How to Run Contractor Payroll The Right Way?

Contractor Payroll

When it comes to contractor payroll, there may be many challenges you come across. Considering the services of an independent contractor is different from hiring a worker or employee. It is important to understand the differences between contractor payroll and employee payroll. This is how you can easily run the contractor payroll in an effective and right manner. There are differences in the forms you will need to gather, wage reporting, and how you pay employees vs. contractors. To simplify the contractor payroll process, taking on contractor payroll services from a reputed company can help you a lot.

Using a software tool for your contractor payroll needs is the right thing you can do. But if you want to do it on your own, then it would be good if you learn the differences. If your business has independent contractors and W-2 employees, it might be a challenging task to process two separate transactions and make sure you pay everyone correctly. Of course, paying independent contractors through spreadsheets or software can ease the process. But when you run payroll for independent contractors with W-2 employee payroll, ensure you understand the difference in the process.

Steps to run a successful contractor payroll 

There are 6 steps you need to take when you want to run a successful payroll for a contractor. These are:


First of all, you need to determine if the worker is a contractor or an employee. You can ask yourself about the responsibilities or duties your contractor or employees are doing. If you have an employee, then you are responsible for everything like assigning duties, scheduling, financial control, and many others. When it comes to independent contractors, they are responsible to dictate their working hours and availability, type of equipment, and methods of performing work.

Independent contractors are also usually working on a temporary basis. They are not eligible to get employee benefits like health insurance or retirement. If your employee meets the classification as an independent contractor, it is important to treat and pay them accordingly.

Prepare and sign an agreement with the contractor 

As independent contractors are not employees, they tend to set their own prices. A contractor or a work agreement is required, which you need to sign. Generally, a work agreement has components like hourly or job rates, timelines, goals and deliverables, if the contractor needs an upfront deposit, and the method to pay the contractor. You can ask any questions or request any changes with your contractor if needed.

Collect necessary forms 

The next step is to gather the necessary forms. If a worker is a contractor, you need to receive a Request for Taxpayer Identification Number and Certification and Form W-9. It provides you with compulsory tax filing information for the employee to report wages for them. This form provides you with information such as name, business name (different from their actual name), business entity, address, exemptions; Taxpayer Identification Number, Certification, etc. keep this form with you for records.

Pay the contractor 

When you are going to pay contractors, avoid withholding payroll taxes and paying employer taxes such as federal unemployment tax. Do not deny Social Security tax, federal income tax, state income tax, Medicare tax, local tax, etc. Hence, there are no net or gross wages with independent contractors. Rather, the wage amount in the work agreement of contractors is the amount the contractor gets.

Recompense invoices and allocate contractor pay stubs 

The independent contractor pay stub appears to be the invoice the contractor sends and you pay. But if you use contractor payroll software or contractor payroll services, then you can download or ask for a check stub, which you will issue to the contractor with their invoice. Contractors may specify in their work agreements that they should get a pay stub when paid.

Give Form 1099-NEC at the year’s end 

You must provide the correct Form 1099 to an independent contractor at the year’s end. This form is given to contractors for performing non-employee work for you.

Can a payroll software tool help you? 

When you consider a software tool for a contractor payroll task, then it is the best decision to meet the pace of today’s life. Paying your contractors through online contractor payroll solutions may help you save time and simplify the process. The interesting thing about a software tool is that you can payroll both employees and contractors in the same payroll rather than running 2 different payrolls. If you go with an option to pay contractors via a payroll software app, then you must look for a solution that gives you a chance to process both contractor and employee payments in a single payroll. You can still provide the contractor pay stubs with the software tool. Visit Payroll4Construction and find the best software solutions for your contractor payroll needs.

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