Independent contractors are commonly referred to as 1099 workers due to an IRS form that has to be filed for them. They don\u2019t fall under the same legal umbrella as regular employees. <\/p>\n\n\n\n
Thankfully, we\u2019re making the process of paying independent contractors much easier with our 5 simple steps!<\/p>\n\n\n
![\"Paying](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/Paying-independent-contractors-cover.jpg\")
<\/figure>\n<\/div>\n\n\nHow should you pay a 1099 employee?<\/h2>\n\n\n\n
According to the latest McKinsey survey<\/a>, 36% of the US workforce consists of independent workers. This is a 9% increase from 2016 data.<\/p>\n\n\n\n So, chances are, you\u2019ll need the services of independent workers at some point.<\/p>\n\n\n\n If you follow these steps, paying them doesn\u2019t have to be complicated at all. <\/p>\n\n\n\n Always make sure the people you work with are legally classified as <\/strong>either<\/strong> regular employees or 1099 contractors (independent)<\/strong>.<\/p>\n\n\n\n Regular employees are individuals under a contract of employment (expressed or implied, oral or written) that specifies employees\u2019 rights and duties. They are employed for a salary or wages, and classified as W-2 employees<\/a> \u2013 all their taxes, benefits, and insurance are handled by the employer they work for.<\/strong><\/p>\n\n\n\n On the other hand, independent contractors<\/a> are self-employed. They pay their taxes, benefits, and insurance<\/strong>. When you work with them, you need to fill out special independent contractor forms.<\/p>\n\n\n\n Attorney at Michael & Associates, Benjamin Michael<\/a>, explains that independent contractors\u2019 work is usually tied to a specific project:<\/p>\n\n\n\n \u201cIndependent contractors are individuals who are self-employed. Once the project is complete, the working relationship is also complete, unless both parties choose to continue with another project.\u201d<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n There are several rules that help you determine whether a professional is an employee or an independent contractor:<\/p>\n\n\n\n \u2192 Note: If you\u2019re still unsure how to correctly classify a worker, you can file Form SS-8<\/a> with the IRS, which will officially determine the status of your worker.<\/p>\n\n\n\n \ud83d\udca1 Clockify Pro Tip<\/strong><\/p>\n\n\n\n Check out our blog post for a more detailed explanation of the differences between these types of workers:<\/p>\n\n\n\n In essence, the W-9 form<\/a> helps you obtain all the independent contractor\u2019s identifying information, including:<\/p>\n\n\n\n Founder & CEO at Ninebird Properties, Mark Buskuhl<\/a>, notes that obtaining the W-9 form is a must for anyone working with an independent contractor:<\/p>\n\n\n\n \u201cIndependent contractors are responsible for paying their own taxes, so it’s important to obtain a W-9 form from them before making any payments. This form provides their tax identification number and other necessary information for tax purposes.\u201d<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n You should double-check every piece of information the independent contractor\u2019s provided, especially the TIN. <\/p>\n\n\n\n In case the TIN is missing or incorrect<\/a>, you need to deduct backup withholding taxes from the contractor\u2019s paycheck (more on this in Step #4). <\/p>\n\n\n\n You and the independent contractor usually determine the payment terms between yourselves \u2014 and there are no prescribed rules here. <\/p>\n\n\n\n Common methods of independent contractor payment terms<\/strong> include:<\/p>\n\n\n\n To get a clear overview of the costs, you could ask the independent contractor to send you the receipts for project-related expenses<\/a>.<\/p>\n\n\n\n General Manager at Digital Minds Group, Lija Wilson<\/a>, advises to always sign a contract and agree on important terms: <\/p>\n\n\n\n \u201cClearly define the scope of work, deliverables, deadlines, and payment terms in a written contract.\u201d<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n So, for the best possible client\/contractor relationship, you should lay out the ground rules about what happens if:<\/p>\n\n\n\n Bear in mind \u2014 many contractors ask for at least one installment before the project is done. Also, contractors with less experience may not have the means to pay all project costs without getting paid for the materials<\/a> upfront (alternatively, contractors may also pay for their own materials, and later request such costs from their client).<\/p>\n\n\n\n Depending on the agreed payment terms, you\u2019ll either have to pay the contractor a lump sum or divide the payment into installments. You should also discuss the best payment method<\/strong> to use to reimburse the contractor for their work. <\/p>\n\n\n\n Buskuhl suggests keeping records of all payments: <\/p>\n\n\n\n \u201cIt’s important to keep accurate records of all payments made to independent contractors. This includes the amount paid, the date of payment, and any additional expenses that were reimbursed. These records will be necessary for tax purposes and in case of any disputes.