Payroll software for contractors: how to pay 1099 workers and what it costs

Quick answer: the cheapest way to pay 1099 contractors

5 US contractors

$25 to $30 a monthQuickBooks $25; Square $30

20 US contractors

$25 a monthQuickBooks Contractor Payments

1099-NEC threshold

$2,000For payments made in 2026, up from $600

2026 1099-NEC due

February 1, 2027To the IRS and to each contractor

For a handful of US contractors, Square's contractor-only plan at $6 per person paid has no base fee, so a month with no payments costs nothing. Past four contractors, QuickBooks Contractor Payments at $25 a month for up to 20 is cheaper. If you also run W-2 payroll, most payroll plans pay contractors at the same per-person rate as employees, only in months you pay them.

What contractor payroll costs

Where you already pay for payroll, adding contractors costs only the per-person fee: $5 at Patriot, $6 at Gusto Simple, OnPay and Square, $8 at Justworks. A base fee only makes sense if you need the rest of the payroll plan. For the full fee breakdown on W-2 plans, see what payroll services cost.

Contractors outside the US

Gusto lists global contractor payments at $5 per payment with no monthly per-contractor fee and says FX rates "may vary". Buyer complaints about international contractor tools center on transfer fees: one Deel contractor on Hacker News said they paid "almost 100$ each month just to make a transfer", and another noted Deel's $49 minimum is more than some freelancers earn. For platform comparisons see contractor payment platforms compared.

Contractor payment tools compared

US payroll tools ranked by our published payroll scores, then international platforms by their EOR scores. Scores come from our scoring method. Payroll services are scored out of 100 on price transparency and cost for 10 employees (25 points), tax filing coverage and guarantee (20), features (20), contract and exit terms (15), support access (10) and documented complaints (10). EOR tools are scored on their own criteria, so compare those scores only with each other. The payroll scores price a 10-employee plan, not contractor-only plans, so check the cost table for contractor pricing.

How to pay 1099 contractors, step by step

1. Confirm the worker is a contractor. Use the IRS behavioral, financial and relationship test, and your state's test if it is stricter (California and Massachusetts use an ABC test). See W-2 vs 1099: how to decide.
2. Collect Form W-9 before the first payment. Without a valid taxpayer ID you must withhold 24% backup withholding. For 2026 the backup withholding threshold is $2,000, the same as the 1099-NEC threshold.
3. Sign a written agreement that sets scope, deliverables and a price, not hours and supervision.
4. Report the contractor to your state if required. Florida, Oregon, Virginia, Ohio, Massachusetts, New Hampshire and Illinois require independent contractors to be reported to the new hire registry.
5. Pay through your tool by ACH against invoices, so each payment is recorded with the contractor's ID for year-end.
6. File Form 1099-NEC by February 1, 2027 for every contractor you paid $2,000 or more in 2026. E-filing is required once you file 10 or more information returns in total for the year.

1099 rules for 2026 payments

The higher threshold means fewer forms, not less tax. The contractor still owes tax on every dollar, and you still need W-9s and payment records for everyone you pay.

Misclassification: what happens if the IRS disagrees

Paying someone as a contractor who is really an employee leaves you owing back employment taxes. The rules that decide it:

• IRS: no single factor decides; the IRS weighs control and the relationship and tells businesses to document their reasoning.
• Section 530 relief can protect you from federal employment tax if you filed 1099s consistently, never treated similar workers as employees, and had a reasonable basis (court precedent, a past IRS audit, industry practice or professional advice). Filing a W-2 for the worker in a later year ends the relief.
• Form SS-8: you or the worker can ask the IRS to decide. The IRS says it can take at least six months.
• Federal wage law: the 2024 DOL rule is still in effect. A February 2026 proposal would focus on control and opportunity for profit or loss. Not final as of October 16, 2026.
• States: California, Massachusetts and Illinois (for unemployment insurance) use ABC tests, which presume employment unless the business proves all three prongs.

Common mistakes when paying contractors

• Paying a base fee for nothing. A $49 payroll base to pay three freelancers costs more than Square's $18.
• Using the old $600 rule for 2026. The 2026 threshold is $2,000; forms for 2025 payments still used $600.
• No W-9 on file. Backup withholding becomes your problem.
• Setting hours and supervising like staff. That is behavioral control under the IRS test.
• Ignoring FX on foreign contractors. Most platforms do not publish their FX margin. Compare the amount received, not just the monthly fee.

Industry pages: hiring subcontractors in construction, payroll for a business of one to five.