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How should companies process payments for contractors


Contractors are a vital part of the US economy and a useful way for large and small business to retain the services of specialists for specific projects.

By using independent contractors, you can leverage top talent and improve your operations quickly with an outside perspective.

A contractor is a non-employee who provides goods or services to your business. They work for themselves and usually with their own equipment. This is usually seen as the contractors full-time employment, but if isn’t they may need to fill out a 1099 form.

While you may have limited control over them, they work to build a reputation which earns them future contracts.

Businesses use external contractors as they do not require training and can come into a project with the necessary skills and are often very cost effective.

While they are not employees, contractors may cost more per-hour is payments, though you are not required to pay benefits packages or for time off as well as other taxes.

Contractors will manage and track their own time and work. They will then invoice the business for their payment based upon the agreement made before starting the project.

To pay a contractor there are a number of different options to businesses, which do need to be agreed upon prior to the start of the project.

  • Checks

This is a bit of a traditional way of making a payment, and one which is not always preferred in the current climate.

Checks can be slow to process, must be written and sent to the contractor, which then takes a further 2-5 business days to process one paid into the bank.

For contractors, a check can bounce, the funds are not guaranteed, which makes them less inclined to accept this form of payment.

They are a cheap and reliable form of payment for a business, though they have a lack of security which makes them less acceptable with quicker and safer options available to both the business and the contractor.

  • ACH Transfers

This form of transactions, basically a direct deposit, it the most common form of payment between employer and employee.

While the contractor is not an employee they can be set up on a system with a one-time payment or recurring ACH transfer for the time they are on the project.

Being paperless and secure, this form of payment is quick and reliable which will benefit both the business and the contractor.

Wire Transfers

When a contractor requires immediate payment, a wire transfer is often the most appropriate. Domestic transfers can usually be carried out within 24 hours.

While it pleases the contractor, the business can be sure that when the project is complete the payment is made and there will be no further responsibilities after.

The issue with wire transfers is that there is a cost to the sender and the recipient. They are also very difficult to reverse if an issue arises, so full trust in the contractor is required.

Online Payment Systems

Online services such as PayPal are a valuable option to business owners and contractors.

It ensures that the contractor can keep their bank details private, and funds can be transferred easily after payment.

For businesses though, there is a need to have a business account on sites like PayPal. It can automatically produce the 1099-K form at the end of the year, which saves the business the hassles of having to do this at the end of the year separately.

Credit Cards

The allure of the credit card payment in the security. They offer protection by keeping bank account details private and separate from daily transactions.

By using a credit card payment there is the security of raising disputes and resolving transactions without putting your money at risk.

For these payments to take place though the contractor needs to have a merchant account. This may not always be an option.

By confirming the payment processes prior to the contract the business and contractor will have peace of mind and no issues hanging over the work leaving the work to be fully focused on.

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