How to pay independent contractors

Published 9 March 2026

Table of contents

• What is an independent contractor?
• What to set up before you pay a contractor
• How to pay contractors
• Best ways to pay contractors
• Handling contractors’ 1099s
• Pay contractors faster with Xero
• FAQs on paying contractors

Key takeaways

• Classify first, pay second: Confirm contractor status and collect a W-9 before you send money to avoid penalties and rework
• Pick the right payment path: ACH is low cost for US payouts; wires and tools like Wise help with cross-border speed and FX
• Build a repeatable workflow: Record bills, approve, pay, and reconcile in one place so 1099 totals and cash flow stay accurate
• Automate compliance: Track year-to-date totals and e-file 1099-NEC through IRS‑approved partners connected to your accounting

What is an independent contractor?

An independent contractor is a self-employed person who works on specific tasks or projects for their employer without being considered a regular employee. You outline the work you need done and agree on a rate or fee. Independent contractors are also responsible for their own taxes.

Contractors are common in roles within industries like graphic design, bookkeeping, marketing, and IT. Since contractors are not regular employees, you typically don’t have to provide benefits, withhold payroll taxes, or manage their daily schedule.

What to set up before you pay a contractor

Before sending a contractor their first payment, collect the right paperwork and set clear expectations. This helps you keep your workflow organized, makes compliance easier, and prevents last-minute scrambling come tax season.

Here’s what to set up before learning how to pay contractors:

1. Request a Form W-9 and verify the contractor’s TIN

Collect a W-9 from every US contractor before they start work. This form shares their legal name, address, and taxpayer identification number (TIN). Then, verify the TIN to avoid reporting errors.

You can verify a contractor’s TIN by using the IRS TIN Matching service or through a payroll and accounting software that checks the name and TIN against IRS records. This confirms the information on the W-9 is accurate and helps prevent 1099 filing errors.

2. Choose how you’ll pay the contractor

Decide how you’ll pay your contractor, whether it’s hourly, per project, per deliverable, or on retainer. Then agree on rates and your payment frequency. For example, you can pay weekly, bi-weekly, or once the project is completed.

It’s a good idea to schedule payments when you know you’ll have the funds available. This avoids straining your budget and ensures contractors get paid on time.

3. Prepare contracts and set payment terms

Create a written contract to protect you and your chosen contractor. Within the contract, set out:

• the scope of work, the deliverables, deadlines ,and who owns the final product
• payment rates
• how and when you will pay the contractor – for example, per hour, per milestone, or per project

Setting clear terms helps reduce disputes and makes your approval workflow easier to follow.

3. Choose how you’ll pay the contractor

Decide how you’ll pay your contractor, whether it’s hourly, per project, per deliverable, or on retainer. Then agree on rates and your payment frequency. For example, you can pay weekly, biweekly, or once the project is completed.

It’s a good idea to schedule payments when you know you’ll have the funds available. This avoids straining your budget and ensures contractors get paid on time.

4. Decide domestic or international status

Determine whether your contractor is based in the US-or internationally.

• If they’re a domestic contractor, you should collect a W-9 and issue a Form 1099-NEC to them at year-end if they meet reporting thresholds.
• If they’re an international contractor, they’ll need to complete a Form W-8BEN (for individuals) or W-8BEN-E (entities), and follow different tax rules.

5. Add the contractor to your system

Once you’ve gathered all necessary information, add the contractor to your accounting or bookkeeping system. Record their legal name, address, TIN, and entity type. For U.S.-based contractors, assign them to a category such as “non-employee compensation” to track payments throughout the year and simplify year-end 1099-NEC filings. For international contractors, track payments separately for potential withholding and reporting on Form 1042-S.

How to pay contractors

Use the following steps to stay organized, maintain accurate records, and ensure compliant payments:

1. Create and approve a bill or expense

Once the contractor invoices you, enter the contractor’s invoice or create a bill in your accounting system. Include the service date, work description, and amount due. If you need to get the bill approved, send it to the right manager or owner before moving forward to prevent duplicate or unauthorized payments.

2. Choose a payment method

Use a payment method that balances speed, cost, and convenience for both you and your contractors. Your options include bank transfer, check, ACH, debit card, credit card, wire transfer, or a contractor payment platform. You may need a global payment service or wire transfer for international contractors.

3. Schedule and send payment

Once the bill gets approved and you’ve chosen a payment method, schedule the payment for the due date and send it immediately. Many accounting systems let you automate recurring or batch payments, saving you time if you work with multiple contractors. Confirm the contractor’s banking details to make sure they get paid on time.

4. Record and reconcile the payment

Once you send a payment, mark the bill as paid in your system. Match the contractor payment to the transaction in your bank feed to help you keep your books accurate and to make sure your expenses reflect real cash movement.

