From Checks to PayPal

The Best Ways to Pay Your Contractors Like a Pro!

1. Introduction 

Paying contractors is an essential part of running a business, but choosing the right payment method can feel like navigating a maze. With so many options available, it’s easy to feel overwhelmed. Should you stick to traditional methods like checks, or opt for modern solutions like digital transfers? Each method has its pros and cons, and the best choice depends on your business’s specific needs. 

Whether you’re a small business owner managing a handful of contractors or a freelancer hiring specialized help, knowing how to pay contractors efficiently is crucial. The right payment method can save you time, reduce errors, and foster stronger relationships with your contractors. 

In this guide, we’ll break down the most common methods for paying contractors, from checks to digital solutions, and help you identify the best fit for your operations. By the end, you’ll have a clear understanding of how to streamline your contractor payments, ensuring smooth business operations and satisfied contractors. 

2. Checks 

Paying contractors with checks is one of the oldest and most traditional payment methods. This approach involves physically writing a check, mailing it to the contractor, and waiting for them to cash or deposit it. While it may seem outdated compared to modern digital payments, checks remain a popular choice for businesses that prioritize a tangible paper trail and prefer traditional bookkeeping. 

Pros 

• Traditional, Reliable Method: Checks have been a trusted payment method for decades and are universally understood and accepted by most contractors. 
• Paper Trail for Bookkeeping: Each check creates a physical record of the payment, which can be valuable for maintaining financial records and preparing for tax season. 
• Widely Accepted: Unlike some digital payment platforms, checks don’t require contractors to sign up for specific accounts, making them a universally accessible option. 

Cons 

• Slow Processing Times: Payments can take several days or even weeks to reach the contractor, especially if mailed. This delay can frustrate contractors relying on timely payments. 
• Risk of Lost or Delayed Mail: Checks sent through the mail may get lost, delayed, or even stolen, creating additional administrative headaches. 
• Administrative Burden: Writing, mailing, and tracking checks requires significant effort, especially for businesses managing multiple contractors. This can add to your workload and reduce efficiency. 

Best For 

Checks are best suited for small businesses with a limited number of contractors or those that prefer a tangible, paper-based payment system. They are ideal for situations where both parties value a physical record of the transaction or when contractors do not have access to digital payment systems. However, as your business grows or if faster payment options are required, transitioning to more modern methods may be necessary. 

3. Wire Transfers 

Wire transfers are a fast and secure method of electronically transferring funds directly from one bank account to another. This method is widely used for both domestic and international payments, particularly when businesses need to send large amounts quickly. Unlike other methods, wire transfers do not rely on intermediary platforms, offering a direct and reliable way to pay contractors. 

Pros 

• Fast and Secure: Wire transfers are one of the quickest payment methods available. Domestic transfers are often completed within the same day, while international transfers typically take 1-2 business days. Additionally, stringent bank protocols make this method highly secure. 
• Reliable for Large Payments: Wire transfers are ideal for significant amounts of money, ensuring contractors receive their full payment without concerns about processing delays or errors. 
• Global Reach: For businesses working with international contractors, wire transfers offer seamless cross-border payment capabilities. 

Cons 

• Fees May Apply: Wire transfers can be expensive, with fees ranging from $15-$50 for domestic transfers and even higher for international transactions. Additionally, contractors may incur fees on their end, which can be frustrating. 
• Complexity for Contractors: Contractors unfamiliar with wire transfers may find the process intimidating, especially if they need to provide bank details like SWIFT codes or IBANs for international transactions. 
• Irreversible Transactions: Once a wire transfer is initiated, it cannot be reversed, making accuracy in payment details critical. 

Best For 

Wire transfers are best suited for businesses handling large payments, working with international contractors, or requiring fast and secure payment methods. While the associated fees may be a drawback, the reliability and speed of wire transfers make them a go-to option for time-sensitive or high-value transactions. 

4. Credit Cards 

Using credit cards to pay contractors has become increasingly popular, particularly through online platforms. Businesses can either pay contractors directly with a credit card or use payment processors like PayPal, Stripe, or Venmo, which accept credit card payments. This method is convenient, especially for small or recurring payments. 

