How to Pay Independent Contractors: A Step-by-Step Guide

The first contractor I ever paid was a designer, and I paid her the way most founders do: she sent an invoice, I sent money, we both moved on. It felt like buying something, and in a sense it was. This guide covers the small steps around a contractor payment, trivial in advance and painful in arrears, including the one I skipped.

What I had not done was collect a W-9, and in January I needed her taxpayer identification number to file a 1099. She had finished the project, taken a full-time job somewhere else, and was answering emails at roughly the speed you would expect from someone with no remaining incentive to help me. It took three weeks. It should have taken one email, sent before the first payment.

Paying a contractor is genuinely simple once you know the sequence: confirming they are actually a contractor, collecting the W-9, agreeing terms, choosing a payment method, and filing the 1099. I also cover the change to the 1099 threshold, the first since 1954, which most articles on this topic have not caught up with yet.

Before You Pay Anyone

Two things need to happen before money moves: confirm the person really is a contractor, and collect their W-9. Both are cheap to do upfront and expensive to fix later.

The order matters: classification, then W-9, then payment. Do it in a different order and you will be negotiating with someone who has already been paid, which is a much worse position than negotiating with someone who has not.

Step 1: Confirm They Are Actually a Contractor

Confirming the classification is the step people skip, and it carries the largest liability. Calling someone a contractor does not make them one.

Per IRS guidance on independent contractor versus employee status, the determination turns on the degree of control and independence in the relationship, evaluated across three categories.

How to Pay a 1099 Employee

There is no such thing as a 1099 employee. The phrase is everywhere, and what people mean by it is an independent contractor: someone you pay in full against an invoice, with nothing withheld, reported at year end on Form 1099-NEC instead of a W-2. The process is the one on this page.

The wording matters because the two halves of the phrase describe opposite obligations. A worker is either an employee, with withholding, overtime, and payroll tax sitting on your side, or a contractor, with none of it. If somebody seems to sit in the middle, that is not a third category. It means the classification has not been settled yet.

Step 2: Collect the W-9 Before You Pay a Dollar

Form W-9 is how the contractor gives you the information you will need to report the payments: their legal name, business name if they have one, entity type, address, and taxpayer identification number.

The form is short, the contractor fills it out, and you keep it. You do not send it to the IRS. It sits in your files until January, when it becomes the thing that makes filing a 1099 possible.

Here is the argument for collecting it before the first payment rather than when you technically need it. The reporting obligation only arises once you cross the threshold for the year, and in January you cannot know whether a given contractor will cross it by December.

There is also a more practical reason: your leverage evaporates the moment you pay them. Before payment, the W-9 is a condition of getting paid. After payment, it is a favor you are asking of someone who no longer needs anything from you.

What Forms an Independent Contractor Fills Out

For a US-based contractor there is exactly one IRS form to complete for you, and it is the W-9. Every other IRS form either comes from you at year end or gets filed by the contractor on their own return. Here is the full set, and who is responsible for each piece of it.

Step 3: Agree the Terms in Writing

A contractor agreement does two jobs. It prevents commercial disagreements, and it serves as evidence for the classification you chose.

Step 4: Pick a Payment Method

You have four realistic options for most contractors, plus wire transfer for large or urgent international payments. The differences that actually matter are cost, speed, and the record each one leaves behind.

Setting a Contractor Payment Schedule

Pay against invoices on stated terms rather than on a calendar you set for them. Net 15 or net 30 from the invoice date is the normal arrangement, and on longer projects a deposit up front with the balance on delivery, or a fixed amount per milestone, keeps both sides honest about progress.

That last caution is worth keeping in view. Paying a set amount on a set day regardless of what was delivered is one of the facts read as financial control, and the agreement is where you show the arrangement was priced for a defined scope rather than for hours of availability.

The Best Way to Pay Contractors

For anyone you pay more than once: ACH or contractor payment software. That is the whole answer, and the reasoning is not really about the payment.

Any method moves money. What separates them is the record they leave. In January you need to know, per contractor, exactly how much you paid them across the entire year, and you need their W-9 on hand.

A method that produces that record automatically is worth far more than one that shaves a little off the transfer fee, because the fee is a known cost and the missing record is an unknown one.

Setting up direct deposit for a contractor takes one form. Collect a signed authorization carrying their routing and account numbers, store it alongside the W-9, and run the payment through your bank or your payroll provider. Give the first run enough lead time, since ACH settles in one to three business days rather than instantly.

