How to Establish an Online Payment System for Independent Contractors

Payment

As a small business owner, you may need to hire an independent contractor at some point. Whether you’re looking for a freelance accountant, website designer, or copywriter, it’s crucial to establish an easy-to-use, secure and manageable payment method for your contractors.

Use the following steps to pay your contractors using our suggested online payment methods.

Step 1: Determine How You’ll Pay Contractors

Unlike employees, independent contractors aren’t paid a salary. Determining how to pay and how much to pay are the first decisions you’ll make when hiring a contractor. Will you pay hourly or per project? A weekly, bi-weekly, or monthly pay schedule? How much will you pay them?

Step 2: Know What Forms to Use

After hiring an independent contractor, you’ll have to complete a W-9 form, which includes their personal information. All contractors must complete this form before starting employment. 

At the end of the year, use this 1099-NEC template and send it to each contractor you’ve paid more than $600 in a tax period. You’ll need to distribute a copy of the 1099 for each contractor, as well as the IRS and state tax agency. This document must include the total amount paid.

Step 3: Set up Contractors in Your Payroll System

Whether you complete payroll yourself or send it over to another company, you can now set them up in your system. Start by ensuring you’ve recorded each contractor’s information, either in Excel, notebook, or payroll software, as accuracy will avoid problems on payday. 

Step 4: Process Online Payments to Contractors

Why is setting up an online payment system important?

After setup, you now need to decide how you will pay your contractors. Most independent contracts will have a preferred method of payment, which will be disclosed in their contract. If they haven’t, it’s beneficial to have one or two systems you used specifically for contractors.

When you have a standard payment method, it becomes less confusing for you and your company to make regular payments. What’s more, if you decide to use a method of payment by your contractor’s request that you don’t use, you’ll have to sign up for it. 

Not only could this delay payments or cost you an additional fee, but the long wait time could cause freelancers to avoid working with you in the future. Remember: freelancers talk.

What types of online payment can you use?

There are many different ways to pay your independent contractors: cash, checks, debit, credit, mobile e-wallets, or bank transfers. For your purposes, direct deposit, pay card, or e-wallets are the most accessible options for businesses, including startups and large corporations.

Direct Deposit

Payroll software allows businesses to set up direct deposits. If your contractor sends you an invoice, you’ll need to adjust the amount you spend each week or month. Keep in mind that monthly fees can range from $10-$30. Discuss with your contractors who pays this fee.

Pay Card

Pay cards are completely electronic, secure, and your contractors don’t need a bank account to use one. They act like prepaid debit cards that can be sent to your contractors but are able to be filled up electronically. Contractors can reap the benefits of direct deposit without an account.

E-Wallets

E-wallets, like Paypal, are more commonly being used by independent contractors. Although PayPal requires a monthly fee, contractors can use them to transfer money into their own accounts. PayPal can be used internationally, which is perfect for foreign expats.

Now that you’ve set up a payment system, you can send your contractor’s money every time they send you an invoice. Keep in mind that most States let you write off fees associated with various payment methods, so keep your receipts for tax season.

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