Introduction — Why Businesses Hire Independent Contractors
Businesses hire independent contractors — often referred to as 1099 contractors — because they bring flexibility and specialized skills without the long-term commitments of traditional employment.
Unlike W-2 employees, contractors decide when, how, and where they work. They handle their own taxes, tools, and schedules, allowing businesses to scale faster, reduce payroll overhead, and focus on project outcomes rather than daily supervision.
Key Reasons Companies Hire Contractors
- Autonomy and Flexibility — Contractors control their workflow and can take on multiple clients simultaneously.
- Results-Driven Collaboration — Companies hire contractors for specific outcomes rather than managing their hours.
- Lower Administrative Burden — No payroll taxes, benefits, or insurance obligations for the hiring business.
How to Pay 1099 Contractors
- Collect a *W-9 form* before the first payment.
- Use a traceable business payment method such as ACH transfer, PayPal, or a split payment system.
- Issue a 1099-NEC form at year-end for any contractor earning more than $600.
In this article, we’ll guide you through each step - from onboarding and documentation to choosing compliant payment systems — to ensure your business stays audit-proof and your contractors get paid smoothly.
If you manage field crews or installers, explore our related guide:
👉 What Are Split Payments and How Do They Work in Field Services?
I. Defining a 1099 Independent Contractor
A 1099 independent contractor is a person, business, or corporation that provides goods or services to another entity under a contractual agreement, rather than being hired as a full-time employee.
Key Characteristics
- Control: Contractors decide how, when, and where to perform their work.
- Autonomy: They can work with multiple clients and set their own job flow.
- Taxes: Businesses do not withhold taxes or pay payroll taxes on behalf of contractors.
These distinctions separate a 1099 contractor from a W-2 employee and directly influence how payments, reporting, and compliance are handled.
Crucial Advice: Avoid Misclassification
Misclassifying a worker as a contractor when they function like an employee can trigger IRS audits, penalties, and back taxes.
A worker is likely a W-2 employee if:
- You control their daily schedule or hours.
- You instruct them exactly how to complete tasks.
- You provide tools, materials, or workspace.
In such cases, the IRS may reclassify the worker, requiring you to pay employment taxes, benefits, and potential fines.
In short, independent contractors offer flexibility, but classification must always align with the actual working relationship, not just what’s written in the contract.
II. Mandatory Onboarding and Documentation
The most important step in protecting your business from IRS audits is to collect the right documentation before sending any payments.
Proper onboarding confirms that the person you are paying is an independent contractor and ensures smooth year-end reporting.
A. The W-9 Form (Taxpayer Identification)
You must have the contractor complete and return the W-9 form before the first payment.
Purpose:
The W-9 form provides the contractor’s legal name, address, and taxpayer identification number (SSN or EIN).
It allows you to correctly report their earnings on the 1099 form later.
Timing:
The IRS recommends collecting the W-9 before starting the contract or any work.
Without it, you may have to apply backup withholding and withhold 24% of each payment.
Required information:
- Name of the individual or business
- Tax classification (individual, LLC, corporation, etc.)
- Address
- Social Security Number (SSN) or Employer Identification Number (EIN)
B. Direct Deposit Authorization
If you plan to pay by direct deposit, ask the contractor to complete a direct deposit authorization form.
This includes their bank name, routing number, and account number.
Keeping this record protects both sides in case of payment errors and helps document your compliance.
C. Contractor Agreement
Each contractor should sign a clear agreement that defines:
- Scope of work
- Payment amount and schedule
- Deadlines or milestones
- Ownership of work results
- Confidentiality and liability terms
The agreement is one of the strongest proofs that the relationship is business-to-business rather than employer-employee.
III. Tax Filing Obligations and Deadlines
Once you begin paying contractors, you also take on reporting responsibilities.
The IRS requires every business to document how much was paid to each contractor during the calendar year.
Following the correct process protects you from penalties and keeps your accounting clean.
A. When a 1099 Form Is Required
You must issue a 1099-NEC form to every contractor who earns at least 600 dollars from your business in a single year.
This form reports the total amount you paid and ensures the contractor can properly file their own taxes.
If you hire multiple contractors, keep a running total of payments throughout the year.
That makes it easier to know who will need a 1099 when January arrives.
Certain payments do not require a 1099 form, such as:
- Payments made to corporations (with a few exceptions)
- Payments for products or physical goods
- Payments made through third-party processors that already report transactions, like PayPal for Business or Stripe
B. How to File the 1099-NEC
The 1099-NEC replaces the older 1099-MISC form for reporting non-employee compensation.
The process is simple once you have the W-9 from each contractor.
Steps to file:
- Fill out the 1099-NEC form with the contractor’s name, address, and tax identification number.
- Send a copy to the contractor by January 31.
- Submit the same form to the IRS by January 31, either electronically or by mail.
- If filing by mail, include Form 1096 as a summary sheet.
Many payroll and accounting platforms can now file these forms automatically, which helps prevent mistakes and saves time during tax season.
C. Penalties for Missing or Late Forms
Failing to send a 1099 or filing it late can result in fines from the IRS.
The amount depends on how long the form is overdue and how many contractors are affected.
The longer the delay, the higher the penalty.
If you realise you made a mistake, submit a corrected form as soon as possible.
Being proactive helps show good faith and can reduce or eliminate penalties.
D. Keeping Your Records
Keep copies of every 1099, 1096, and W-9 form for at least three years.
Store them securely, either digitally or in paper form.
In the event of an audit, these records serve as proof that you met your reporting obligations.
