Contingent or gig workers are likely to represent 35-40% of the global workforce by 2025. A gig economy is characterized by flexible and temporary jobs, with companies hiring freelancers and independent contractors instead of full-time employees. Unlike a traditional economy, a gig economy benefits businesses and workers with a flexible and adaptable work culture that caters to the moment’s needs.
Independent contractors are typically paid on a project or hourly basis. But do independent contractors get pay stubs?
Pay slip, pay stub or paycheck stub are different words for the same document. A pay stub gives employees an account of their gross earnings, income deductions, and net pay. Typically, pay stubs are issued along with paychecks for each payment cycle.
Since independent contractors are self-employed, they do not receive independent contractor pay stubs from their employer. However, contractors must draw up their own pay stubs for each client to get the payment for their services.
Employee vs. Independent Contractor
Before we go into the details of an independent contractor pay stub and how to generate one, we must clarify the differences between an employee and an independent contractor. Understanding the distinction is crucial since the employment status, payroll, and pay stubs differ for employees and contractors.
Relationship with employer
The most significant difference between an employee and an independent contractor is the relationship they share with their client or employer. While full-time employees have long-term relationships with their employer, independent contractors take up short-term work with clients, usually on a project basis.
Pay and benefits
Full-time employees get paid a fixed salary or hourly wage. In addition, the employer withholds several taxes such as unemployment tax, social security tax, medicare, and income tax from the employee’s paycheck and pays part of the taxes on the employee’s behalf.
On the contrary, no tax deductions are made from an independent contractor’s paycheck, and they are not entitled to benefits such as health insurance, retirement plans, etc.
While employees receive Form W-2 listing their annual pay, benefits, and tax deductions, independent contractors get Form 1099-NEC listing only the total yearly income. It does not include any deductions or tax withholdings.
Degree of employer control
Another significant difference between an employee and an independent contractor lies in the employer’s degree of control. Employers generally have a right to control and direct how, when, and where their employees work.
In contrast, independent contractors work on their set terms, work schedule, and rates and primarily use their own tools and equipment.
The IRS puts down three criteria to help classify workers as employees or independent contractors.
- Behavioral control: Whether the company has a right to dictate how the worker performs the work.
- Financial control: Whether the company has control over the financial aspects of the worker’s job, including salary/hourly payments, frequency of pay, and reimbursements
- Relationship with employer: Whether the worker’s relationship with the company is permanent, if the work is integral to the company’s operations, and if the worker gets any benefits.
Misclassifying independent contractors as employees or vice versa can land a company in trouble with the invitation of penalties, fines, taxes, and lawsuits.
Differences between an employee and an independent contractor:
|Criteria for comparison||Employee||Independent contractor|
|Relationship with employer||Permanent/long-term||Project-basis/short-term|
|Employment status||Employer controls and directs where, when, and how to work||Self-employed with individual methods of work|
|Source of income||Fixed salary/wage||Variable, depending on the project|
|Taxes||Taxes deduction at source||Independent tax payment, no payroll tax deduction|
|Benefits||Entitled to health insurance, paid leaves, retirement plans, and other benefits||No entitlement to benefits|
|IRS forms||Form W-2, Form W-4||Form 1099-NEC, Form W-9|
What are Contractor Pay Stubs?
As an independent contractor, you must have your contractor pay stubs organized to avoid landing in trouble with the IRS. But what makes the contractor pay stub so vital?
A pay stub or paycheck stub is a document or form summarizing an employee’s wages, tax information, and other compensation for a given pay period. It helps employees track their payment history and simplifies payroll calculations and reporting to government authorities like the IRS.
Moreover, pay stubs help employers maintain transparency around wage and tax calculations. The pay stub generally accompanies the employee’s paycheck.
For contractors and freelancers, pay stubs may also record the working hours, giving employers a quick insight into the hours worked and the payment due. Being self-employed, independent contractors do not receive a standard paycheck and pay stub from the employer/client. However, it is common practice for independent contractors to submit a pay stub and an invoice for their services.
Since employers do not provide the independent contractor pay stub, contractors must generate pay stubs using information from their Form 1099-NEC. Independent contractors can get hold of an independent contractor pay stub template for each client and fill it out to get the payment for your services. It helps you organize and track your expenses, making things easier during tax filings.
