How to manage independent contractor payroll

The world of contractor payroll can feel like a minefield. It’s complex, time-consuming, and hard to wrap your head around — especially if you have contractors who live overseas.

But one of the most important parts of contractor payroll management is being able to pay people quickly and accurately. And to do that, you need to understand how contractor payroll works and have a seamless and efficient payroll structure in place.

In this article, we show you how to manage payroll for contractors all over the globe, including:

• The differences between contractor and employee payroll

• How to effectively set up and manage contractor payroll

• The main risks and requirements to be aware of

• The benefits of outsourcing contractor payroll services

So let’s dive right in.

What is contractor payroll?

Contractor payroll is the process of paying individuals or businesses for their services. In the US, it ensures that temporary W2 workers and 1099 independent contractors are paid correctly and on time, in line with their contract or statement of work.

Contractor payroll can get complex, presenting new responsibilities and obligations that differ from paying traditional employees. But don’t worry — we lay everything out in this article to make it easy to follow.

And if the thought of handling contractor payroll functions is putting you off the idea altogether, remember that hiring independent contractors comes with a lot of benefits. After all, there must be a reason why 92% of companies expect to increase their engagements with freelancers in 2024, right?

Access to subject experts, less day-to-day management, and not having to cover the cost of benefits are a few examples of the perks that come with contractor payroll.

What is the difference between contractor payroll and employee payroll?

Let’s start by clarifying the differences between independent contractors and in-house employees:

• Behavioral: Independent contractors tend to have more autonomy over how they perform their work, determining their own schedule and providing their own tools to accomplish their tasks. In-house employees, on the other hand, are usually under more direct control from their managers or supervisors. They work within the company's established structure, following company policies and working hours, as well as use company equipment to complete their work.

• Financial: Contractors are typically paid a set fee for the completion of a project or specific tasks, while employees receive a regular salary or hourly wage. Employees also get additional benefits, such as health insurance, retirement plans, paid time off, and sometimes, bonuses. Contractors aren’t eligible for these benefits.

• Type of relationship: The relationship between a hiring company and a contractor is usually temporary and tends to be more transactional in nature. Employees have a more long-term relationship with their employers. They contribute to the day-to-day operations continuously, so their employers naturally build stronger relationships with them.

Now, let’s walk through some of the key differences when running payroll for these groups.

Independent contractor payroll

• Your contractor is (in most cases) responsible for handling their own income tax payments and social contributions.

• Your contractor isn’t (in most countries) entitled to statutory benefits.

• Both you and your contractor may need to fill out and submit specific paperwork, such as a 1099 in the US (more on this later) or an IR35 in the UK.

• You need to possess local labor, tax, and intellectual property (IP) expertise to avoid non-compliance and worker misclassification.

Employee payroll

• You are (in most cases) required to withhold tax and social contributions and are expected to provide additional employer contributions.

• You are (in most cases) required to provide statutory employee benefits, such as sick leave, health insurance, and maternity leave.

• You need to understand local HR, tax, and legal requirements for each country you hire in.

• The level of misclassification risk is lower than with contractors. However, there are other potential risks, such as permanent establishment.

How does the contractor payroll process work?

Are you wondering what the contractor payroll process looks like? Here are the key steps:

1. Determine if they are an employee or a contractor

Start by confirming whether you’re hiring an employee or a contractor.

Consider factors such as your level of control over their work, the method of payment, the provision of tools and equipment, and the nature of your relationship. These will help you distinguish whether you’re hiring a contractor or an employee.

You can also take a look at the IRS guidelines to determine a worker’s classification if hiring in the US.

2. Set rates and sign a contract

Outline the scope of work, including the deliverables, timelines, and rate of pay.

Once all of the terms and rates are agreed upon, formalize the agreement by signing a contract. The contract should include details such as the parties involved, the scope of work, compensation terms, and any other relevant provisions.

Top tip: Use Remote to manage your contractors, automate admin, mitigate compliance risks, and handle payroll in over 180 countries. Sign up to see how it works.

