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An In-depth Look Into Contractor Payroll

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Table of Contents

What is Contractor Payroll?

Contractor payroll refers to the organized process of ensuring that companies pay 1099 independent contractors accurately, efficiently, and on time. A 1099 independent contractor is a self-employed individual rendering specific services defined by a written contract.

Independent contractors do not receive a regular wage and are not entitled to benefits like employees. Instead, they receive payment under the contract terms and use the IRS 1099 form to report income. They must pay self-employment and federal income tax independently since their clients/employers do not withhold taxes from their paycheck.

With the gig economy thriving, independent contractors are a popular option for employers worldwide. While hiring independent contractors offers several benefits, managing the independent contractor payroll might require professional intervention.

Do Independent Contractors Qualify for Payroll?

Unlike W2 employees (regular employees receiving fixed wages and benefits), hiring independent contractors helps small businesses cut back on costs and legal obligations. While companies must pay their employees in due time, paying independent contractors timely is equally essential.

Since the IRS does not classify contractors as employees, it is not mandatory to put independent contractors on the payroll. So, instead of paying independent contractors through payroll, they can be paid separately as a business expense.

However, putting independent contractors on a payroll system helps companies pay contractors on time. Moreover, paying independent contractors through payroll is more efficient, quick, and automated. Payroll software can save accurate payroll data of employees and independent contractors in a centralized platform.

Classification of Independent Contractors vs. Employees

Whether you hire W2 employees or independent contractors, classifying them correctly is crucial to avoid legal troubles. Employee misclassification is a serious offense and can invite fines, taxes, penalties, and legal disputes.

The IRS defines the following categories to determine whether an individual is an employee or a self-employed independent contractor:

Behavioral control

Behavioral control refers to whether a company has a right to direct or control what individuals do or how they perform their job. The individual classifies as an employee if the business directs and controls their work, primarily in the following aspects:

  • Type of instructions given: Unlike an independent contractor, an employee is typically bound by instructions about where, when, and how to work.
  • Degree of instruction: More detailed instructions indicate greater control, typical for an employee. Individuals are more likely to be independent contractors if they get less detailed instructions.
  • Training: An employee typically gets job training, indicating that the company wants the job done in a certain manner. On the contrary, independent contractors generally use their preferred approach/techniques for their tasks.
  • Evaluation systems: For employees, the evaluation systems measure details of the work performed. However, if clients only evaluate the final results, a professional may be an employee or an independent contractor.

Financial control

Financial control determines if the employer can regulate the economic aspects of an individual’s job. The financial control factors in the following:

  • Mode of payment: While an independent contractor is usually paid a flat fee, an employee gets a regular wage on a weekly, bi-weekly, or monthly basis.
  • Unreimbursed expenses: Independent contractors are more likely to incur unreimbursed costs for their services than employees.
  • Significant investment: Independent contractors often invest substantially in the tools and equipment they use to work for someone else. However, this is not a necessary criterion for the independent contractor status.
  • Market availability: Unlike employees, an independent contractor has the autonomy to seek out business opportunities in the relevant market.
  • Incurring a profit or loss: If an individual’s investment and unreimbursed expenses exceed their income, they are likely an independent contractor.

Type of relationship with the employer

Lastly, the type of relationship an individual has with their employer dictates if they are an employee or an independent contractor. Categories under this include:

  • Written contracts: The IRS does not consider work contracts the ultimate mandate in deciding if one is an employee or independent contractor. Instead, it determines one’s employment status based on how the parties work together.
  • Permanency of the relationship: It is an employer-employee relationship if a business hires an individual in a permanent position instead of a fixed period.
  • Benefits: Businesses generally grant benefits like insurance, paid leaves, pension plans, etc., to employees. However, independent contractors are not entitled to such benefits.
  • Services provided: If a business controls or directs an individual’s work, it indicates an employer-employee relationship.

What is the Payroll Process for Independent Contractors?

Other than some minor differences, an independent contractor payroll works the same way as employee payroll. The following pointers outline the working concept of how an independent contractor payroll works:

Determining if the individual is an employee or independent contractor

Before proceeding with the independent contractor payroll, you must determine if the individual is an independent contractor. You can do so based on the behavioral and financial control you have over them and the type of work relationship shared between you. Independent contractors decide their availability, work hours and techniques, and use their own equipment.

Signing an agreement with the contractor

Independent contractors set their rates and sign a work contract or agreement with the following details:

  • Job rates
  • Payment methods and timeline
  • Goals and deliverables
  • Project timelines

The work agreement is generally negotiable, and one can request changes before signing the same.

Collecting necessary IRS forms

Once you sign the agreement, the next step in the independent contractor payroll process is collecting Form W-9 and requesting the contractor’s Taxpayer Identification Number and Certification. Form W-9 contains the necessary tax filing information the contractor needs for reporting their income. It includes the contractor’s name, business name (if any), entity type, address, exemptions, Taxpayer Identification Number, and Certification with signature and date. You need not send Form W-9 to the IRS.