Pros 

• Quick and Easy Payments: Credit cards offer a fast and straightforward way to pay contractors, requiring only basic information for transactions. 
• Reward Points or Cashback: Businesses using credit cards for payments can earn benefits like cashback, travel points, or other rewards, which add value to regular transactions. 
• Perfect for Online Platforms: Many contractors prefer platforms like PayPal or Stripe, which allow for seamless credit card payments and easy tracking of transactions. 
• Ideal for Recurring Payments: For businesses with regular contractor agreements, credit cards provide a hassle-free option to automate recurring payments. 

Cons 

• Transaction Fees: Using credit cards often incurs processing fees, typically ranging from 2-5% per transaction. These fees can add up, especially for international payments. 
• Payment Processor Requirements: Some contractors may need to set up accounts with specific payment processors, which may not always be convenient. 
• Potential Overspending: Businesses relying heavily on credit cards for payments must ensure they manage their spending carefully to avoid high interest rates or debt accumulation. 

Best For 

Credit cards are ideal for businesses that make frequent, smaller payments or need a convenient method for online transactions. This method is particularly advantageous for businesses that utilize platforms like PayPal or Stripe and want to take advantage of rewards programs. However, businesses should consider the fees and ensure that contractors are comfortable with this payment option.

5. Direct Deposit 

Direct deposit is a widely used payment method that allows businesses to transfer funds electronically directly into a contractor’s bank account. This system eliminates the need for physical checks or manual payment processing, making it a convenient and efficient option for both businesses and contractors. Once set up, direct deposits ensure timely and secure payments, making them particularly suitable for recurring transactions. 

Pros 

• Fast and Reliable: Payments are processed quickly, often within one business day, ensuring contractors receive their money on time. 
• No Physical Paperwork: Direct deposit eliminates the need for checks, reducing administrative tasks and simplifying record-keeping. 
• Cost-Effective: For most businesses, direct deposit is either free or involves minimal processing fees, making it an economical choice. 
• Environmentally Friendly: By going paperless, direct deposit contributes to reducing paper waste and environmental impact. 

Cons 

• Banking Details Required: Contractors must provide sensitive banking information, which some may hesitate to share. 
• Cumbersome Setup: Setting up direct deposit can be time-consuming initially, requiring businesses to collect contractor information and configure their payment systems. 
• Limited Use for One-Time Payments: While ideal for recurring transactions, it may not be the most practical option for occasional or one-off payments. 

Best For 

Direct deposit is best suited for businesses with long-term relationships with contractors who require regular payments. It’s especially beneficial for businesses looking to streamline their payroll process while maintaining cost-efficiency. For one-time or irregular payments, however, other methods may be more appropriate. 

6. ACH Payment 

Automated Clearing House (ACH) payments are a type of electronic funds transfer that allows businesses to send money directly to contractors’ bank accounts. Similar to direct deposits, ACH payments are processed through a centralized network, making them a secure and low-cost option for recurring or bulk payments. ACH is particularly popular in the U.S. for payroll and contractor payments. 

Pros 

• Secure and Low-Cost: ACH payments are one of the most cost-effective electronic payment methods, with fees significantly lower than wire transfers or credit card transactions. 
• Convenient for Recurring Payments: ACH is ideal for businesses that make regular or scheduled payments to contractors, as the process can be automated. 
• Widely Accepted: ACH payments are commonly used, making them a familiar and accessible option for contractors. 
• Efficient for Bulk Payments: Businesses can process multiple payments simultaneously, saving time and effort. 

Cons 

• Slower Processing Times: ACH payments typically take 2-3 business days to process, making them slower than wire transfers. 
• Banking Details Required: Similar to direct deposit, contractors need to share their bank account information, which may raise privacy concerns for some. 
• Not Ideal for International Transactions: ACH payments are primarily used domestically, limiting their utility for paying contractors based outside the U.S. 

Best For 

ACH payments are ideal for businesses that need a secure, cost-effective solution for recurring or bulk payments to contractors, particularly within the U.S. While the slower processing time may be a drawback for urgent payments, the overall affordability and convenience make ACH a preferred choice for long-term contractor relationships.

