How to Handle Payroll When You Have Employees and Independent Contractors

When you have employees and independent contractors, you run payroll and withhold applicable payroll taxes for employees, while you generally pay contractors without withholding taxes. You can still pay contractors with the same payroll software or service you use for your employees, so the payments you make to workers are recorded in one system. If you pay employees through payroll and contractors by check, Zelle, or bank transfer, you're keeping two sets of payment records, and both feed year-end forms due January 31.

With SurePayroll® By Paychex, you can pay employees and contractors from one account, and SurePayroll generates year-end Forms W-2 and 1099-NEC.

Paying contractors with payroll software vs. running payroll for them

You run payroll for employees, and you pay contractors. If your payroll software or service supports contractor payments, you can pay both from one place. Using payroll software to send a contractor's payment doesn't put that person on your payroll.

Running payroll for an employee means you calculate their pay for the period, withhold income tax and their share of Social Security and Medicare (FICA) taxes, and pay employer taxes on their wages. Generally, none of that applies to a contractor. You pay a contractor the amount your agreement sets. Contractors are generally self-employed, so each one is responsible for their own income and self-employment taxes.

Recording a contractor payment and sending it are two separate jobs:

• Recording the payment. In your books or accounting software, a contractor payment is a business expense, tracked separately from wages, the same way you track salaries and the payroll taxes you've paid. That entry doesn't change based on how you pay the contractor.
• Sending the payment. You can pay a contractor with the payroll software or service you already use to pay your employees, instead of a separate check or payment app.

The payment method doesn't change the worker's classification, and issuing a Form 1099-NEC doesn't confirm that someone is a contractor. Worker classification is your decision, based on the working relationship, and it's covered in W-2 vs. 1099 for small business owners.

If you misclassify an employee as a contractor, you may be liable for the employment taxes you didn't withhold or pay, plus IRS penalties and interest. As many as 10% to 30% of employers may misclassify their workers, according to a 2020 National Employment Law Project analysis cited by the Economic Policy Institute.

In SurePayroll, you can pay employees and contractors from the same account. SurePayroll calculates the payroll taxes you withhold from employees' pay, and you pay contractors the amount you owe them. If you've been paying a freelance copywriter by Zelle and start paying them from your payroll account, your expense entry stays the same. Only the payment method changes.

"SurePayroll allows us to process our payroll seamlessly. They have great customer service."

— Brenda, Trustpilot review

Forms, withholding and year-end filings for employees and independent contractors

The forms and tax rules follow the worker's classification, not how you process the payment. Here's what each worker type requires from you.

For employees, you collect Form W-4, Employee's Withholding Certificate, and Form I-9, Employment Eligibility Verification, and at year-end you file Form W-2, Wage and Tax Statement, with Form W-3, Transmittal of Wage and Tax Statements. For contractors, you collect Form W-9, Request for Taxpayer Identification Number and Certification, and at year-end you file Form 1099-NEC, Nonemployee Compensation. For filing steps, see how to issue a 1099-NEC.

The W-2 and 1099-NEC deadlines both move to the next business day when January 31 falls on a weekend or legal holiday. Because both forms are due the same day, paying everyone from one system gives you each worker's year-end totals in one set of records.

How to set up employees and contractors in one payroll system

You set each person up by worker type, and the worker type determines what you withhold from their pay and which year-end form you issue. For a business with two employees and three contractors (a designer, a developer, and a bookkeeper), setup generally follows the same four steps for all five people.

1. Collect forms when you bring each worker on. Get a W-4 and an I-9 from each employee, and a W-9 from each contractor. You complete the I-9 with each employee and keep it in your own records. The W-9 gives you the contractor's taxpayer identification number (TIN), which you need for their Form 1099-NEC.
2. Add each person as an employee or a contractor. Enter both employees as employees and the three 1099 contractors as contractors, matching the classification you've already made.
3. Set how each person is paid. For full-time and part-time employees, that's a pay schedule and a salary or hourly rate. For contractors, it's the amount and timing in the contractor agreement, such as a monthly retainer for the bookkeeper and a payment at each milestone for the developer.
4. Choose a payment method. Direct deposit can work for both employees and contractors, so every payment goes out the same way.

Once you've set up all five people, you pay each of them from the same account, and each year-end form draws on those payment and payroll records.

How an employee paycheck differs from a contractor payment

You withhold applicable payroll taxes from an employee's paycheck and owe employer payroll taxes on their wages, while you generally pay a contractor the agreed amount without tax withholding.

Here's how that plays out for one employee and one contractor:

• An employee paycheck. An employee earns $2,500 in gross pay for a biweekly period. Assuming no pre-tax deductions, you withhold federal income tax based on their W-4, applicable state and local income tax, and $191.25 for Social Security and Medicare (FICA) taxes at 7.65%. You also pay a matching $191.25 as your employer share.
• A contractor payment. A contractor sends an $1,800 invoice, which you pay on the payment terms in your agreement. You generally pay the full $1,800 and record it as a business expense.

In certain situations, Internal Revenue Service (IRS) backup withholding rules may require you to withhold 24% of a contractor's payment and send it to the IRS, for example when the contractor doesn't provide a TIN or the IRS notifies you that the TIN provided is incorrect. Topic 307 covers the full set of conditions.

Year-end Forms W-2 and 1099-NEC for employees and contractors

You give each employee a Form W-2, and you generally provide Form 1099-NEC for reportable nonemployee compensation of $2,000 or more in 2026. Both are due January 31, or the next business day when that date falls on a weekend or legal holiday. You also file each 1099-NEC with the IRS, and W-2s go to the Social Security Administration with Form W-3.

Payments to corporations are generally exempt from 1099-NEC reporting, with exceptions such as payments for legal services, so check each contractor's W-9 for their business type. In January, the developer who invoiced $9,000 over the year gets a 1099-NEC. The bookkeeper, paid $1,500 in total, falls under the $2,000 threshold.

If you pay contractors with separate tools, you pull each contractor's annual total from bank, card, and app records. When you pay employees and contractors from one system, you have those payment records in one place. SurePayroll can generate year-end Forms W-2 and 1099-NEC.

Pay employees and contractors from one SurePayroll account

You can pay employees and contractors from one SurePayroll account. SurePayroll calculates payroll taxes for your employees and generates year-end Forms W-2 and 1099-NEC.

See how to pay employees and contractors with SurePayroll.