As a small business owner, it’s likely that from time to time you are utilizing an individual to perform services for or on behalf of your business. Maybe you even utilize contractors on an ongoing basis and find that easier than hiring employees. Wherever you find yourself, it’s important to know how you should be paying these 1099 contractors.
First, I’d encourage you to watch this special Facebook training where I discussed the difference between an employee vs. contractor and why it matters. You’ll want to make sure that you are compliant with IRS regulations, so be sure to start there first. Once you know your 1099 contractors are legit, it’s time to pay them. A common question we get all the time is how a business should be paying its contractors. I’m going to go through some common payment types we see and answer the question of whether this payment method is ok and if that payment method requires you to issue a 1099 in January each year.
1. Paypal – YES
Paypal is an acceptable form of payment for your 1099 contractors. However; please make sure you are not using the “friends and family” option. If you are truly paying for a service that was performed then you need to check the box that says you are doing so. Yes, this might mean that your contractor is charged a fee and this is for the convenience of them receiving money straight to their account with a simple push of a button. If they do not want to pay that fee then you need to agree on a different payment method. Any payments made to a contractor via Paypal do not need to be reported on a 1099 as this liability falls on Paypal to do so.
2. Gusto – YES
Gusto* is amazing in so many ways and for so many reasons and the ability to pay your 1099 contractors with direct deposit is just one of the ways they are amazing. For a very small fee, you can add contractors to Gusto, ask the contractor to enter their details such as SSN and direct deposit info and before you know it, you are sending them their first direct deposit. It’s so easy and convenient and worth every small penny they charge. Plus, they file all 1099s for you each January which means you can wipe your hands clean of that responsibility and know they have it handled. It is no cost for your contractor, low cost to your business and a WIN WIN on all sides. Plus, you can use Gusto to pay W2 employees as well if you have a mix or need to transition some contractors to W2.
3. QBO – YES
Quickbooks Online is another great option for paying your 1099 contractors. You will need to have some sort of Quickbooks Online Payroll subscription in order to pay your contractors with direct deposit so this option is a little more expensive than Gusto but if you are already using QBO and looking to stay within the same software, it is an option. You can also file 1099s through QBO but it is not included in the cost so be prepared for an additional fee there as well.
4. Check – YES
You can certainly go old school and pay your contractors via check – there is nothing wrong with that method and it’s completely free for both parties. Whether you are handwriting a check and giving it to them in person or using your bank’s bill pay and mailing it (small fee may apply – check with your bank), this is a great option for paying contractors. Any payments that are made via check will need to be recorded on a 1099 and sent to the contractor by January 31st each year.
5. Cash – Not preferably
Yes, if you need to, you can use cash to pay your contractors but it’s not preferable. Why? It’s too easy to lose track of who you paid, when you paid them, why you paid them and you’re likely to miss out on some expenses because of it. If you have a contractor who is asking you to pay them in cash only, you should really dig into it and ask why. If they are wanting you to pay them “under the table” and not issue a 1099, I’d run away from that as fast as I could. This is not a good business decision on your part because you’re going to lose the ability to categorize that money that you paid them as an expense. If you paid Jill the contractor $750 for a service she performed and she asked for cash and no 1099, how are you going to record that in your books? You shouldn’t record an expense to a 1099 contractor without actually issuing a 1099. It’s just not a great idea for multiple reasons but if you absolutely must pay in cash, make sure you are immediately recording the transaction in your books, keeping a cash on hand account balance and also issuing a 1099 for the cash that was paid.
6. Venmo – NO
We see this all the time and it’s just not a good idea. It’s almost like paying someone with cash. There is no real paper trail, Venmo doesn’t issue a 1099 and Venmo also clearly states in their terms and conditions that this service is not to be used to pay for goods or services. We’ve actually seen businesses have their Venmo accounts locked for abusing this. I know, Venmo is free and quick and easy to use. I get it, I really do but I want you to be compliant and always legit within your business. It’s silly to risk your business just by taking a shortcut or a “free method.”
These same principles apply to anyone who wants to pay you. If you are a service provider and you have a client request to pay you via Venmo, Paypal Friends & Family or cash, I would kindly request that they use a different method. Your best option is to let them know about Gusto* or simply ask them to write a check which will be free for both parties.
*Note: I am an affiliate partner with Gusto because they are amazing and I want to tell everyone about them. We use them here at Steadfast to pay both our employees and our contractors, plus so much more in the HR department. If you sign up for Gusto using my link, not only will you receive a discount but I may also receive some sort of compensation. Thanks for your support and trust in us!