The payment app case deserves a specific warning, and it runs the opposite way to what most founders assume. Per the IRS instructions for Forms 1099-MISC and 1099-NEC, payments made with a payment card or through a third-party network are reported by the settlement entity on Form 1099-K and are not reportable by you on a 1099-NEC.

According to IRS guidance issued in October 2025, a third-party settlement organization (the company behind the app) files a 1099-K only once gross payments to a payee exceed $20,000 and the transaction count exceeds 200. A contractor paid modest amounts through an app can therefore end up with no information return from anyone.

Leaving the reporting to the app is thinner cover than it sounds. ACH out of your own bank avoids the whole question. The reporting stays where you can see it and the obligation stays yours, which is the reason it remains the default on this page rather than any difference in transfer fees.

What You Do Not Withhold

You do not withhold taxes from a US contractor: no federal income tax, no Social Security, no Medicare. It is the sharpest practical difference between paying a contractor and paying an employee. You pay the invoice amount in full, and the contractor handles their own tax.

There is one exception, and it is the reason the W-9 matters so much. Backup withholding, currently 24 percent, applies where the payee fails to furnish a taxpayer identification number, furnishes an obviously incorrect one, or where the IRS notifies you that the number does not match. In that situation you are required to withhold and remit, and the contractor gets less money because they did not fill in a form.

Read that table as a cost comparison and the incentive to misclassify becomes obvious, which is exactly why the IRS scrutinizes it. Every row where you owe nothing for a contractor is a row where you owe something for an employee, and the difference is not a rounding error.

Who Pays the Payroll Taxes Instead

Independent contractor payroll taxes do not disappear. They move to the contractor. Per IRS guidance on self-employment tax, the rate is 15.3 percent of net earnings: 12.4 percent for Social Security up to the annual wage base and 2.9 percent for Medicare with no cap, which is both halves of what an employee and an employer otherwise split.

Contractors pay that themselves, through quarterly estimated payments, rather than through anything you operate. An extra 0.9 percent of Medicare tax applies on top once combined wages and self-employment income pass $200,000 for a single filer or $250,000 for a married couple filing jointly, and the self-employment tax itself starts at $400 of net earnings.

The same arithmetic explains why an hourly contractor rate that looks generous beside an employee wage is closer to even than it first appears. The contractor carries both halves of Social Security and Medicare tax, plus their own insurance and unpaid time off, out of that rate.

Your side of it is short: no deposit schedule for that person, no line for them on your quarterly employment tax return, and no W-2 in January. The one figure you do have to keep is the running total of what you paid them, and that is a reporting job rather than a tax one.

The New $2,000 1099 Threshold

The 1099-NEC reporting threshold is now $2,000 per contractor per calendar year, for payments made on or after January 1, 2026. It is the part most articles on this topic still have wrong.

Section 70433 of the One Big Beautiful Bill Act amended Internal Revenue Code section 6041 to set the reporting threshold at $2,000 for Form 1099-NEC and for Form 1099-MISC payments such as rents and other income, effective for payments made after December 31, 2025. Beginning in 2027 the figure is indexed for inflation.

The statute itself explains why the old number is so sticky. Section 6041 was enacted in August 1954 and its $600 figure was never amended until Public Law 119-21 (the One Big Beautiful Bill Act) replaced it, so seven decades of guides, templates, and accounting habits were built on a single sentence that has now moved.

Two details matter more than the headline. The threshold is per contractor, per calendar year, in aggregate: four payments of $600 to the same person come to $2,400, which is over the line even though no individual payment came close and nobody thought to add them up.

The second detail is that income below the threshold is still taxable, and the IRS is explicit that it goes on a tax return even when no Form 1099-NEC reports it. The change alters who has to file a form, not what counts as income, and it does not make the first $1,999 tax-free for anyone who receives it.

You can still file voluntarily below the threshold, which supports your own records and helps the contractor document income. The IRS General Instructions for Certain Information Returns go further: you may file for all payments for your own convenience, and the IRS encourages it.

Whichever number applies to you, the tracking is the same job: a running total per person that you can read in one line. The workbook below keeps quarterly subtotals against the year total, flags who has crossed the line, and records the W-9 and agreement dates that make the January filing possible.

Step 5: File the 1099-NEC

Form 1099-NEC reports nonemployee compensation. If you paid a contractor at or above the threshold during the calendar year, you file one for them and send them a copy.

