How to pay contractors

Paying contractors is straightforward once you understand the workflow: set up payment providers, define milestones or payment terms, send funds, attach proof, and log confirmations. This guide walks through each step with practical examples.

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. This creates a clean audit trail and prevents disputes.

Step 1: Set up payment providers

Before you can pay contractors, you need accounts with payment providers. The three most common options are:

Wise (formerly TransferWise): Best for international contractors. Supports 70+ currencies, low FX fees (0.35-1%), and fast transfers (1-3 business days). Create a business account, verify your identity, and add your bank account. Typical cost: $3-15 per payout.

PayPal: Best for contractors who prefer PayPal. Supports 25+ currencies, higher fees (2.9% + $0.30 domestic, 4.4% + fixed fee international), and instant transfers. Create a business account and link your bank account. Typical cost: $3-50 per payout.

Bank transfers (ACH/wire): Best for U.S. contractors. ACH transfers are free or $1-3, wire transfers are $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 minimizes fees while providing flexibility.

Step 2: Collect contractor payment details

Before the first payment, collect payment details from each contractor:

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

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

For Wise: Email address (Wise will request bank details from the contractor), full name, country, currency preference.

Store payment details securely in your contractor management system. Verify details before the first payment to avoid errors or delays.

Step 3: Define milestones and payment terms

Clear payment terms prevent disputes and ensure contractors know when to expect payment. Include these details in your contract:

Payment schedule: Monthly, bi-weekly, or milestone-based. Example: "Payment due within 15 days of invoice submission" or "Payment upon completion of each milestone."

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

Invoice requirements: What contractors must include in invoices (hours worked, deliverables completed, rate, total amount). Example: "Submit itemized invoices by the 1st of each month."

Payment method: How you'll pay (Wise, PayPal, bank transfer). Example: "Payments made via Wise to contractor's bank account."

Step 4: Review and approve invoices

When a contractor submits an invoice, review it 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.

Check amounts: Confirm the invoice amount matches the contract rate and hours/deliverables. Flag any discrepancies and ask the contractor to clarify.

Approve for payment: Once verified, mark the invoice as approved in your contractor management system. This creates a record of who approved the payment and when.

Most businesses have a simple approval workflow: contractor submits invoice → manager reviews and approves → finance processes payment. This takes 1-3 days depending on your process.

Step 5: Send payment

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

Wise: Log into Wise, create a new transfer, enter contractor details (email or bank account), amount, and currency. Review fees and exchange rate, then confirm. Wise provides a transaction ID immediately.

PayPal: Log into PayPal, click Send & Request, enter contractor's PayPal email, amount, and note (invoice number). Review fees and confirm. PayPal provides a transaction ID immediately.

Bank transfer: Log into your business bank account, create a new transfer (ACH or wire), enter contractor's bank details, amount, and reference (invoice number). Confirm. Your bank provides a confirmation number.

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

Step 6: Attach proof of payment

After sending payment, attach proof to your records:

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

Upload to contractor record: In your contractor management system, attach the receipt to the contractor's profile and link it to the specific invoice. This creates a complete audit trail.

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

Proof of payment is critical for audits, tax reporting, and dispute resolution. If a contractor claims they weren't paid, you can provide the receipt and transaction ID as proof.

Step 7: Get contractor confirmation

After payment is sent, ask the contractor to confirm receipt:

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

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

Contractor confirmations prevent disputes and provide peace of mind. If a contractor doesn't confirm within 3-5 business days, follow up to ensure they received payment.

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 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 (from your contractor management system) with the statements. Confirm every payment matches in amount, date, and recipient.

Verify fees: Check that fees charged by payment providers match what you expected. Flag any unexpected charges and contact the provider if needed.

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

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

Common mistakes to avoid

Paying without proof: Always get a receipt or transaction ID. Without proof, you can't verify payment was sent or resolve disputes.

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

Unclear payment terms: Vague terms like "payment upon completion" lead to disputes. Define specific milestones, amounts, and timelines in contracts.

Using personal accounts: Pay contractors from business accounts, not personal accounts. This keeps business and personal finances separate and simplifies tax reporting.

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

Documentation checklist

For each contractor payment, maintain these records:

Before payment: Contract with payment terms, contractor's tax form (W-9 or W-8BEN), payment details (bank account or PayPal email), approved invoice.

During payment: Transaction ID or confirmation number, payment receipt (PDF from provider), payment date and amount, fees paid.

After payment: Contractor confirmation (email or platform message), confirmation date, any follow-up communications.

Store all documentation securely (encrypted cloud storage or contractor management software) and keep for at least 4 years (IRS record-keeping requirement).

The bottom line

Paying contractors is straightforward: set up payment providers, collect payment details, define clear 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 just as compliant when you maintain proper documentation.

With contractor management software, this entire workflow is automated: contractors submit invoices, you approve, payments are logged with proof, contractors confirm receipt, and everything is reconciled automatically. It's simpler than using an EOR and saves thousands per month in fees.