Hiring contractors is a big step for any small business, as they play a crucial role in helping your company grow. Contractors can help your business increase its productivity without adding the financial burden of hiring a new full-time employee.
According to the Bureau of Labor Statistics, benefits accounted for 30% of employee compensation in the private sector in 2018. That means employers can save that 30% by hiring a contractor since they won’t need to pay contractors payroll taxes, unemployment benefits, health insurance, sick days, paid vacation time, workers’ compensation and disability, and other benefits.
Once you’ve decided to hire a contractor, the next step is to determine how to securely pay them through the company’s payroll system. With an increase in cyberthreats to small businesses, it’s important that you ensure you are using a payment system that can securely and quickly send compensation to contractors without the risk of a cyberattack.
To set your small business’ contractors up in your payroll system, follow these five steps.
Step 1: Determine if you need a contractor or an employee
While it may be more affordable to hire a contractor rather than a full-time employee, businesses need to make sure they are classifying employees correctly according to the IRS guidelines.
The IRS states, “an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
Classifying contractors correctly is important to ensure the business is following the IRS rules to avoid penalties.
Step 2: Onboard your contractor
Onboarding a contractor starts with collecting all necessary forms and information. The paperwork needed depends on your business and industry, but it usually includes:
- Resume: Even though a contractor is not applying for a full-time position, your business should collect a formal resume and perform due diligence to verify their qualifications.
- Application: If your company has a formal application process for all full-time employees, the contractor should also submit an application. This will help collect important information from the contractor, as well as verify their skills.
- Contract: Create a written contract, to be signed by the contractor, detailing the criteria and terms of the engagement. This should include specific language outlining compensation, payment schedules and distribution details.
- W-9 Form: All contractors must complete and sign a W-9 form after they are hired but before they are paid. This form from the IRS requests a taxpayer’s identification number and certification. It provides information the employer needs for completing payments and submitting the information to the IRS.
Step 3: Set up a payment schedule and structure
When hiring a new contractor, it’s important to set up a clear payment schedule and structure. This sets expectations with the individual and keeps your business documents organized to ensure payments aren’t missed.
Setting a payment structure
There are typically two ways to pay contractors — hourly or per project:
1. Hourly: Small businesses can agree to pay contractors by the hour, but there are pros and cons to this method. It can help the small business pay for a larger project in stages if they agree to pay per timecard submissions, as well as allow your company to track the expense of the work by auditing it hour-by-hour.
The downside to hourly pay is it can also be more expensive for small businesses. If the hours are not capped on a job, the contractor can submit more hours than the company has budgeted for.
Choose hourly payment if:
- The project scope is flexible or may change
- You have a more flexible budget for contractors
- The timeline of a project or set of tasks is uncertain
2. Project: Instead of paying by the hour, a small business may opt to pay a contractor per project. This requires payment at the submission and acceptance of the project. The benefit here is that you’ll know exactly how much you need to budget for contractor support.
The drawback to paying per project is the contractor might add extra fees into the flat rate to account for his or her time and any additional work he or she might encounter to complete the assignment.
Choose per-project payment if:
- The structure and timeline of the project is well-defined
- You only have a limited budget for contractors
- You have a contingency plan for any major project changes
Setting a payment schedule
Once the payment structure has been set, your business needs to determine a payment schedule for contractors. Many business owners choose to sync contractor payments with the full-time employee schedule, since this can keep things streamlined and simple.
Contractors may also be paid weekly, bi-weekly, monthly, quarterly, or at the culmination of a project. The frequency should be detailed in the contract and agreed upon by the company and the contractor.
If your business is only working with one contractor, you’ll have more flexibility over the payment schedule. The frequency can be set based on the availability of funds, the company’s payroll methods, and the contractor’s preference. For bookkeeping reasons, it can be easier to pay at the submission of the contractor’s work, timecard or invoice, or to sync it with the company’s overall payroll schedule.
If your business is working with multiple contractors, then it is important to have a set payment schedule for everyone. This keeps all contractors on the same pay frequency and allows your business to track who has been paid and when.
Step 4: Select your payment method
After the payment structure and schedule is set, the next step is for your business to determine what method it will use to pay contractors. There are multiple options for companies to choose from. Your choice depends on which method works best and is most secure for both your company and your contractors.
- Emailable eChecks: Another option is to send payment via eChecks, as offered through Deluxe. This method allows contractors to be paid quickly and conveniently while keeping their financial information secure. Companies only need the contractor’s email address, eliminating the need to store his or her financial or banking information.
- Credit Card: Small businesses can pay contractors with a credit card if they are set up with a merchant account. If the contractor is, this can be a quick and convenient method of payment — but it will require a portal or invoicing system on the contractor’s part.
- Direct Deposit: Direct deposit is a convenient method for contractors and it saves businesses time not having to send paper checks. To pay contractors via direct deposit, businesses need to acquire necessary banking and checking account information from the contractor to ensure the money can be correctly deposited.
- Print Checks: Print checks allow companies to pay contractors without needing all of their checking account information, but it can require more time and money. Sending paper checks requires small businesses to address envelopes, purchase stamps and mail the checks in a timely manner. Sending a paper check can pose a security risk if it is lost in the mail, or even misplaced at the office before it is sent.
Step 5: Fill out a 1099-MISC
The final step to paying contractors is to have them complete a 1099-MISC form. The 1099-MISC form is used to track miscellaneous income, or income that is not from a regular employer. The IRS requires businesses to complete this form if they pay a contractor more than $600 a year. The form is then sent to contractors at the end of the year to include with their yearly income tax returns.
If your contractor has organized as a corporation, you may not have to provide a 1099-MISC form, though there are some exceptions to this requirement, including those for attorneys.
Pay your contractors quickly and securely with Deluxe
Hiring contractors to perform work for your business is an exciting step in growing your company — but keeping your contractors content and working well depends on your ability to pay them quickly and securely.
Providing safe and convenient payments via eChecks by Deluxe ensures contractors are receiving payment without putting their personal and financial information at risk. Plus, since eChecks only require that you have your contractor’s email address, this can significantly reduce the administrative time needed to set a contractor up for direct deposit or other forms of digital payment.
To learn more about eChecks and other services designed to save your business time and money — plus tips and tricks about how to grow your small business — visit the Small Business Resource Center.