How To Pay Independent Contractors In 2024

If you, like many other business owners, make use of contract labor (such as independent contractors or freelancers), you need to understand the best ways to pay these professionals for their work.

Choosing the right payment method for independent contractors will help you get projects completed on time, keep your clients happy, and ensure good working relationships with the independent contractors you hire.

In this article, we’ll cover the top 8 methods of paying independent contractors (also known as 1099 contractors). We’ll go over the pros and cons of each method, as well as the key considerations business owners should make when deciding how to pay their contractors. Let’s take a look.

Key Takeaways

• There are several common methods businesses use for paying independent contractors and freelancers.
• Some payment methods offer advantages like enhanced security, while others offer faster payment processing or lower transaction fees.
• Every business will have different needs to consider when deciding how to pay its contractors.
• Businesses should consider processing time, transaction fees, ease of use, accessibility, record-keeping, and tax implications when choosing a method for paying independent contractors.

Table of Contents

• Checks
• Wire Transfers
• Credit Cards
• Direct Deposit
• ACH Payment
• PayPal
• Accounting Software
• Cash
• Factors to Consider When Paying Contractors
• Conclusion
• Frequently Asked Questions

1. Checks

Personal checks are a simple and familiar way to pay your contractors. Just grab your checkbook, fill out the relevant information, and send it to the independent contractor—simple as that. 

While their simplicity makes checks a great option, there are also a few downsides. For one thing, it takes time for a physical check to get delivered and processed before the funds are transferred. The check takes time to arrive in the mail, and there will often be a hold on the funds for 2 to 5 business days before the check clears, potentially leading to delays in payment for the independent contractor. 

eChecks are an alternative option—although they still take a few days for banks to process, you can email them to your independent contractor, meaning they won’t have to wait for their payment to arrive in the mail.

2. Wire Transfers

Wire transfers are a fast, reliable way to pay independent contractors almost anywhere in the world. While an international transfer may take a few days to go through, domestic wire transfers usually clear in 24 hours, making wire transfers one of the quickest ways to pay a 1099 contractor. 

Wire transfers have some downsides, however. For one thing, both the sender and recipient of a wire transfer will usually incur a fee. For domestic transfers, the sender will have to pay a fee of $20 to $30, and the recipient will pay a fee of $15 to $20. These costs are even higher for international transfers. Also, it’s very difficult to reverse a wire transfer in case of a dispute or mistake—especially for international payments. 

Between the fees and risks of wire transfers, it’s suggested to use them only when time is of the essence.

3. Credit Cards

Credit cards can be another quick, reliable way to pay a contractor. Many business owners opt for credit card payments because they offer additional layers of security for the sender, keeping your banking information private and separate from your independent contractor payments. 

Credit cards also offer extra assurance in the form of dispute resolution. Because credit card payments are made with a line of credit versus your actual money, it’s much easier to initiate a dispute or reverse a mistaken payment. Many credit card companies offer comprehensive protection for their clients (some even offer zero fraud liability), making them an attractive option for paying freelancers and contractors.

On the other hand, you’ll likely need a merchant account with your bank (and will have to pay transaction fees) to pay an independent contractor via credit card, meaning this isn’t always the best option.

4. Direct Deposit

Direct deposit is one of the most common ways to pay employees, contractors, and freelancers alike. It’s simple to set up direct deposit for freelancers—you just need to get banking information from each independent contractor, and then set up the deposit arrangement with your own bank. After that, payments are sent directly to your contractor’s account.

Direct deposits are great for freelancers you send recurring payments to since you just have to set up the direct deposit payments a single time to pay them in the future.

Direct deposits are also a very secure way to make payments, and the funds are usually available to the recipient within 1 to 2 business days. Overall, direct deposit is a great option for paying freelancers with little to no downside.

5. ACH Payment

Automated Clearing House (ACH) payments are a form of bank deposit payments commonly used for employers and their staff. But they work just as well as a method to pay independent 1099 contractors.

ACH transfers are simple to set up, and once you’ve done so, you can continually pay the same independent contractor without having to collect more information. This makes ACH transfers ideal if you’re working with the same contractors ongoingly. ACH payments are also paperless, making them relatively secure for both the sender and the recipient.

Banks will sometimes charge a fee to the sender for processing ACH payments (sometimes as high as $10 per transaction), but this varies greatly depending on your financial institution and any arrangement you’ve already negotiated with them.

6. PayPal

As the world’s leading online payment platform, PayPal is a very common method for business owners to pay independent contractors. 

As the sender, you simply need to link your bank account to your PayPal business account. This lets you transfer funds directly to your independent contractor’s PayPal account, which they can use directly from PayPal or transfer into their regular bank account. Of course, this has a downside—all your contractors must have a (free) PayPal account of their own for this method to work.

Bear in mind that PayPal charges fees for merchant and business accounts in some regions, but not all. Double-check the relevant fees in your region before using PayPal as your main payment method for freelancers—these costs can add up over time.

7. Accounting Software

There are many great options on this list, but contractor accounting software has many added benefits as a method of paying contractors. These include automation, integrated record-keeping, and cross-compatibility with other financial service platforms.

