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How to Pay Independent Contractors

Congratulations!

You’ve brought contractors into your growing company. You’ve collected the W-9s. Now, the work is finally happening. That new blog post gets written. The web site gets revamped. Magically, your business is able to keep up with the work that your employees don’t have the time for.

Then, it comes time to pay for all this magic. And...things...get...messy. “Where’s your invoice?” you say. “Where’s my payment?” the contractor says. Now multiply this by the number of contractors you have. It isn’t pretty.

Paying contractors is an integral part of running a business. But, it’s also tedious, time-consuming work. That means these tasks get delayed, postponed, and even forgotten. And, since money’s involved, tensions quickly mount. That’s not good for anyone involved.

Here are some quick tips to set you and your contractors up for a happier interaction that saves you time, money, and emotional strain.

Receiving Invoices

Make sure to set expectations with your contractors at the onset for how you want to be invoiced. Upfront? 50% now and 50% upon completion? Milestone-based? Weekly? Monthly? There are many ways to do it -- none right or wrong. But if you have multiple contractors, having each on their own cycle is an operational nightmare. Try to make things as consistent as possible across your contractors.

This also goes for the format of the invoices. Do you want a paper copy? Email? PDF? Should they be sent to you? The bookkeeper?

Ironing out these seemingly small details will greatly streamline the process. In fact, it's even worth getting them formalized with a contract. Services like Shake can get your agreements started in the right direction.  

Getting Contractors to Send Invoices

Once you reach your agreed upon point to be invoiced, your contractor is supposed to let you know it’s time to pay. While it would seem the contractor would be highly motivated to send the invoice, human nature tends to get in the way. Invoicing is tedious work and easy to put off.

So, be proactive. Send a quick email, text message, or phone call: “Thanks for your work! Send me your invoice at the earliest convenience.”

It’s simple and somewhat obvious. But, it’s worth mentioning because it’s one of those little things we often don't do. This slight nudge can be the trigger that spurs action. To save yourself time and emotional energy, do what you can to help your contractors stay on top of things.

Processing Invoices

Now, you’ve got your contractors’ invoices. Hopefully they’re in a consistent format (thanks to coordinating expectations at the onset). Time to get your contractors their money. But how?

Check

Ahhh...the tried and true stalwart of the analog era. There’s something visceral and tangible to finding your checkbook and pen, writing the check out, placing it in its envelope, and sealing it with a lick (just not too many Seinfeld fans).

Your contractor will receive it in a few days time and will need to deposit it at a bank or take it somewhere to get cashed.Direct costs of checks are low. It’s just a stamp and an envelope, right? But when time and labor are factored in, you’re paying over $7 per check according to the Aberdeen Group.

Online Check (ACH)

The checkbook and pen get replaced by the keyboard and mouse. You’ll be in a faster, more trackable world if your online banking allows it. But, you’ll need to collect all your contractors’ bank account and routing information first.

Credit Card

If your contractor is set up with a merchant account and can accept credit cards, you can pay them by phone or online. This approach is quick, convenient, and trackable. The contractor is likely bearing the costs (in terms of processing fees) to this approach.

Software

You’ll also find software services that allow you to pay your contractors in one batch as opposed to individually. Services such as ZenPayroll and Payable (ahem...shameless plug) allow you to do this. These services use the ACH system to move the money from your business's bank account to your contractors’. Typically, there’s a monthly service fee based on the number of contractors you're paying.

paying independent contractors online

Payable lets you skip invoice collection altogether. Invoices are automatically created as contractors track work.

Accounting & 1099 Taxes

One last thing...don’t forget the books! You or your bookkeeper will need to enter these invoices and track the payments against them. If you make over $600 in payments to an individual contractor during a calendar year, you’ll owe that contractor a 1099-MISC.

Bringing It All Together

Standardizing your approach to receiving invoices and paying your contractors will save you time, money, and sanity.

  • Get on the same page with your contractors from the start.
  • Make it clear how you want to be billed.
  • Make it clear how you will pay.
  • Use software that can streamline and automate as much of this work as possible (tedious tasks are great for computers, not people).
Tad is the Co-Founder and CEO of Payable.

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