3. Collect the necessary IRS forms (for US employees)

For independent contractors in the US, the most common form is the IRS Form W-9. This collects the contractor's Taxpayer Identification Number (TIN) or Social Security number (SSN) for tax reporting purposes. If the contractor is a corporation and not an individual, they may still provide a Form W-9 (or a Form W-8BEN-E if they’re a foreign entity).

The IRS forms you need vary depending on the contractor relationship, their status, and their location. Find out which forms you need on the IRS website or use Remote’s global HR platform, and let us give you peace of mind by handling it for you. It’s your call.

4. Pay the contractor

When the work is complete, issue payment to the contractor. Payment methods may include checks, direct deposit, electronic transfers, or other mutually agreed-upon methods.

5. Store invoices and pay stubs

Keep a record of all invoices, payment receipts, and pay stubs for contractor payments. These records are essential for financial management, tax compliance, and potential audits.

Issue and submit a 1099 form

A 1099-NEC (Nonemployee Compensation) form reports payments over $600 made to independent contractors within the same calendar year. It’s necessary for tax reporting and can result in penalties if not issued within the necessary timeframe.

The deadline is typically January 31 of the following year (you can double-check this on the IRS website). You must issue this form to the contractor and file it with the IRS.

Side note: The steps may vary depending on the type of contractor you’re working with, the type of work they’re doing, and the country they’re working in. Use these steps as a guideline, but be sure to do your own research to confirm the appropriate steps for your circumstances.

6 best practices for setting up contractor payroll

For a contractor payroll structure to work efficiently, it needs solid foundations. Here are some key steps to follow to lay the groundwork.

1. Don’t ignore compliance

To effectively manage payroll for contractors, you need to understand who qualifies as one. Otherwise, you risk worker misclassification, which can result in fines, penalties, and reputational damage.

Misclassification occurs when you treat your contractors like employees. If you dictate the contractor’s working hours and processes, provide them with tools and equipment, or provide them with health insurance, these are the hallmarks of an employer/employee relationship — not a client/contractor one.

Misclassifying contractors in this way is illegal as it prevents you from paying employment costs, statutory benefits, and taxes.

However, correctly classifying workers can be a challenge. Why? Because different countries (and even different US states) have different definitions of what an independent contractor is.

Generally speaking, if workers have control over when, how, and where they work and use their own equipment, they’re more likely to be classified as contractors.

Top tip: Use our misclassification calculator to ensure you classify your workers correctly.

2. Draw up and sign a contractor agreement

When you work with an independent contractor, you should draw up a legal agreement, even if the contractor is only working on a one-off project. This is important, as it protects both you and the contractor.

It’s also important for contractor payroll management, as your agreement clarifies the agreed-upon pay rate and pay cycles.

The conditions of these agreements should always align with any relevant payroll laws in your contractor’s country, including restrictions on certain types of work activities. Some countries also require your contractor to register with a specified authority before they can be legally deemed a contractor.

3. Identify any relevant forms in the contractor’s country

You may be required to submit payroll-related forms to the countries you’re hiring in.

For example, if you pay a US-based contractor (or a US citizen in another country) more than $600 in a year, you will likely need to submit Form 1099-NEC to the IRS — even if your company isn’t based in the US.

Alternatively, if you’re a US-based company and you work with a contractor outside the US, you may need to fill out a W-8 form. These forms are used to specify any unique conditions (like economic treaties between the US and your contractor’s country) and help you understand if you need to withhold and settle any payroll taxes in the US on the contractor’s behalf.

Technically, it’s up to your contractor to identify any relevant conditions in the W-8 form. In practice, this is difficult — which is why it’s important for you to verify the taxation status of the contractor. If you fail to do so, your company may be held accountable.

Of course, if you’re hiring a lot of contractors from multiple locations (or plan to), all of these obligations can quickly become overwhelming. That’s why it’s a good idea to work with a trusted, experienced global HR provider like Remote, which can handle all the heavy legal lifting for you.

When you onboard new contractors through Remote, they’ll automatically be asked to fill out the correct form wherever they are based.

4. Coordinate your international obligations

When working with an international contractor, you must consider their local regulations to ensure you’re fully compliant. But when you’ve got multiple contractors across the globe, keeping track of everything can get tricky.