Paying the contractor

Since independent contractors are not employees, employers need not withhold payroll taxes or pay their share of employer taxes unless the IRS or state laws say so. Therefore, you should not withhold federal income tax, state income tax, social security tax, local tax, and Medicare. Also, you don’t have to contribute to federal and state unemployment tax. The amount stated in the work agreement is exactly what you must  pay the contractor.

Paying invoices and distributing pay stubs

No federal law mandates employers to issue pay stubs to independent contractors or employees, and state laws vary in this regard. However, if a contractor specifies in the work agreement that a pay stub should be issued during payment, you can do so.

Issuing form 1099-NEC at year-end

The last leg of the independent contractor payroll process involves issuing the Form 1099-NEC to the contractor for the non-employee work they performed for you. You must send copies of the form to the contractor by January 31 – if it is a weekend, you can send it on the next business day. In addition, you need to file Copy A of the Form 1099-NEC with the IRS by January 31.

Contractors’ Payroll Taxes

Another significant difference between employees and independent contractors lies in the payroll taxes applicable to each. Below we explain the payroll taxes for W2 employees and independent contractors to present a clear distinction between the two.

W2 employee payroll taxes

Employers engaged in a business or trade and paying remuneration (including non-cash payments) of $600 or more in a year to an employee must file Form W-2, Wage & Tax Statement. The form reports the wages, tips, and other compensation the employer pays to the employee. In addition, the employer must withhold the following taxes from employees’ salaries:

  • Federal Income Tax
  • Federal Unemployment (FUTA) Tax
  • Social Security and Medicare Taxes
  • Additional Medicare Tax

Independent contractor payroll taxes

Independent contractors are self-employed individuals who need to pay estimated tax quarterly and file an annual return. They are liable to pay the following taxes independently:

  • Self-employment tax
  • Federal income Tax

The self-employment tax is primarily a Social Security and Medicare Tax similar to the ones withheld from the pay of W2 employees. However, the employer cannot withhold taxes from the contractor’s payment. Also, the independent contractor need not contribute to Federal Unemployment Tax and Social Security and Medicare Taxes.

Difference Between Payroll for Employees vs. Contractors

While having your employees and independent contractors on the same payroll system has its benefits, you must be aware of the significant differences between the payroll for 1099 employees and the payroll for W2 employees.


W2 employees usually have a fixed pay cycle. On the contrary, independent contractors or 1099 employees are paid per project, hourly or weekly or after project completion.

Tax withholdings

One of the most significant features of an independent contractor payroll is that employers don’t need to cover payroll taxes – paying the entire tax amount falls on the contractor. Therefore, it is easier to pay contractors since employers need not worry about tax withholdings. On the other hand, employers typically pay part of the W2 employees’ payroll taxes and withhold the rest from the employees’ paychecks.


Unlike W2 employees, contractors are not entitled to employment benefits such as health insurance, paid leaves, unemployment benefits, pension, etc. Instead, they are responsible for their savings and insurance, making the contractor payroll process more manageable and straightforward.

IRS forms

While Form 1099-MISC is the appropriate tax reporting form for contractors, Form W-2 reports the wages, tips, and other compensation paid to a W2 employee. In addition, Forms W-9 and W-4 apply to 1099 independent contractors and W2 employees, respectively. Form W-4 is the Employee’s Withholding Certificate the employee fills out to let the employer know the withholding amount. On the other hand, Form W-9 is an IRS form in which the taxpayer (contractor) provides their correct Taxpayer Identification Number.

How Can Multiplier Help With Contractor Payroll?

Hiring independent contractors and managing a contractor payroll system can drain your HR staff. Moreover, for small business owners, the cost and hassles of paying independent contractors through payroll can be substantial.

Multiplier makes independent contractor payroll processing quick, simple, and hassle-free with SaaS-based PEO/EOR solutions. No matter your location, Multiplier can take care of your payroll processing, tax management, and international employee management. With us, you can tap the global talent pool while we take care of your international teams.


Q: Are independent contractors eligible for benefits?

A: No, independent contractors do not get the usual employee benefits. They are self-employed and are therefore responsible for their own benefits.

Q: What is my employment status as an independent contractor?

A: As an independent contractor, you are self-employed, and you work for clients under contractual agreements in exchange for an agreed-upon remuneration. The client may either pay you through accounts payable or have a contractor payroll system but does not withhold federal, state, and local taxes from your payment.

Q:  Are there risks associated with being an independent contractor?

A: Compared to regular employment, self-employment as an independent contractor involves some risks and responsibilities. For instance, the independent contractor handles their benefits, assumes complete responsibility for tax obligations, accepts legal duties, and has to maintain relevant licensing and insurance.

Hiring and onboarding using Multiplier ensures you hire remote talent with locally compliant, fool-proof job contracts, offer emphatic benefits and disburse salaries accurately with absolutely nil errors in payrolls.

Hiring and onboarding using Multiplier ensures you hire remote talent with locally compliant, fool-proof job contracts, offer emphatic benefits and disburse salaries accurately with absolutely nil errors in payrolls.​

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