7. PayPal 

PayPal is one of the most popular online payment platforms used by businesses and freelancers worldwide. Known for its simplicity and ease of use, PayPal allows businesses to send payments quickly and securely, making it a favorite for both domestic and international transactions. For contractors, PayPal offers a straightforward way to receive payments without needing to share sensitive bank account details, making it especially useful for freelancers. 

Pros 

• Instant Transfers: Payments are processed almost immediately, whether domestic or international, ensuring contractors receive their funds quickly. 
• Easy Setup: Setting up a PayPal account is quick and straightforward, and contractors only need an email address to receive payments. This simplicity makes PayPal a go-to for small businesses and freelancers. 
• Low Fees for Small Payments: For smaller transactions, PayPal charges relatively low fees, typically around 2.9% + $0.30 for domestic payments. This makes it cost-effective for businesses making regular, small payments. 

Cons 

• High Fees for Large or International Payments: For larger payments or international transactions, PayPal’s fees can add up, ranging from 4.4% to 5.4% depending on the destination country, plus additional currency conversion fees. 
• Withdrawal Delays: While PayPal transfers funds quickly, contractors may need to transfer the funds from PayPal to their bank account, which can take several business days, particularly for international accounts. 
• Account Freezes: PayPal has been known to freeze accounts due to suspicious activities, which can cause disruptions if a business relies heavily on the platform for payments. 

Best For 

PayPal is best suited for freelancers and small businesses that need quick, low-value payments and don’t mind paying transaction fees. It is also ideal for international contractors due to its global reach, though businesses should be aware of the fees for large or cross-border payments. 

8. Accounting Software 

Accounting software like Vantazo, QuickBooks, and Xero offers businesses an integrated solution for managing payments, invoices, and financial records. These platforms can streamline contractor payments by automating the entire process, making it easier to track payment schedules, generate invoices, and ensure tax compliance. Accounting software also offers advanced features like financial reporting, expense tracking, and tax filing, making it a powerful tool for small businesses with multiple contractors.  

Pros 

• Streamlined Payments: Accounting software integrates payment processing, making it easier to pay contractors directly from the platform without needing separate payment methods. 
• Automated Tracking: Payments and invoices are automatically recorded, providing a comprehensive overview of business finances. This eliminates the need for manual tracking and reduces the risk of errors. 
• Tax Filing Features: Many accounting tools come with features that help businesses calculate and file taxes for contractors, ensuring compliance with tax regulations. 
• Reporting and Insights: These platforms offer financial reporting, helping businesses understand their cash flow, track expenses, and make informed decisions. 

Cons 

• Monthly Subscription Fees: Most accounting software platforms require a subscription, which can be an ongoing cost for businesses. Fees typically range from $10 to $50 per month, depending on the features and plan. 
• Learning Curve: Although intuitive, accounting software requires an initial learning period to understand the features and how to use them effectively. Some businesses may need time to fully adopt the system. 
• Limited Payment Options: While some accounting software integrates with payment platforms like PayPal or ACH, others may not support every payment method, limiting options for certain businesses. 

Best For 

Accounting software is ideal for businesses with multiple contractors or those looking to integrate payment and accounting systems into a streamlined workflow. It’s perfect for businesses that want to automate invoicing, payments, and tax filings to save time and reduce errors.

9. Cash

Paying contractors in cash may seem outdated, but it’s still a method some small businesses use, particularly for in-person services or small jobs. While cash provides immediate, tangible payment, it’s often less reliable for record-keeping and tax compliance compared to digital methods. For contractors, cash may feel like a more personal, immediate way to get paid, but it comes with several challenges that businesses must consider.

Pros 

• Instant Payment Method: Cash payments are immediate, and contractors can walk away with payment in hand, without waiting for a bank transfer or processing time. 
• No Transaction Fees: Unlike online payment systems, there are no fees involved with cash transactions, which can be particularly appealing for small payments where transaction fees may otherwise be significant. 