\u201d<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n When an independent contractor doesn\u2019t provide their TIN, you have to deduct backup withholding taxes<\/a> from their earnings at the rate of 24%. If the contractor doesn\u2019t pay their taxes on their own, you\u2019ll be responsible for doing that using the backup taxes you withheld from them. <\/p>\n\n\n\n You report the withheld taxes by filling out Form 945<\/a>. This form is due on January 31st of each year for withholding during the year prior.<\/p>\n\n\n You report any non-employee compensation to the IRS by completing Form 1099-NEC<\/a>. This form is mandatory if you\u2019ve paid $600 or more to an independent contractor during the year.<\/p>\n\n\n\n You need to fill out the form and send copies both to the IRS and the independent contractor by January 31 of the following tax year.<\/p>\n\n\n\n Filing Form 1099-NEC is fairly simple:<\/p>\n\n\n\n Employee misclassification can lead to serious financial and legal consequences<\/a>. The most frequent misclassification is treating regular employees as independent contractors and failing to pay their benefits. <\/p>\n\n\n\n Wilson helped us name some of the dangers of misclassifying employees as independent contractors: <\/p>\n\n\n\n Wilson also notes that employment classification regulations vary. Thus, contacting the IRS in case of uncertainty is the best way to ensure you don\u2019t misclassify a worker. <\/p>\n\n\n\n Not every payment method will suit you or the contractor you\u2019re working with. <\/p>\n\n\n\n The first step in choosing the right payment method is determining what\u2019s important to you, whether that\u2019s speed of payment processing, processing fees, security, or something else.<\/p>\n\n\n\n For instance, 54% of JP Morgan survey<\/a> respondents claimed that speed is the main factor they consider when they choose a payment method. <\/p>\n\n\n\n On the other hand, 32% of organizations participating in a 2022 Global Payments Survey<\/a> highlighted cost (rebate) as the top driver of their payment method choice. <\/p>\n\n\n\n Once you determine your priorities, you can go over our list of payment methods to choose one that works best for your priorities. <\/p>\n\n\n\n Direct deposits are a great way to transfer money domestically. If you and your contractor are in the same country, direct deposit is a safe and convenient way to pay them.<\/p>\n\n\n\n In the US, direct deposits are arranged through the ACH system<\/a>, which allows you to transfer money directly to your contractor\u2019s bank account.<\/p>\n\n\n\n Executive Director and Founder of the Association of Ghostwriters, Dr. Marcia Layton Turner<\/a>, has two preferred payment methods for her work:<\/p>\n\n\n\n \u201cI’m an independent contractor who works as an <\/em>S corporation<\/em><\/a>, so I routinely bill clients through my business and am paid either by check or ACH (bank deposit).\u201d<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n <\/p>\n\n\n\n Many online payment systems make it easy to carry out transactions, both domestic and international.<\/p>\n\n\n\n Some of the most common payment processors include:<\/p>\n\n\n\n CFP and founder of GoodFinancialCents.com, Jeff Rose<\/a>, highlights speed as the main upside to using online payment systems: <\/p>\n\n\n\n \u201cThese methods are efficient, secure, and offer digital record-keeping for easy tracking.\u201d<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n Namely, PayPal is probably the most popular payment system among freelancers, and your contractor most likely has a PayPal account. It\u2019s a faster option than a check, considering the entire transaction is carried out online. <\/p>\n\n\n\n However, one con of PayPal and similar online payment systems is their often steep fees. For example, payment processing fees<\/a> for PayPal can go up to 3.5% of the transaction.<\/p>\n\n\n\n \ud83d\udca1 Clockify Pro Tip<\/strong><\/p>\n\n\n\n Looking for more ways to make payments easier? Check out the top payment apps:<\/p>\n\n\n\n Checks are a great payment option because they don\u2019t come with fees. <\/p>\n\n\n\n One major downside of checks is that they take time to clear and contractors receive them via post, which means they have to wait longer for their payment. <\/p>\n\n\n\n Still, Rose believes checks are outdated:<\/p>\n\n\n\n \u201cSome contractors may still prefer traditional checks, but electronic options tend to be faster and more convenient for both parties involved.\u201d<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n You may eliminate some of the disadvantages of traditional checks by opting for eChecks<\/a>. These work exactly similarly to regular checks, except they\u2019re sent via email, and payments are processed via the ACH system, which speeds up the payment process. <\/p>\n\n\n\n Another type of bank transfer is wire transfer. According to the Consumer Financial Protection Bureau<\/a>, wire transfers \u201cmove money electronically from one bank account to another<\/em>.