The Importance of Tracking Independent Contractor Pay Stubs
A pay stub is crucial since it is a standard record of rendered services, payments, taxes, and other deductions. Here is why it is essential to track the independent contractor’s pay stub:
Proof of expenses
The primary purpose of a pay stub for contractors is to keep proof of finances. Maintaining proper financial records eases expense tracking and is also useful when taking loans, renting an apartment, purchasing a new car, etc.
Easier tax filling
A pay stub details the total income of the contractor along with other information such as tax deductions, exemptions, rates, and work hours. Creating an independent contractor pay stub keeps your financial records organized and handy for tax filing purposes.
Crucial Elements of an Independent Contractor Pay Stub
A standard independent contractor pay stub template contains all the essential elements for finance tracking. While generating your independent contractor pay stub, include the universal elements that make your pay stub complete, including:
- Client information: You must include your client’s name and address (be it an organization or individual), at the beginning of the pay stub, ideally on the top left.
- Personal information: Next, enter your personal information, including your full legal name, address, social security number, pay period, and pay date.
- Gross income: Gross income is what you earn before tax deductions.
- Pay rate and the number of working hours: Fill in the number of hours you have worked during the pay period and the hourly rate.
- Current total: Multiplying your working hours with the rate gives you the current total. It does not include deductions.
- Deductions: The next part of your contractor pay stub includes various taxes that you have to pay. It covers multiple federal, local, and state tax payments. You may notice the following abbreviations in your pay stub, which are nothing but the most common deductions found on pay stubs:
- FED TAX: Federal income tax
- STATE TAX: State income tax
- FICA SS TAX: The social security part of the Federal Insurance Contributions Act (FICA)
- FICA MED TAX: The Medicare part of FICA
- Enter the current total and year-to-date (YTD) total for your deductions.
- Net pay: The net amount is the final payment you take home after deductions. Also include all YTD amounts (gross income, deductions, and net sum) and the corresponding information for the considered period.
The Process of Generating Independent Contractor Pay Stub
Every time you complete a project, you must create a pay stub reflecting the relevant details of your work and payment. Generating an independent contractor pay stub is a simple and hassle-free process if you know the right steps.
Here’s a guide to generating pay stubs for 1099 independent contractors:
- Choose a relevant independent contractor pay stub template: You can check out sample pay stubs for an independent contractor on the internet and choose one that fits your needs.
- Enter the client/company information: Once you have selected a suitable template, fill out the pay stub by entering the client’s name, address, and Employer Identification Number (EIN).
- Enter the contractor information: Next, enter the contractor information, including the contractor’s full legal name, address, and social security number.
- Enter earnings information: After including the client and contractor information, provide the pay period, pay date, and the payment schedule.
- Add income and deductions: In the next part of filling the pay stub, you need to fill in your gross income, rate, hours worked, and the current total. Then proceed to the deductions along with the current and year-to-date values.
Once you have filled in the required information, review your pay stub and make changes if necessary. You may download/print the final contractor pay stub reflecting your gross income, deductions, net pay, and other relevant information about your services.
How Can Multiplier Help?
If you want to outsource the job of creating independent contractor pay stubs, you can rely on Multiplier.
With Multiplier, managing independent contractor payroll is quick and hassle-free. Our independent contractor payroll software aids global businesses in streamlining payroll for independent contractors. Using our secure, end-to-end automated, and scalable platform, you can easily onboard, manage, and pay contractors globally without any hassle.
Contact us to know more about the amazing benefits of our global contractor payroll software!
Q: What type of information should you see when looking at your pay stub?
A: A standard pay stub or paycheck stub summarizes the total income distribution of an employee, contractor, or freelancer. The information on a pay stub ideally includes the gross pay before deductions, the amount deducted for taxes and benefits, and the net pay after all deductions. Additionally, a pay stub includes the client/company information, the employee/contractor information, the pay date, pay period, rates, and hours worked.
Q: Why is it important to understand your pay stubs?
A: Understanding how to read the information on your pay stub is vital because it provides a helpful and detailed breakdown of your gross income, net pay, and all the tax deductions applicable to you. Moreover, a pay stub ensures transparency by recording your work details such as rates, hours, pay period, pay date, personal information, and client details. It organizes your financial records and comes in handy when you file taxes.
Q: What counts as a pay stub?
A: A pay stub is a document detailing the hours worked, the wages earned, and the taxes paid for a specific pay period. While it is standard practice for regular employees to get a pay stub along with their paycheck, self-employed independent contractors and freelancers must create their own pay stubs to record their finances and taxes.