How to pay contractors: A complete step-by-step workflow

Paying contractors is straightforward once you understand the workflow: set up payment providers, define payment terms, send funds, attach proof, and log confirmations. Whether you're paying one contractor or fifty, the process is the same. The key is organization: clear payment terms, reliable providers, and complete documentation that creates a clean audit trail and prevents disputes.

This guide walks through each step with practical examples.

Step 1: Set up payment providers

Before you can pay contractors, you need accounts with payment providers. Choose based on your contractor locations and payment patterns.

Wise (formerly TransferWise) is best for international contractors. It supports 70+ currencies, charges low foreign exchange fees (0.35-1%), and delivers funds in 1-3 business days. Set up a business account, verify your identity, and link your bank account. Typical cost: $3-15 per payout.

PayPal works well for contractors who prefer PayPal. It supports 25+ currencies, charges higher fees (2.9% + $0.30 for domestic, 4.4% + fixed fee for international), and delivers funds instantly. Create a business account and link your bank account. Typical cost: $3-50 per payout.

Bank transfers (ACH or wire) work best for U.S. contractors. ACH transfers are free or $1-3. Wire transfers cost $15-30. Set up through your business bank account. Typical cost: $0-30 per payout.

Most businesses use Wise for international contractors and ACH for U.S. contractors. This combination minimizes fees while providing flexibility.

Step 2: Collect contractor payment details

Before making the first payment to each contractor, collect their payment details. Store these securely and verify them before the first payment to avoid errors or delays.

For bank transfers: Collect full name (as it appears on the bank account), bank name, account number, routing number (U.S.) or SWIFT/IBAN code (international), and bank address.

For PayPal: Collect PayPal email address, full name, and country.

For Wise: Collect email address (Wise will request bank details from the contractor), full name, country, and preferred currency for receiving payments.

Store payment details in a secure location—encrypted cloud storage or contractor management software. Use a standard form to collect consistent information from all contractors.

Step 3: Define milestones and payment terms in the contract

Clear payment terms prevent disputes and ensure contractors understand when to expect payment. Include these in your contractor agreement:

Payment schedule: Specify how often you'll pay. Examples: "Monthly on the 28th," "Upon completion of each milestone," "Bi-weekly on Fridays."

Milestones for project work: Define specific deliverables and associated payment amounts. Example: "Milestone 1: Design mockups ($2,000), Milestone 2: Development ($5,000), Milestone 3: Testing and launch ($3,000)."

Invoice requirements: Specify what contractors must include in invoices. Example: "Submit itemized invoices including hours worked, deliverables completed, hourly rate, and total amount by the 1st of each month."

Payment method: Specify how you'll pay. Example: "Payments made via Wise transfer to contractor's bank account in their local currency."

Payment terms: Specify the timeframe for payment. Example: "Payment within 5 days of invoice approval" or "Payment within 15 days of invoice submission."

Clear terms in writing prevent misunderstandings. Both you and the contractor understand expectations, reducing disputes.

Step 4: Review and approve invoices

When a contractor submits an invoice, review it carefully before approving payment.

Verify deliverables: Confirm the work described in the invoice matches what was delivered. For milestone-based work, check that the milestone is complete. For hourly work, review time logs or deliverables against the contract scope.

Check amounts: Confirm the invoice amount is correct. For hourly work, verify hours match time logs and the rate matches the contract. For project work, verify the amount matches the contracted milestone amount.

Flag discrepancies: If anything doesn't match, ask the contractor to clarify or correct before approving. Document the issue and resolution.

Approve formally: Once verified, mark the invoice as approved in your system (spreadsheet, contractor management software, or email). This creates a record of approval, who approved it, and when.

Most businesses process approvals in 1-3 days: contractor submits invoice → manager reviews and approves → finance processes payment.

Step 5: Send payment

Once an invoice is approved, send payment through your chosen provider.

Via Wise: Log into your Wise account, create a new transfer, enter the contractor's email or bank account details, amount, and currency. Review the quoted fee and exchange rate, then confirm. Wise provides a transaction ID immediately.

Via PayPal: Log into your PayPal account, click "Send & Request," enter the contractor's PayPal email, amount, and a reference note (invoice number). Review the fee, then confirm. PayPal provides a transaction ID immediately.

Via bank transfer: Log into your business bank account, create a new transfer (ACH for U.S., wire for international), enter the contractor's bank details, amount, and a reference (invoice number). Confirm the transaction. Your bank provides a confirmation number.

Save the transaction ID or confirmation number immediately. You'll need this for your records and to prove payment if a dispute arises.

Step 6: Attach proof of payment to your records

After sending payment, preserve proof for documentation and audits.

Download receipt: Most payment providers allow you to download a PDF receipt showing transaction details (date, amount, recipient, transaction ID, fees charged). Download this immediately after payment.