Cloud-based accounting software, such as the platform offered by FreshBooks, is a great way to offer flexible, simple-to-use payment solutions to your contractors and independent freelancers.

Our payroll software is designed for small businesses and makes it simple to pay an independent contractor just as you would an employee—perfect for ongoing arrangements with freelancers. 

With FreshBooks, you can pay your team of contractors directly from your account in just 5 clicks. Access unlimited payroll runs, automatic payroll tax filing (if applicable), direct deposit, and tax forms—all from within your FreshBooks accounting software. Plus, FreshBooks automatically files your independent contractor payments with your other finances, categorizing it as an expense and automatically generating all relevant tax forms and data for later.

8. Cash

Despite all the more high-tech options on the list, cash remains a possible way to pay independent contractors that you interact with personally. Cash has its benefits: It’s tangible and physical, it can’t bounce like a check, and it doesn’t need to be processed by a bank before it can be spent. 

Some contractors might prefer to be paid in cash, but it’s considered a risky move for businesses. Paying in cash often means no paper trail, leaving you open to the risk of a tax discrepancy or even an audit. This also makes it possible for freelancers to evade some taxes or make mistakes when reporting their business income, which can lead to more questions and challenges at tax time. Though not technically illegal, it’s often advised not to pay contractors in cash. 

If paying in cash, consider, at the minimum, obtaining a cash payment receipt signed by the contractor.

Factors To Consider When Paying Contractors

There are plenty of options when it comes to choosing the best method to pay an independent contractor. Here are a few key factors to consider before making your decision. 

Payment Processing Time

Certain payment methods, such as direct deposit, checks, ACH transfer, and PayPal payments can be subject to payment processing delays. In some ongoing arrangements where trust is established between the business owner and the independent contractor, this may not be an issue, but it can be a concern for new contractors or one-off projects.

Transaction Fees

If you use a lot of contract workers in your business, you’ll need to consider the fees associated with each payment. Fees for credit card payments, PayPal transfers, or wire transfers may seem reasonable at first, but they can add up to a significant sum over time. Opt for lower-cost options if you’ll be making consistent, ongoing payments to freelancers.

Ease of Use and Accessibility

Choosing an easy-to-use payment method (such as bank deposit or ACH transfer) helps make life easier when you pay contractors. Certain payment methods also make the funds more readily accessible for the contractors, which may be important in order to maintain good working relationships with your freelance team.

Record Keeping and Documentation

It’s essential for businesses to keep good records of all payments made to freelancers for both tax purposes and to maintain good financial accounts.

It’s recommended that you choose an online payment method that makes it easy to keep organized documentation of all payments. Certain methods, such as accounting software, make it much easier to keep thorough records of each time you pay contractors.

Tax Implications and Compliance

Good financial records go hand in hand with organized tax information and compliance with all tax laws. It’s recommended to choose a payment method that makes it simple to keep track of the tax obligations of paying freelancers.

Accounting software is a great option since it can automatically generate tax forms and other important data to ensure full compliance for your business.

Conclusion

There’s no one-size-fits-all answer on how to pay contractors—every business will have to look at their specific needs to find the best option for them. Certain situations require different payment methods. Some contractors may have personal preferences on how they’re paid. In any case, some time and research on the subject will help you make the right call for your business.

If you’re looking for a flexible starting point for contractor payments, FreshBooks accounting software is a great option. With automated payroll and built-in tax prep tools, it’s a fast, easy way to pay contractors and keep your business running smoothly. Try FreshBooks for free! 

FAQs About How To Pay Contractors

More questions about how to pay contractors in a secure, reliable, and efficient way? Here are the most commonly asked questions about payment methods for independent contractors and freelancers.

What are normal payment terms for contractors?

Normal contractor payment terms usually concern how they’re charging for work (e.g., hourly, price per deliverable, etc.), the currency they’ll be paid in, the payment methods they accept, the payment schedule (e.g., whether payment is due in advance, upon delivery, etc.), and the payment due date.

Should contractors be paid upfront?

You may need to pay an independent contractor before they begin work. This might be a deposit (such as 50% of their total fee) to ensure the company remains communicative while the contractor is working. Some contractors may demand the entire payment upfront, but this varies by industry.

How long do you have to pay a contractor’s invoice?

You have until the agreed-upon payment due date to pay your contractor’s invoice. This date will be indicated on the invoice itself or in the statement of work and depends on the specific contractor’s payment policies. Paying after this date will likely result in late fees.

Can you 1099 someone you paid cash?

Yes—in fact, you’re required to provide a 1099 to an individual or corporation if you paid them more than $600 in a tax year, whether that payment was made in cash or with another method. Failing to do this can result in penalties from the IRS.

What is the safest way to pay a contractor?

Direct deposit is the most secure way to pay a contractor. This avoids payment being routed through email or physical mail, going directly into the contractor’s bank account, which provides fewer vulnerabilities in security. You can usually set up a bank deposit with your financial institution or use it through accounting and payroll software like FreshBooks.

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