Let’s say you’re a US-based entity with contractors in Australia and the UK:

• The tax year in the US runs from January 1 to December 31.

• In Australia, it runs from July 1 to June 30.

• In the UK, it runs from April 6 to April 5.

This means you need to provide your Australia and UK-based contractors with the relevant payroll forms before their respective deadlines. Failure to do so would result in hefty fines and penalties.

Again, Remote can help ensure that you stay within the lines at all times.

Our expert payroll team lets you know what exactly needs to be done and when — no matter where your contractors are based.

5. Onboard the contractor properly

There are a wealth of benefits to properly onboarding a new contractor, especially if they’re working with your company on a long-term basis.

A thorough onboarding process also makes payroll easier further down the road. It allows you to collect relevant payment information, establish and execute any legal requirements, and answer any questions your contractor might have.

Follow these steps to onboard contractors properly:

1. Create an onboarding checklist: This includes tasks like gathering contractor information (including their TIN and SSN), creating a contract, collating IRS forms, and setting up access to tools and systems.

2. Provide the contractor with relevant documentation/information: Share the contract, company policies, contact information, and any other information that the contractor needs to do their work effectively.

3. Introduce them to your processes: Schedule a meeting to show contractors your company's processes, workflows, communication channels, and expectations.

4. Set them up on your payroll: Add the contractor to your payroll system or contractor payment solution.

6. Establish the payment method

One of the most important elements of seamless contractor payroll is the method of payment.

If you want to have a good relationship with your contractors, you need to pay them correctly and promptly. You should also be able to pay them in their desired currency, although if a contractor requests to be paid in a non-local salary (e.g., an Indonesian contractor requests US dollars), you need to check that this is allowed.

To simplify this process, you can use a dedicated aid, like Remote’s Contractor Payout Explorer. This quick, free, and easy-to-use tool allows you to see:

• Which currencies you can pay in

• The various withdrawal options (across Wise, Stripe, and Connect)

• The approximate payout speed for each option

You can also easily set up and manage payments with Remote using our Contractor Management system.

To learn more about paying your contractors — and how Remote can help — check out our in-depth guide.

How do you successfully manage contractor payroll?

Once you’ve established a solid grounding for your contractor payroll, there are several things you can do to make it run smoothly.

Set a payroll expenses budget

When setting a payroll budget, you should account for two types of costs: fixed and variable.

• Fixed costs relate to your yearly employee benefits plans, salaries, and payroll taxes. These costs tend to remain the same throughout the year.

• Variable costs include employer retirement contributions, contractor payments, overtime, bonuses, commissions, and raises. These costs tend to fluctuate.

By agreeing on a budget, you’ll know exactly how much wiggle room you have to hire independent contractors — and at what rates.

Frequently audit contractor payments

It’s highly advisable to regularly review your contractor payments to ensure you’re paying your contractors correctly. You may also need to amend these payments, such as increasing rates if you’ve been working with the person for a long time.

Auditing these payments helps with benchmarking, accounting purposes, and to monitor compliance. In some countries, frequent monthly payments of the same amount can potentially trigger misclassification risk.

Combine your payroll solution for employees and contractors

Many contractor payroll services only allow you to handle contractor agreements. This can be inconvenient, as it forces you to jump between two payroll software solutions for contractors and employees.

It’s more efficient to use a contractor payroll solution that handles both — like Remote. Our platform allows you to:

• Hire people either as contractors or employees and ensure compliance with their payroll, contracts, and benefits

• Quickly and easily convert long-term contractors to employees

• Onboard new contractors and employees in minutes

• Manage invoicing and payments in one click

Automate where possible

Instead of assigning repetitive, manual tasks (such as emailing the right tax form template to your contractors), try to automate as many payroll tasks as possible. This saves you and your team countless hours and headaches, allowing you to effectively scale your contractor recruitment and minimize human error.

A contractor management platform, like Remote, allows you to do this. Our platform identifies your new contractor’s country of residence and legal status and then automatically assigns the right forms.