Link to invoice: In your contractor management system or spreadsheet, attach the receipt to the contractor's profile and link it to the specific invoice. This creates a complete audit trail showing invoice → payment → proof.

Record details: Log the payment date, amount, currency, payment method, transaction ID, and fees paid. This makes reconciliation easier at month-end and simplifies tax reporting at year-end.

Proof of payment is critical. If a contractor claims they weren't paid, you can provide the receipt and transaction ID as proof that the payment was sent.

Step 7: Get contractor confirmation of receipt

After sending payment, ask the contractor to confirm they received it.

Notify the contractor: Send an email or message letting them know payment has been sent. Include the transaction ID, amount, currency, and expected arrival date (typically 1-3 business days).

Request confirmation: Ask the contractor to confirm receipt once funds arrive. Example: "Please confirm receipt of payment by replying to this email or marking the payment as received in the platform."

Log the confirmation: When the contractor confirms, record the confirmation date and method in your system. This closes the payment loop and proves funds reached the contractor.

If a contractor doesn't confirm within 3-5 business days, follow up to ensure they received the payment. Don't assume everything went smoothly without confirmation.

Step 8: Reconcile monthly

At the end of each month, reconcile your payment records with your bank and payment provider statements.

Download statements: Get statements from your business bank, Wise, PayPal, and any other payment providers you use. These show all transactions and fees for the month.

Match payments: Compare your internal payment records with the statements. Confirm every payment appears in the statements with matching amount, date, and recipient.

Verify fees: Check that fees charged match what you expected based on amounts and currencies. Flag any unexpected charges and contact the provider if needed.

Document discrepancies: If you find discrepancies (missing payments, incorrect amounts, duplicate charges), document them immediately and resolve them. Update your records to reflect correct information.

Monthly reconciliation ensures your records are accurate and complete. This makes year-end tax reporting easier and helps you catch errors early before they compound.

Common mistakes to avoid

Paying without proof. Always get a receipt or transaction ID before considering the payment complete. Without proof, you can't verify payment was actually sent or resolve disputes if they arise.

Not tracking confirmations. If contractors don't confirm receipt, you won't know if there's a payment problem until they complain. Always request and log confirmations.

Unclear payment terms. Vague terms like "payment upon completion" lead to disputes about timing and amounts. Define specific milestones, amounts, and timelines in writing in the contract.

Using personal accounts for business payments. Always pay from business accounts, never personal accounts. This keeps business and personal finances separate, simplifies accounting, and is essential for tax purposes.

Skipping monthly reconciliation. Without monthly reconciliation, errors accumulate and become harder to fix later. Reconcile every month to keep records accurate and current.

Poor record organization. If records are scattered across emails, spreadsheets, and different storage locations, you'll struggle during audits or tax filing. Organize all records in one central location.

Documentation checklist for each payment

For each contractor payment, maintain complete records:

Before payment: The contract with payment terms, contractor's tax form (W-9 for U.S. or W-8BEN for international), contractor's payment details (bank account or PayPal email), and the approved invoice.

During payment: The transaction ID or confirmation number from your payment provider, a PDF receipt showing transaction details, the payment date and amount, and any fees paid.

After payment: The contractor's confirmation that they received payment (email, message, or platform notification), the confirmation date, and any follow-up communications if payment was delayed.

Store all documentation securely in encrypted cloud storage or contractor management software with access controls. Keep records for at least 4 years (IRS record-keeping requirement for business expenses).

The complete workflow in summary

Here's the entire process from contract to confirmation:

1. Set up payment provider accounts (Wise, PayPal, bank transfer options)
2. Collect and verify contractor payment details
3. Include clear payment terms in the contractor contract
4. Contractor submits invoice for completed work
5. You review and approve the invoice
6. You send payment through your chosen provider
7. You save proof (receipt and transaction ID)
8. You notify the contractor and ask for confirmation
9. Contractor confirms receipt
10. You record everything in your system
11. At month-end, you reconcile with statements
12. At year-end, you have complete documentation for tax reporting

Once established, this workflow becomes routine and takes minutes per payment.

The bottom line

Paying contractors is straightforward: set up payment providers, collect payment details, define clear payment terms, approve invoices, send funds, attach proof, get confirmations, and reconcile monthly. This workflow takes minutes per payment and creates a complete audit trail.

You don't need an EOR to pay contractors. Direct payments via Wise, PayPal, or bank transfers cost less, give you more control, and are fully compliant when you maintain proper documentation.

The small investment in setting up a clear process pays dividends: fewer disputes, easier tax reporting, complete audit trails, and significant fee savings compared to EOR services.

Start with one contractor to establish your process. Once you're comfortable, add more contractors. The process scales easily from one to fifty contractors without any change in complexity.