\u201d<\/p>\n\n\n\n It\u2019s a great option for time-sensitive payments and international transfers. <\/p>\n\n\n\n Co-founder and CMO of NCHC, Logan Nguyen<\/a>, believes wire transfers are best for fast transfers:<\/p>\n\n\n\n \u201cThis payment method is preferred when payment speed is necessary. A wire transfer allows employers to make payments quickly. International transfers may take a few days, but domestic transfers often take 24 hours.\u201d<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n Yet, the downside is that fees can be costly. So, if you\u2019re not in a hurry, you may want to consider other options.<\/p>\n\n\n\n Credit card payments are appealing because they are highly secure and often easily reversible in case of fraud.<\/p>\n\n\n\n Since you\u2019re paying with a line of credit, you don\u2019t have to worry about fraud affecting your actual money. Moreover, many credit card companies offer zero fraud liability<\/a>. However, to be able to pay your contractor via credit card, contractors need to have a merchant account with the bank or alternative merchant service.<\/p>\n\n\n\n While accounting software<\/a> is not a payment method per se, it can help you speed up the payment process immensely. Accounting tools can be used to calculate billable hours<\/a> and generate invoices<\/a> which make payments much easier. <\/p>\n\n\n\n Once you agree on the hourly rate<\/a> for the project, you can instruct the contractor to track the time spent on your project<\/a> and invoice you based on their time worked. <\/p>\n\n\n\n You could also ask them to input the specific tasks<\/a> they performed, to better understand the work they\u2019re performing for you. <\/p>\n\n\n\n To make the process of tracking their tasks and invoicing easier, you can recommend Clockify by CAKE.com<\/a> to the independent contractor.\u00a0<\/p>\n\n\n Time tracking software used by millions. Clockify by CAKE.com is a time tracker and timesheet app that lets you track work hours across projects.<\/p>\n\n Among other uses, Clockify is a freelance time-tracking tool<\/a> that allows independent contractors to:<\/p>\n\n\n\n \ud83d\udca1 Clockify Pro Tip<\/strong><\/p>\n\n\n\n Not sure how to differentiate between billable and non-billable hours and find the perfect balance between them? Read this post:<\/p>\n\n\n\n Looking for more clarification on who falls under the independent contractor category? Do you need advice on paying contractors from another country? <\/p>\n\n\n\n This section has all the answers. <\/p>\n\n\n\n According to the Office of Federal Contract Compliance Programs, freelancers \u201cperform temporary, flexible jobs and are paid per service provided or task completed.<\/em>\u201d <\/p>\n\n\n\n Wilson explains that job freedom and tax responsibility differentiate freelancers from regular employees:<\/p>\n\n\n\n \u201cFreelancers are responsible for their own taxes and may not receive benefits like health insurance or retirement plans. They often work on short-term projects and may work with multiple clients simultaneously.\u201d<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n As a freelancer\u2019s payer, you have \u201cthe right to control or direct only the result of the work and not what will be done and how it will be done<\/em>\u201d, according to the IRS. This sets freelancers and independent contractors apart from regular employees. <\/p>\n\n\n\n Freelancers are usually paid by the hour or by project, as they don\u2019t have a monthly salary regular employees have. They are often classified as <\/strong>1099 independent contractors<\/strong><\/a>, who have to pay their own taxes<\/a>, benefits, and insurance. <\/p>\n\n\n\n Independent contractors are self-employed workers (subject to the self-employment tax<\/a>) who perform temporary tasks for an employer and are in control of how their work-related tasks are performed. <\/p>\n\n\n\n \ud83d\udca1 Clockify Pro Tip<\/strong><\/p>\n\n\n\n Want to start freelancing but aren\u2019t sure what your hourly rate should be? Use this article as a reference:<\/p>\n\n\n\n The term \u2019contractor\u2019 is a more \u201cloose\u201d term without an official definition as it can include independent contractors and those who don\u2019t have that status. <\/p>\n\n\n\n Rose notes that the contractor\u2019s status depends on the situation:<\/p>\n\n\n\n \u201cIndependent contractors are like free agents <\/em>\u2014 they work on specific projects, often independently. Contractors, though, can be a bit of a chameleon. They can be independent or on the company’s payroll, depending on the situation.\u201d<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n So, contractors may or may not be self-employed. When contractors are outsourced by a base company or agency<\/strong> (staffing, temp, or employment agency), such agency usually provides them with some benefits and insurance<\/a>. If that\u2019s the case, they\u2019re paid as W-2 workers, just like regular employees. <\/p>\n\n\n\n If this isn\u2019t the case, these workers are considered independent contractors. Unlike the rest of the contractors, independent contractors are never tied to an outsourcing-based company<\/strong>, and they handle their taxes.