5. Track year-to-date totals

An accounting payment system should accumulate each contractor’s total payments for 1099 reporting throughout the year. Regularly review these totals to confirm they’re correct and that they’re coded to the right category. This avoids last-minute corrections during tax season and ensures you’re issuing accurate 1099s.

Best ways to pay contractors

Here are common ways you can pay contractors as a small business:

ACH transfers

This is an efficient and affordable option for US contractor payments. It’s secure, low-cost (often free), and fast – payment usually arrives within 1–2 business days. ACH works well for recurring payments because you can automate the process straight from your accounting or bill-pay system.

Paper checks

Checks are slow but useful if you don’t have the contractor’s banking details or if they prefer physical payment. They’re also cheap per transaction. But they require manual handling and can delay payments if they’re lost or mailed late – so use them as backup rather than as your main payment option.

Credit cards

Paying contractors by credit card ensures a quick payment workflow because charges post immediately and the card balance settles later on in your billing cycle. They’re convenient, too, as contractors may accept card payments via invoice or an online platform. But watch out for processing fees that contractors often pass back to the payer.

Wires and international transfers

While wire transfers are fast, they typically carry higher fees. They’re often used for international contractors or time-sensitive payments.

Online payment systems and apps

You can also pay contractors online through platforms like PayPal or Stripe which offer speed, automation, and built-in compliance features. Since fees vary, it’s best to use these services when you need ease of use and flexibility.

Handling contractors’ 1099s

This information will help you handle 1099s for independent contractors:

Who gets a 1099-NEC

Issue Form 1099-NEC to each US contractor you paid $600 or more in the calendar year for their services. Don’t issue one for payments made by credit card or payment processors or for most corporations (unless the contractor is a law firm or medical provider which may still require reporting).

Filing deadlines and e-file options

The deadline to send 1099-NEC forms to contractors and file them with the IRS is January 31.

Most accounting tools let you e-file directly, and many small businesses use services like Tax1099 or e-file portals to make fast bulk submissions. E-filing reduces errors, provides proof of submission, and is required for many businesses that file a certain number of information returns.

Backup withholding and B notices

If a contractor’s TIN is missing or doesn’t match IRS records, you may have to withhold 24% from payments (which is known as backup withholding).

If the IRS sends you a B notice, it means the contractor’s name or TIN didn’t match the IRS’s records. Tell the contractor and consider whether you need to begin backup withholding until they correct their information. Factors that affect whether backup withholding applies include the contractor’s TIN status, IRS mismatch notices, exempt payee status, and the type of payment. For full guidance, see the IRS Backup Withholding page.

Avoid withholding and B notices by collecting and verifying W-9s.

State 1099 requirements

Some states require separate 1099 filings even if you submitted them to the IRS, while others follow the IRS Combined Federal/State Filing program.

The reporting requirements also vary by state – some require you to report at lower payment thresholds, and others require e-filing regardless of volume. To stay compliant, check your state’s annual rules or use an e-file service that handles state submissions.

Pay contractors faster with Xero

Managing contractor payments doesn’t have to be slow, manual, or complicated. With Xero, you can streamline the entire payment process, whether it’s collecting details to sending payments or preparing 1099s. Xero makes compliance simpler – whether you work with a few freelancers or dozens of contractors.

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FAQs on paying contractors

Here are answers to common questions about paying contractors:

How do I pay a contractor from my LLC?

First, collect a W-9 and enter the contractor’s bill or invoice. Then choose a payment method and record the expense in your accounting system.

How much can I pay a contractor without a 1099?

You can pay a contractor up to $599.99 in a calendar year without a 1099. If you pay a contractor $600 or more, you must issue a 1099-NEC.

How often should I pay contractors?

It depends on your agreement. For example, you can pay per project, milestone, or weekly/biweekly. Ensure the payment schedule aligns with your cash flow and with what you agreed to in the contract or scope of work.

Can I pay contractors by cash or Zelle?

Yes you can, but it’s not recommended. It’s harder to document cash and Zelle doesn’t give you the same audit trail as ACH or bill-pay systems. If you decide to pay by cash or Zelle, keep detailed records and receipts to properly track payments for taxes and 1099s.

Do I need a contract to pay a contractor?

While you don’t need a formal contract to pay a contractor, it’s strongly recommended. Because a contract outlines all the important details you've agreed with the contractor – the scope of work, deadlines, rates, ownership of work, and payment terms – you’re better protected against disputes.

Should I use payroll or accounts payable to pay contractors?

Use accounts payable to pay your contractors. Since they’re not employees, you shouldn’t run them through payroll or issue W-2s.

How do I pay international contractors?

You can pay international contractors by international wire transfer, global ACH, or services like PayPal or Wise. Research any tax treaty rules to determine if you need to pay withholding tax.