Best Way to Pay 1099 Contractors
Using 1099 contractors is a great option for your small business payroll, offering several advantages to both business owners and 1099 contractors.
When you first start a small business, nearly all the work will fall directly on you. But as you begin to expand and grow, there will be a need to delegate and outsource. Hiring more people is a milestone — one that comes with its own questions and challenges. If you’re not quite to the point where you’re ready to hire a full-time employee, or are struggling to find full-time employees due to the current workforce dynamics, 1099 contract workers may be a good option.
Here are some basics around what a 1099 contractor is, why you may want to use them, and the best way to pay them.
What are 1099 contractors?
One common option for bringing on additional help is using 1099 contractors. The term comes from the form a business uses to prepare and file their year-end taxes. The IRS Form 1099 is used to report how much your business spent on various expenses, including independent contractors.
A contractor may work for multiple companies, and each company would fill out its own 1099 form at the end of the year to report their own 1099-related expenses. A contractor will also need to complete and send you a W-9 form (similar to a W-4 for a full-time employee) as they get started.
Advantages and tax implications of 1099 contractors
For a small business, there are several tax advantages and workload advantages to using 1099 contractors:
- Simplified withholdings — A small business does not need to pay Social Security taxes, Medicare taxes or unemployment taxes on income paid to the contractor. The 1099 contractor handles their own taxes when they file each year.
- Benefit expenses — While laws will vary from state to state, employers don’t typically have to offer or pay benefits (insurance, retirement, etc.) to 1099 contractors.
- Targeted talent pool — If you’re in need of a specialized skill set but not enough for a full-time employee, there’s likely a 1099 contractor out there with the specific skills you’re looking for. There are contractor management tools to help you as well.
- Flexible work hours — Depending on the contract and work arrangement you have with the contractor, they should be able to step in as needed to support the ebbs and flows of your business. They can also be paid per hour, per job, or on retainer.
There are also advantages for the contractor. They can establish their own work flexibility, work with multiple clients at the same time, and take on the types of projects they want.
How to pay 1099 contractors
Just like full-time employees, contractors will need to be set up within your company and payroll system. Depending on your hour-tracking system, they may input their hours each week, or they may submit a regular invoice.
When you run payroll, their pay would be included as part of the typical process. Arrange with them in advance whether they’d like direct deposit (if that’s an option) or to receive a physical check.
Lastly, at the beginning of each year — by the end of January — you’ll need to send each contractor a 1099 form with the total amount they’ve been paid for the previous year.
Running small business payroll
The beginnings of a business are some of the most exciting times for an entrepreneur, but they can also bring some new challenges as you dive into the world of employment, taxes, payroll and more. 1099 contractors can be a great way to get the workers you need to keep your business moving, without some of the more long-term commitments and taxes that come from hiring full-time employees.
Roll by ADP takes care of all the payroll hassle for paying 1099 contractors — as well as paying yourself — wherever they are in the country. Small business owners just like you are already using it to take care of their small business payroll needs.
"I used the chat function to change one of my workers from a 1099 to a W-2, and it was very quick and easy. I’ve shown the app to a bunch of other contractors who are all still using paper checks or cash. I told them, 'You can do payroll for your whole company on your lunch break. It’s totally worth it.'" ~Garren Pitts, Artisans Construction & Renovations
“Roll is so simple and easy that it takes me less than 10 minutes to run my entire payroll now. All you do is open the app on your phone, tap the bubble on the bottom, type the word “payroll,” put in the hours, and you’re good to go. It remembers how much everyone gets paid, so it calculates everything for you. And it’s flexible enough to handle a mix of W-2 and 1099 employees. It even has a reminder that comes up that lets you know when it’s time to do payroll. That’s pretty awesome.” ~Fernando Faraldo, Denali Interactive Communications