and Pay Contractors Easily with INS Global

 

INS Global’s PEO services 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 15 years of experience partnering with companies worldwide, INS Global is ready to handle all your recruitment needs. From sick leave management, to forming legal employment agreements, to running payroll internationally, we have the expertise and experience you need.

Our international services and staff team are ready to help you reach your company goals, all through a single streamlining payroll process platform. INS services ensure your payroll taxes are correct and secure, all while protecting confidential information and complying with local terms and conditions.

Contact us today to learn more.

 

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