If you run a small business, chances are sooner or later you’ll need to know how to hire a contractor.

Whether it’s to outsource internal business tasks like admin, marketing, or systems, or it’s to subcontract client work, utilizing contractors is an efficient way to grow your business.

But whether you have one contractor or fifty contractors, there are some non-negotiables involved with having a team. You’ll need to learn how to onboard contractors, how to pay your contractors, and how to manage their profitability to your business.

I’m going to share my tips and tricks for making each step of managing contractors as easy and efficient as possible. Let’s dive in!

(Note: this advice is geared towards US based businesses only)

What tax forms do I need from my contractors?

First, you’ll need some tax paperwork from each contractor on your team in order to hire them.

If your contractor is US based, you’ll need a W9 from them which will help you file a 1099 for them at the end of the year (if it’s required).

If your contractor is not US based, ask them for a W8 which will prove they are not a US citizen and not eligible to receive a 1099 at the of the year.

Either way, get a W9 or W8 from your contractors before they start working for you. If not, it could cause you lots of stress to try and get one later.

How to Write a Contract for Contractors

Next, you will likely want a contract in place with your contractors.

This contract can be as simple or detailed as you’d like but it should at least spell out the cost, deliverables, and that they are an independent contractor, not an employee and thus are receiving no employee benefits from your business.

Contracts are necessary to protect you both in case of a disagreement, which of course no one anticipates ahead of time.

How to Pay New Contractors

The best way to pay contracts is with secure direct deposits or ACH/wire transfers.

You will need to collect your contractors direct deposit information either through a form or by inviting them directly to your payment system where they can enter their own banking information. More on this below.

The Best System or Software to Pay Contractors

This is a question which has many many solutions. My answer to this question when clients ask is usually: ‘The way we can pay all our contractors through one system if possible’.

If you have only US based contractors, there are a few free services you can pay them by direct deposit including Melio and QB Bill Pay.

Or if you use a paid payroll service like Gusto or QuickBooks payroll, they will even file 1099s at the end of the year for you.

If you have international contractors, I like Wise as a low-cost solution but PayPal is also a reliable way to send payments to virtually any country.

Of course, depending on your bank, there may be a built-in system for sending ACH/wire transfers to each contractor.

What if your contractor sends an invoice with a payment link attached? Just ask them if you can submit your payment through ACH instead. It’s rare that a contractor will refuse.

How to Create a Payment System for Contractors

Now that we have selected a payment method to pay our contractors, let’s chat about a payment schedule.

Again, let’s always keep in mind how we can simplify (which will be a life saver as you scale and grow your business).

I advise my clients to process contractor payments on designated schedules.

If you only have a few contractors, maybe you pay once or twice a month and require their invoices to be submitted by that date. If you are processing several payments a month, you may have to process every other week or even weekly.

Be sure to select the specific day(s) when you will process payments and then let your contractors know to submit by that date if they expect to be paid on time.

If you hold your boundaries and don’t just process payments when you feel like it (or contractors bug you about it), I promise you’ll feel more organized, you’ll save yourself time, and your contractors will appreciate knowing exactly when they will get paid.

How to Calculate Profitability for Contractors

Now our contractors are on boarded and set up to be paid on our pay schedule, what’s left to manage them over time?

From a financial perspective, we want to make sure all business costs are generating more money for the business, right? This includes your contractors!

How do we evaluate if a contractor is making the business money?

If they are a subcontractor performing client work, it’s somewhat simple to calculate their profitability to the business. Take the amount of money their work brings in for the business each month, subtract the total cost of that contractor and you’ll get the ‘profit’ generated for that contractor.

Subcontracted revenue - cost of subcontractor = profit of subcontractor

Of course this doesn’t account for any management costs or business overhead costs, but it will give you a pretty good idea of how much a contractor is contributing to your bottom line.

What’s a healthy amount of profit for contractors? It really depends on your business and industry but 50% profit is a great goal.

If the contractor is working on internal business tasks for you such as admin work, marketing, business development, or internal systems, their profitability can be harder to calculate.

For these contractors, we ultimately need to pinpoint how their cost is adding revenue or saving you/your team time.

For someone in marketing or sales, they are hopefully adding new clients or connections to your network. Calculate the average revenue value of a new client multiply by how many clients they add each month, then subtract the cost of your contractor.

Average revenue of new clients x # of new clients - cost of contractor = profit of contractor

For someone not directly related to new revenue, we’ll instead calculate the time they save other revenue generating members of your team. Take the amount of hours they take off your plate (or amount of hours they take off your teams plate), multiply by the average billable rate of you or your team then subtract the cost of the contractor.

# of hours they save your team x average billable rate - cost of the contractor = profit of contractor

Ultimately, some internal contractors’ profitability is hard to calculate but their work is still very necessary to the operation and growth of your business.

Calculating profitability of your contractors should be used as a guide, not a hard-and-fast rule, to help make better business decisions in hiring, outsourcing, rates, and the growth plan for your business.

Final Thoughts

Contractors are a great tool for your business.

Whether you are bringing on your first contractor or your hundredth streamlining your contractor onboarding and payments will save you loads of time and stress in the long run.

Making sure your contractors are a profitable addition to your team will guarantee that they are contributing to the growth of your business. All these pieces together ensure we are utilizing contractors to provide services more efficiently and effectively.

Did I miss a contractor related question you have about building and growing your contractor team? Head over to LinkedIn or Instagram and drop me a message!