How to pay 1099 employees | 1099 payroll tips

Hiring independent contractors allows businesses to bring in skills that full-time employees may not have. This can be especially useful for one-off projects. Contractors are often known as 1099 employees, as businesses use the 1099 tax form to report payments to the Internal Revenue Service (IRS).² Contractors use the form to file their self-employment tax returns.

In 2022, there were about 31.9 million occasional independent workers in the United States, an increase from 15.8 million in 2020.¹

Paying contractors is easier than employees in some ways, as you don’t need to manage benefit and tax payments. But, there are certain procedures you need to follow in paying and reporting contractors’ income. These differ from the process for employees.

In this post, we explain how to pay employees using a 1099.

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How to pay 1099 employees: Main steps

Before you decide how to pay 1099 employees, you need to ensure that the worker can be correctly classified as an independent contractor. Incorrectly filing forms for workers who are actually employees makes businesses liable to penalties. The definition depends on the relationship with the worker, whether the company controls how they work, and how they are paid.

Once you have confirmed that the worker is a 1099 employee, follow the steps below to pay them.

Set up a contract or a statement of work (SOW)

To avoid problems down the line, it’s best practice to exchange asigned contract or statement of work (SOW) with the contractor before they start. It should set out the terms of payment, work to be delivered and expected timelines. This makes sure that expectations and payments are clear for both sides.

As independent contractors don’t receive salaries, you’ll need to agree on a rate per hour, project, or other criteria. Some contractors are paid on retainer, meaning they receive a fixed regular fee. This may be supplemented with additional payments based on the work they complete.

Keep in mind that as independent contractors pay their own taxes and don’t receive benefits, you may need to pay them more than a regular employee.

Collect the required documents

The documents you need to pay a 1099 employee are relatively simple. But it’s important to make sure that you have the correct information you need from the contractor, to avoid problems when it comes to tax filing season.

When they start working with you, the contractor should complete a W-9 form. This is a federal tax form that collects their business name, address, taxpayer identification number (TIN), and other information.³ It acts as an agreement that the contractor is not an employee and is not subject to withholding taxes. Businesses use the W-9 to report to the IRS how much they pay contractors.

The W-9 form includes a section on how the contractor is classified, such as a sole proprietorship, S corp, or LLC. This determines whether you need to file a 1099-NEC form. If the contractor is subject to backup withholding tax, you will be required to deduct 24% from their pay if they do not provide a valid TIN.

Each contractor should send you their W-9 form before the end of the tax year. You can then use the information in the W-9 to fill out the 1099.

The information you need to provide on the 1099 includes:

• The contractor’s legal name
• The contractor’s TIN
• The contractor’s business classification
• The total amount your business has paid them during the tax year

You must submit the 1099 to the IRS by January 31 to the IRS every year to avoid incurring penalties. If you receive a backup withholding notice from the IRS, you’ll also need to send the withholding payments.

To help simplify the process, you can opt to pay 1099 employees in QuickBooks or another accounting software program, which can automatically complete and file 1099s for you.

Ways to pay 1099 employees

The key to building good relationships with contractors is to pay them the correct amount of money on time. This will also keep your business in good standing with the IRS.

The payment method you agree with the contractor will depend in part on whether you are working on a one-off project or will pay them regularly for ongoing work. How you pay 1099 employees with long-term contracts may differ from how you pay short-term contractors.

Bank transfer

Direct deposit is the process of transferring money to a bank account electronically through the Automated Clearing House (ACH) networks. You’ll need the contractor’s bank account number, routing number, account type, and transaction type to transfer the money directly to their account.

This is one of the most common and convenient ways to pay employees and contractors. Direct deposits are secure and simple – especially if you make recurring payments to the same contractor. They are also fast, so contractors will receive the payment within 1-2 business days.

Payroll system

If your business pays several independent contractors regularly, using payroll software can help to manage the process. You can link the website or app to your business bank account and store each contractor’s information for easier payments.

The payroll system will allow you to make bulk payments, and track them along with your other business expenses. This will also simplify the accounting process come tax time.

Money transfer service

Sending funds through a money transfer service is one of the fastest ways to pay a contractor. Some wire services can take several days to process international payments, but Wise Business can transfer money within one day in some cases. Domestic transfers can often be completed within minutes.

It’s important to check the fees that wire transfer providers charge. Fees vary between domestic and international transfers and the amount of money you transfer. They can quickly add up depending on how often you need to make payments. Services can often charge hidden fees, especially for currency conversion.

How to pay 1099 employees online

If you're looking for a fast and simple way to pay 1099 contractors online, one option is to use Wise Business.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed to provide businesses with affordable and straightforward money transfer services.

Find out more about Wise Business

Paying contractors with Wise Business can help you save time with batch payments. You could also save money on payment and foreign exchange fees if your contractors are international.

All sources checked July 27, 2023.