Mar 28, 2025

How to Handle Payroll for Contractors and Freelancers

How to Handle Payroll for Contractors and Freelancers
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As more businesses embrace flexible teams and remote work, hiring contractors and freelancers has become increasingly common. But managing payroll for non-traditional employees can be confusing—especially when it comes to compliance, tax reporting, and payment systems.

1. Classify Workers Correctly

The first and most important step is to correctly classify who is a contractor vs. an employee. Misclassifying workers can lead to serious IRS penalties.

  • Contractors are self-employed and control how, when, and where they work.
  • Employees are subject to company control and direction.

Not sure which category someone falls into? The IRS offers guidelines under the Common Law Rules, focusing on behavioral control, financial control, and relationship type.

2. Collect Proper Documentation

For independent contractors and freelancers, you'll need to collect and keep on file:

  • W-9 Form (Request for Taxpayer Identification Number and Certification)
  • Signed contract or agreement outlining payment terms and scope of work

Make sure you keep these records updated and stored securely.

3. Set Up a Payment Schedule

While employees are typically paid on a fixed schedule (weekly, biweekly, etc.), contractor payments can be more flexible. Agree on:

  • Flat-rate or hourly billing
  • Milestone payments
  • Payment timelines (e.g., Net 15, Net 30)

Make expectations clear in writing to avoid confusion later.

4. Use the Right Tools

Paying contractors doesn’t require traditional payroll software—but you still need accurate tracking. Tools like QuickBooks, Gusto, or even ACH payment systems can streamline the process.

These tools also help you:

  • Track payments by contractor
  • Generate 1099 forms at year-end
  • Keep digital records for tax time

5. Prepare and File 1099-NEC Forms

If you’ve paid a contractor $600 or more during the year, you’re required to file Form 1099-NEC by January 31 of the following year. This includes:

  • Sending a copy to the contractor
  • Filing with the IRS (electronically or by mail)

Tip: Get a head start on this in December—track down any missing W-9s or payment discrepancies before year-end.

6. Stay Compliant with State Laws

Some states have additional rules about contractor payments or require you to file 1099s at the state level. Be sure to check your state’s Department of Revenue website for guidance—or ask a professional.

We say “need help,” but we don’t want to leave you hanging. Whether you’ve got questions, want to learn more about what we do, or just want to see if we’re the right fit for your business—we’re here for you.

👉 Reach out here, give us a call at (877) 972-9284, or email us at info@shbsusa.com. Let’s start a conversation.

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