Learn more about automating payroll and other contractor management tasks.

Regularly review your contractor arrangements

Local labor laws and guidelines are often subject to change, which means you need to frequently reassess your contractor relationships from a legal point of view. As well as creating compliance risk, law changes can affect your payroll.

For instance, one of your contractors might be based in a country that only recognizes short-term independent contractor arrangements. After a certain period, the local labor authority will require you to convert the contractor into an employee. If you’re unaware of this law, you can easily run into serious legal and tax issues.

Each country uses its own employee/contractor classification formula to assess the validity of your agreements, with a particular focus on payment schemes, contract durations, and the exact number of working hours.

The more countries you hire contractors from, the more time-consuming it is to monitor and comply with regulations. Remote’s local, on-the-ground experts stay on top of any proposed law changes and ensure that everything is compliant, saving you countless headaches.

If you review a contractor arrangement and realize there is a misclassification risk, you should immediately consider converting that contractor into an employee.

Can I outsource contractor payroll?

Yes. In fact, it’s highly recommended, especially if you’re working with global talent. If your organization is (or will be) remote and looking to scale, outsourcing contractor payroll means you don’t have to worry about handling the workload or managing the costs of hiring in-house payroll specialists.

Working with a contract management provider like Remote has many advantages. It enables you to:

Offer benefits to contractors

As mentioned, contractors are not entitled to statutory benefits (unless there are unique, local laws in place). However, this doesn’t necessarily mean that you can’t offer them.

Self-employed workers are an essential part of the evolving digital workforce, and non-employee talent shouldn’t be seen as second-class team members. This is especially true in cases where contractors are handling long-term projects and working closely with your teams.

You can potentially offer benefits for your contractors, but it's important to note that this can create a misclassification risk (you may also face restrictions in certain countries).

Remote’s global hiring experts can help you establish which benefits might be best for each contractor.

We’ll also make sure that offering extra perks doesn’t put you at risk of employee misclassification.

Minimize misclassification risk

The definitions of an employee/employer relationship and a client/contractor relationship vary between countries. As a result, it can be hard to understand the relevant international laws and regulations, let alone comply with them.

When you work with a contractor management provider like Remote, you don’t need to understand everything. Our in-house, on-the-ground experts are proficient in local, regional, and national laws and ensure that you remain compliant. Not only will we help you avoid fines and reputational damage, but we’ll save you a whole load of paperwork.

Seamlessly manage payroll and taxes

A reliable, all-in-one contractor management platform is ideal for seamlessly managing payroll and taxes. It automates the most time-consuming workflows and does all the legal heavy lifting for you. This allows you to focus on growing your business and making your customers happy instead of getting swamped under spreadsheets and tax forms.

Remote’s global payroll functionality is the ideal solution, giving you clear payroll visibility for all your independent contractors.

Plus, it can automate accurate payroll calculations as well as track and approve incentives, bonuses, salary changes, and paid time off.

Reduce payroll costs

Outsourcing payroll can be a significant money saver. When you run payroll internally, you buy payroll software, hire payroll professionals, and regularly check if everything is being run correctly. What’s more, you have to provide training to guarantee that your staff is up to date with changing laws, tax rules, and accounting deadlines — all of which require time and money.

By outsourcing payroll, you cut long-term costs by:

• Staying compliant with payroll regulations and avoiding any legal penalties

• Improving the contractor experience, reducing costly turnover

• Giving your HR and payroll staff time to focus on more productive activities, which are more valuable for the company

• Saving on payroll software costs

Manage contractor payroll with Remote

Working with independent contractors allows you to work with some of the world’s most talented individuals. But the more you bring on board, the more complex your contractor payroll becomes.

With our all-in-one platform and our team of tax and legal experts, Remote helps you manage and pay your contractors smoothly. We provide:

• Documentation management (for both you and your contractors)

• Localized, fully compliant contractor agreement templates

• Automated invoice payments in multiple currencies

• In-house, on-the-ground expertise in tax, legal, and compliance

To learn more about contractor payroll, download our free Contractor Management Guide or speak with one of our knowledgeable experts.