IV. Recommended Payment Methods and Systems
Once you have collected the proper documentation, the next step is deciding how to pay your contractors.
The method you choose affects not only how quickly they get paid but also how easy it will be to track payments and stay compliant with IRS rules.
The goal is to use systems that leave a clear paper trail and integrate easily with your accounting or payroll software.
A. Payment Methods to Avoid
Many small business owners make the mistake of paying contractors through personal payment apps such as Venmo or Cash App.
While convenient, these tools are not designed for business transactions.
Reasons to avoid them:
- Personal and business payments can become mixed together.
- There is no automatic tracking or reporting feature.
- It is easy to lose records when it comes time to issue 1099 forms.
- It gives an unprofessional impression when paying for official work.
B. Recommended Payment Methods
Using professional payment systems helps you keep your accounting organised and ensures that all payments are properly recorded.
Invoicing and Business Credit Cards Ask contractors to send invoices and pay them through your business account or card. Invoices act as proof of payment and make it easier to reconcile transactions. Free and paid tools like Wave, Stripe, or Dubsado (which uses Stripe as a processor) work well for this.
PayPal for Business PayPal offers an easy way to send payments while automatically recording transactions. If payments are marked as “goods and services,” PayPal can help generate 1099 forms automatically. It also adds a layer of professionalism and security to your business payments.
Dedicated Contractor Payroll Software
Platforms like Gusto, Deel, or QuickBooks Contractor Payments can automate onboarding, direct deposits, and year-end 1099 filings. They collect W-9 forms digitally and send payment invitations to contractors. These systems reduce manual work and maintain full compliance with IRS deadlines.
**Split Payment Systems ** For field service companies managing product and labour together, split payments simplify transactions. The system divides one customer payment into separate transfers — one for the product supplier and one for the contractor. To understand how this works, see our related article: What Are Split Payments and How Do They Work in Field Services?
C. Record-Keeping Advice
Even if you use software, keep a simple record of all payments.
Include the contractor’s name, date, amount paid, and payment method.
This helps you quickly calculate totals at year-end and ensures that no one is missed when preparing 1099 forms.
Accurate records are the foundation of compliance.
They make tax season smoother and protect your business if questions ever arise about payments or classification.
V. Special Case: International Contractors
If your business hires contractors who live and work outside the United States, the payment and tax rules change.
The IRS treats international or non-resident contractors differently from domestic ones, so it is important to handle their documentation and reporting carefully.
A. When a 1099 Is Not Required
You do not need to issue a 1099-NEC form to an international contractor if:
- They are not a U.S. citizen or resident.
- They perform all their work outside of the United States.
In these cases, the contractor is responsible for paying taxes in their own country, not to the IRS.
However, if any part of the work is completed within the U.S., you may need to withhold taxes and report the payment.
B. Required Documentation: Form W-8BEN
Instead of a W-9, international contractors should complete a Form W-8BEN.
This form certifies that they are not a U.S. taxpayer and allows your business to document the payment correctly.
The W-8BEN form includes:
- Full legal name and address of the contractor
- Country of citizenship
- Foreign tax identification number (if applicable)
- Signature confirming non-U.S. tax status
Always collect and keep this form before issuing any payment to an international contractor.
It protects your business from being responsible for their taxes later.
C. Withholding and Tax Treaties
Some countries have tax treaties with the United States that can reduce or eliminate withholding requirements.
The contractor can claim this benefit by filling out the treaty section on the W-8BEN form.
If no treaty applies and the contractor performs services within the U.S., you may be required to withhold up to 30 percent of the payment and send it to the IRS.
For most fully remote contractors working abroad, no withholding is needed.
D. Payment Methods for International Contractors
For global payments, use systems designed for cross-border transfers that keep transaction records.
Good options include:
- Wise (formerly TransferWise)
- Payoneer
- Deel or Remote for full contractor management
These platforms simplify currency exchange, offer clear documentation, and help you stay compliant with local and U.S. tax rules.
E. Record-Keeping and Proof
Keep copies of all W-8BEN forms, invoices, and payment confirmations for at least three years.
Even if 1099 forms are not required, these records prove that the contractor was paid correctly and that the work was performed outside the United States.
VI. Summary and Practical Checklist
Paying 1099 contractors correctly comes down to a few simple but essential habits.
Good documentation, clear agreements, and consistent record-keeping will protect your business and make tax time easier.
Before paying any contractor, confirm that they are truly independent, collect the right forms, and use reliable payment systems that track everything automatically.
Below is a quick checklist you can use to stay compliant.
Contractor Payment Compliance Checklist
Confirm classification
- Review whether the person qualifies as an independent contractor.
- Avoid giving daily supervision or providing equipment.
Collect required documents
- W-9 form for U.S. contractors.
- W-8BEN form for international contractors.
- Signed contractor agreement and direct deposit authorization.
Pay through traceable systems
- Use invoicing tools, PayPal for Business, or software like Gusto or QuickBooks.
- Avoid personal payment apps such as Venmo or Cash App.
Track payments
- Maintain a simple spreadsheet or use accounting software.
- Record names, dates, and payment amounts throughout the year.
File required tax forms
- Send 1099-NEC forms to contractors who earned 600 dollars or more.
- Submit copies to the IRS by January 31.
- Keep all records for at least three years.
Review international payments
- Collect W-8BEN forms and check whether tax treaties apply.
Closing Note
Efficient systems keep both sides protected.
When documentation, payment, and reporting flow together, your contractors get paid on time and your business stays compliant with IRS rules.