<\/p>\n\n\n\n If the independent contractor is working remotely from another country, you have fewer payment methods to choose from. <\/p>\n\n\n\n You can opt for an international bank transfer, which is usually facilitated by SWIFT<\/a>. SWIFT is a bank messaging system that allows people to send and receive money internationally. It works as a regular wire transfer. <\/p>\n\n\n\n Based on the Global Payments Survey we previously mentioned, 43% of organizations believe SWIFT has an increasing role in global connectivity, while 38% think it will remain dominant in the next decade. <\/p>\n\n\n\n Alternatively, you can opt for one of the online payment systems we mentioned. Nearly every online payment system is available internationally, and they typically don\u2019t differentiate between domestic and international transactions.<\/p>\n\n\n\n For that purpose, PayPal, Payoneer, and Transferwise are among the most popular platforms for international transfers. <\/p>\n\n\n\n In the end, it\u2019s crucial to correctly classify workers before paying them.<\/p>\n\n\n\n You have to determine whether the worker is a W-2 employee or a 1099 independent contractor. Then, you\u2019ll know if you need to cover their taxes, insurance, and benefits.<\/p>\n\n\n\n Hopefully, you now understand the steps necessary to pay your contractors and freelancers. Remember that a proper payment method and good software make the payment, time tracking, and invoicing process much easier!<\/p>\n\n\n\n If you\u2019re looking to speed up the process of paying for independent contractors, a tool such as <\/em>Clockify<\/em><\/a> is a great choice. <\/em><\/p>\n\n\n\n Clockify allows independent contractors to track the time and projects they work on, as well as differentiate between billable and non-billable hours. When payment is due, they can quickly create an invoice and even attach hours worked for an even easier billing and invoicing process! <\/em><\/p>\n\n\n\nStep #1: Properly classify the worker<\/h3>\n\n\n\n
![\"Ben](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/Ben-Michael-Attorney-at-Michael-Associates.jpg\")
<\/figure>\n<\/div>\n\n\n\nRegular employee vs. independent contractor: IRS rules<\/h4>\n\n\n\n
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Step #2: Have the independent contractor fill out a W-9 form<\/h3>\n\n\n\n
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![\"W-9](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/pay-contractors-freelancers-w-9.jpg\")
![\"Mark](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/Mark-Buskuhl-Founder-CEO-at-Ninebird-Properties.jpg\")
<\/figure>\n<\/div>\n\n\n\nStep #3: Agree on the payment terms<\/h3>\n\n\n\n
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![\"Lija](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/Lija-Wilson-General-Manager-at-Digital-Minds-Group.jpeg\")
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Step #4: Make payments<\/h3>\n\n\n\n
<\/figure>\n<\/div>\n\n\n\n![\"Annual](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/pay-contractors-freelancers-945.jpg\")
Step #5: Fill out Form 1099-NEC<\/h3>\n\n\n\n
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Misclassification of employees: How important is it to properly classify workers?<\/h2>\n\n\n\n
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6 Best payment methods for independent contractors<\/h2>\n\n\n\n
Method #1: Direct deposit (ACH payment)<\/h3>\n\n\n\n
![\"Marcia](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/Marcia-Turner-Executive-Director-and-Founder-of-the-Association-of-Ghostwriters.jpeg\")
<\/figure>\n<\/div>\n\n\n\nMethod #2: Online payment systems<\/h3>\n\n\n\n
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![\"Jeff](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/Jeff-Rose-CFP-and-founder-of-GoodFinancialCents.com_.jpg\")
<\/figure>\n<\/div>\n\n\n\n![\"Paypal\"](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/pay-contractors-freelancers-paypal.jpg\")
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Method #3: Checks<\/h3>\n\n\n\n
<\/figure>\n<\/div>\n\n\n\nMethod #4: Wire transfer<\/h3>\n\n\n\n
![\"Logan](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/Logan-Nguyen-Co-founder-and-CMO-of-NCHC.jpeg\")
<\/figure>\n<\/div>\n\n\n\nMethod #5: Credit card<\/h3>\n\n\n\n
Method #6: Accounting software<\/h3>\n\n\n\n
![\"Clockify](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/Clockify-billable-nonbillable-screenshot.png\")
![\"Illustration\"](\"https:\/\/clockify.me\/blog\/wp-content\/themes\/cake-blog\/theme\/images\/banners\/clockify\/landing-3@2x.png)
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![\"Clockify](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2024\/01\/Clockify-invoice-.jpg\")
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FAQs about independent contractors<\/h2>\n\n\n\n
What\u2019s the difference between freelancers, independent contractors, and regular employees?<\/h3>\n\n\n\n
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Are all contractors independent?<\/h3>\n\n\n\n
<\/figure>\n<\/div>\n\n\n\nHow do I pay an independent contractor in another country?<\/h3>\n\n\n\n
Paying independent contractors is easier with Clockify by CAKE.com<\/h2>\n\n\n\n