The deadline is the part people underestimate. Form 1099-NEC is due January 31; for 2026 payments that means February 1, 2027, since the 31st is a Sunday. Under the Treasury regulation governing extensions, the automatic 30-day extension that covers the rest of the 1099 series does not reach forms reporting nonemployee compensation.

Your State May Disagree With the IRS

The federal threshold tells you what the IRS wants. It tells you nothing about what your state wants, and states are actively diverging on this.

Some states take your 1099s through the IRS Combined Federal/State Filing program, which forwards the federal filing to them, while a handful want a direct filing no matter how you filed federally. Others keep a figure of their own: per the Wisconsin Department of Revenue, the threshold for certain Forms 1099 filed there remains $600 until state law changes.

California goes further and adds a separate state report. According to its Employment Development Department, a business required to file a federal 1099-NEC for an individual contractor, having paid or contracted for $600 or more, also files Form DE 542 with the state within 20 calendar days of the payment or the contract, whichever came first.

The shape of that rule is what to notice. The state filing rides on the federal one but adds its own trigger, its own form, and a deadline measured in days rather than months, which is not something a federal compliance calendar will ever remind you about.

The practical guidance for a small business is unglamorous: if you pay contractors in more than one state, check each one, and check it again, because this is a moving target. Do not assume the federal change propagated everywhere.

Paying Foreign and International Contractors

A foreign contractor runs on a different set of forms. They do not give you a W-9, and they usually do not receive a 1099-NEC. What you file instead turns on a single question: where the work was physically performed.

Per IRS guidance on the source of personal service income, compensation for services performed in the United States is US-source income, and compensation for services performed abroad is foreign-source. The contract, the currency, and your own location do not decide it. The place the person was sitting while working does.

That one fact drives everything else. A developer in Poland who never sets foot in the US is earning foreign-source income, which sits outside US withholding and outside 1099 reporting. The same developer spending three weeks working from your office has earned US-source income for those three weeks.

Form W-8BEN is the foreign counterpart of the W-9. On it the contractor certifies that they are a foreign beneficial owner (the person the income actually belongs to) and gives you what you would need if withholding ever applied. A contractor working through a company gives you W-8BEN-E instead. Collect it before the first payment, just as you would a W-9.

Where withholding does apply, the statutory rate is 30 percent of the US-source amount, reduced or removed where a tax treaty covers the country the contractor lives in. Treaty relief has to be claimed in the withholding paperwork, on Form 8233 for an individual paid for services performed in the US. It does not apply automatically just because a treaty exists.

The IRS also says plainly that nonemployee compensation paid to nonresident aliens, meaning foreign individuals who are not US tax residents, is reported on Form 1042-S rather than Form 1099-NEC. An international contractor is never simply a domestic 1099 with a foreign address, and the tool you use for domestic contractors may not produce a 1042-S at all.

Moving the money is the easier half. Wires cost more per transaction and land the same day, while cross-border payment platforms are cheaper on small amounts and usually take a margin on the currency conversion. Agree in the contract which currency the invoice is in and who absorbs the transfer fee, because that is a miserable argument to have afterwards.

Mistakes That Cost Real Money

These are the six mistakes I watch for when paying contractors.

Notice how many of these are procedural rather than conceptual. Nobody misunderstands what a W-9 is. They just do not collect it, because at the moment of the first payment it feels like unnecessary formality between two people who trust each other. The formality is not for that moment. It is for January.

Doing This Without an HR Team

The steps are easy. The failure mode at a small company is always the same: the W-9 is in an email, the agreement is in a different email, the payments went out of three different accounts, and nobody has added up what any single contractor was actually paid this year.

This is where FirstHR fits. Document management keeps each completed W-9 on file and e-signature collects the signed agreement, so both can actually be found in January. Employee and contractor profiles hold the classification decision and the reasoning behind it, so it is a record rather than a memory. Task workflows make collecting the W-9 a step in engaging a contractor rather than a thing someone meant to do.

FirstHR is an onboarding and HR platform, not a payroll provider, so payments and 1099 filing stay with your payroll or accounting provider. What it holds is the document and classification layer around the payment, which is the part that goes missing and the part that costs you when it does.

None of this is legal or tax advice, so confirm your classifications and your state filing obligations with a qualified advisor.

Frequently Asked Questions