Contractor payroll, explained

Here's the first thing to understand: contractors aren't on payroll. The term "contractor payroll" is technically incorrect. Independent contractors are self-employed. They invoice you for services, you pay them directly, and they handle their own taxes. There's no payroll processing, no tax withholding, no benefits administration.

But businesses still need a systematic way to manage contractor payments. You need to track who gets paid what, when, and why. You need records for audits and tax filing. You need proof that payments were made and received. This is what people mean when they say "contractor payroll"—the workflow for managing contractor payments cleanly and consistently.

This guide explains how contractor payments actually work, the tools you need, typical fees, and the records you must keep. No EOR required.

Employees vs contractors: the payment difference

The distinction matters because it determines how you pay people and what records you keep.

Employees are on payroll. You process regular payments, withhold taxes, provide benefits, and use payroll software to manage everything. It's complex and regulated.

Contractors invoice you. You review the invoice, approve it, send payment through a direct payment provider, and keep records. It's simpler, but you still need organization.

Why "payroll" doesn't apply to contractors

Payroll is a specific legal and financial process for employees. It involves calculating gross pay, withholding taxes (federal, state, local, Social Security, Medicare), deducting benefits, calculating net pay, and remitting withheld amounts to tax authorities. Payroll runs on a fixed schedule (weekly, bi-weekly, monthly) and is heavily regulated.

Contractors don't fit this model. They're self-employed. They set their own rates, invoice for completed work, and receive gross payment. They handle their own taxes, benefits, and business expenses. There's no withholding, no fixed schedule, no benefits deductions.

When people say "contractor payroll," they usually mean the workflow for managing contractor payments: tracking invoices, approving payments, sending funds, and keeping records. It's payment management, not payroll.

The direct-pay stack

To pay contractors directly, you need three things: a payment provider, a record-keeping system, and a workflow.

Payment providers are services that send money from your account to contractors. The most common options:

• Wise – Best for international contractors. Low fees (0.4-1%), real exchange rates, fast transfers. Supports 50+ currencies.
• PayPal – Familiar to contractors, instant transfers, higher fees (2.9% + $0.30). Good for small, frequent payments.
• Payoneer – Popular with freelancers, supports mass payouts, 2-3% fees. Good for batch payments to many contractors.
• Bank transfers – ACH (US) or SEPA (EU) are often free but slower (2-5 days). Good for large, infrequent payments.

Record-keeping is essential. You need to track contracts, invoices, payment confirmations, and tax forms. Many businesses use spreadsheets, but contractor management software provides better organization and audit trails.

Workflow is the process: contractor submits invoice → you review and approve → you send payment → contractor confirms receipt → you log the transaction. Consistency matters for audits and tax filing.

Records and audit trail

Even though contractors aren't on payroll, you still need detailed records. Tax authorities, auditors, and your finance team need proof of what you paid, to whom, and why.

Essential records:

• Contracts – Scope of work, deliverables, payment terms, IP ownership. Proves the relationship is contractor, not employee.
• Invoices – Contractor-submitted invoices with dates, amounts, descriptions, and payment terms.
• Payment confirmations – Receipts from Wise, PayPal, Payoneer, or bank showing payment was sent and received.
• Tax forms – W-9 (US contractors) or W-8BEN (international contractors) collected before first payment.
• Payment log – Spreadsheet or software tracking all payments with dates, amounts, contractors, and references.

Keep these records for at least 7 years. If you're audited, you'll need to prove every payment was legitimate business expense to a properly classified contractor.

Common mistakes

Treating contractors like employees. Paying contractors on a fixed schedule (like payroll) or withholding taxes can create misclassification risk. Pay per invoice, not per pay period.

Not collecting tax forms upfront. Get W-9 or W-8BEN before the first payment. If you pay $600+ to a US contractor without a W-9, you can't file 1099-NEC and may face penalties.

Poor record-keeping. Spreadsheets get messy. Emails get lost. Use contractor management software to centralize contracts, invoices, and payment records.

Paying without invoices. Every payment needs a corresponding invoice. No invoice = no proof of what the payment was for. This creates audit risk.

Using expensive payment methods. Bank wires cost $25-50 per transfer. PayPal charges 2.9% + $0.30. For international contractors, Wise is usually 5-10x cheaper.

The bottom line

Contractors aren't on payroll. They invoice you, you pay them directly using Wise, PayPal, Payoneer, or bank transfers, and you keep detailed records. No payroll software, no tax withholding, no benefits administration.

The key is organization. Use contractor management software to track contracts, invoices, and payments in one place. Choose low-fee payment providers (Wise for international, ACH for US). Keep records for 7 years. Pay per invoice, not per pay period.

This approach is simpler and cheaper than using an EOR or payroll service. You maintain direct relationships with contractors, control payment timing, and avoid middleman fees. For most businesses, it's the right choice.