Cons 

• Difficult to Track and Document for Tax Purposes: One of the major downsides to paying in cash is that it can be difficult to track and document for tax purposes. Businesses need to ensure proper records are kept, especially if the contractor is paid regularly. Without a clear paper trail, it could be challenging to prove payments were made, which could lead to issues during tax season or audits. 
• Not Suitable for Large Payments: Cash is impractical for large payments, which may require a physical cash withdrawal that isn’t always feasible or secure for significant sums. 
• Risk of Misplacing Cash or Handling Errors: Cash can be misplaced, lost, or stolen, which is a risk for both businesses and contractors. There is no digital record to trace payments, making it harder to verify transactions. 
• Lack of Convenience: For some contractors, receiving payment in cash can be an inconvenience, particularly if they need to deposit it into their bank account, especially when they don’t have immediate access to a bank or an ATM. 

Best For 

Cash payments are best for small, in-person gigs or one-off projects, especially when both parties are comfortable with this method. It’s ideal for situations where other methods are unavailable or impractical, but it should be used with caution when it comes to larger payments or regular contractor relationships. 

10. Factors to Consider When Paying Contractors

Payment Frequency 

The frequency of payments can affect the choice of payment method. For contractors with recurring work, like monthly invoices, methods such as ACH payments or direct deposit may be more suitable. For those who work on smaller projects, PayPal or checks could be the better option. 

Payment Amounts 

Larger payments should be made via secure methods like wire transfers, ACH, or checks to ensure they are processed accurately and securely. Smaller payments, like those for short-term gigs, can be managed easily with PayPal, credit cards, or even cash. 

Tax Requirements 

Ensuring compliance with tax regulations is crucial for businesses. Different payment methods may require different types of documentation. For example, if using PayPal, the business must ensure that contractors are issued 1099 forms when applicable, as required by the IRS. With cash payments, businesses must ensure they maintain accurate records for tax purposes, even if it’s more difficult to track. 

Contractor Preferences 

Some contractors may have preferences for how they receive payments, particularly if they work internationally. PayPal, for example, is a preferred method for many freelancers due to its global reach and low fees. It’s important to discuss payment preferences with contractors upfront to avoid any payment issues or delays. 

Fees and Costs 

Each payment method comes with its own set of fees, and businesses should compare these to ensure they are choosing the most cost-effective solution. While cash has no fees, digital methods like PayPal or wire transfers can come with processing fees, especially for international payments. Businesses should consider these costs when selecting the best payment method for their contractors.

11. Independent Contractor vs. Employee

Understanding the difference between an independent contractor and an employee is essential when deciding on payment methods for your workforce. The distinction has a significant impact on how you manage compensation and the payment systems you choose.

Key Points 

Tax Responsibilities: Independent contractors are responsible for handling their own taxes, unlike employees, who typically have taxes withheld by the employer. This affects payment methods because contractors often need more flexibility in receiving their payments quickly to manage their taxes and expenses.

Payment Methods: For independent contractors, businesses may use more flexible, direct methods like PayPal, wire transfers, or ACH, since these workers are usually paid for specific projects or hourly work. In contrast, employees are typically paid through a more consistent method like direct deposit, which fits the regular, salaried payment structure of employees.

Choosing the right payment method based on whether the worker is an independent contractor or an employee ensures compliance with tax laws and meets the needs of both the employer and the worker. By recognizing the distinctions, businesses can streamline their payroll processes and make the best decisions for their workforce.

12. FAQs on How to Pay Contractors

1. What payment method is best for international contractors? 

   For international contractors, wire transfers or PayPal are commonly used due to their ability to handle cross-border payments securely and quickly. PayPal offers a cost-effective option, while wire transfers are best for larger payments.

2. Can I use PayPal to pay contractors outside the U.S.? 

   Yes, PayPal is widely accepted for international payments. It’s a popular method due to its ease of use, fast transfers, and low fees for small payments. However, there are higher fees for larger or international transactions.

3. How do I handle taxes when paying contractors? 

   When paying contractors, ensure that you track all payments and issue a 1099 form at the end of the year for any contractor who earned over $600. It’s essential to keep accurate records to ensure tax compliance.

4. Can I pay contractors using credit cards? 

   Yes, credit cards can be used to pay contractors, especially if the contractor uses platforms like PayPal or Stripe that accept credit card payments. This method is ideal for small, frequent payments.

5. What’s the best payment method for freelancers with irregular hours? 

   For freelancers with irregular hours, PayPal or ACH payments are a great option. These methods are flexible and allow you to make payments quickly and efficiently as work is completed.