How-To Run Contractor Payroll

Running contractor payroll is different from running employee payroll. This is because independent contractors are not classified as employees. So, in order to run an accurate payroll, it is important that you can correctly differentiate your employers and contractors. 

Here’s how to run contractor payroll quickly and easily: 

Classify the Worker

Before you start running your payroll, you need to determine if the individual you are paying is an employee or an independent contractor. This is known as worker classification and it determines your employer’s responsibilities and how you pay your workers. 

Independent contractors typically dictate their working hours and availabilities, type of equipment, and method for completing tasks. They also typically work on a temporary contract and do not receive employee benefits. 

If your worker meets these classifications, you must treat and pay them accordingly.

 Gather Required Information

Contractors need to file Form W-9 once they are hired. Form W-9, Request for Taxpayer Identification Number and Certification, provides you with necessary tax filing information for the worker to report wages for them. 

A W-9 Form provides the contractors: 

  • Name
  • Business name, if different from their actual name
  • Business entity 
  • Exemptions
  • Address
  • Taxpayer Identification Number (SSN or EIN)
  • Certification (Signature and date)

Paying the Contractor

If you have an independent contractor on your payroll, you should not withhold payroll taxes or pay employer taxes (ex. FUT) for them. An independent contractor is not an employee, thus, you do not need to withhold federal income tax, Social Security tax, Medicare tax, state income tax, or local tax from their paychecks. You also do not have to withhold taxes from contractor wages, the employer does not need to make any contributions. 

Thus, there are no gross wages or net wages with independent contractors. The wage amount the contractor and the employer agreed upon will be the amount the contractor receives. 

Distribute the Contractors Pay Stub

There are no federal laws requiring employers to distribute pay stubs to employees or independent contractors. However, most contractors would appreciate receiving pay stubs because they are useful and in certain instances necessary documents to have. 

When you use an online payroll provider, it is simple to generate and distribute pay stubs to your independent contractors. 

File Form 1099

At the end of the year, you must issue the correct Form 1099 to your contractor. Typically, this will be Form 1099-NEC, which reports payments made to nonemployees that are $600 or more. 

You must provide recipient copies of Form 1099-NEC to the contractor by January 31. You must also file Copy A of Form 1099-NEC with the IRS by January 31 too. 

Form 1099-MISC is also a common return that may need to be filed for independent contactors. Form 1099-MISC is an IRS tax form used to report miscellaneous payments made to other self-employed people during the calendar year. 


Paying contractors with payroll software makes the process much more simple and efficient. With PayWow, you can process both employee and contractor payments in one payroll. With PayWow, employers can also generate pay stubs for their contractors and file Form 1099-NEC and 1099-MISC.

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