Category: Payroll & HR

Many small businesses work with independent contractors, such as designers, developers, writers and consultants. Paying contractors is simpler than running payroll for employees in some ways, but it still requires organization and attention to rules.

Important: This guide is general information for U.S. businesses. It is not legal, tax or HR advice. Classification and reporting rules are complex and vary. Use official IRS and state resources and consult qualified professionals.

Contractor vs. Employee

The first question is whether a worker is truly an independent contractor. Classification depends on factors defined by federal and state law, such as control over how work is done and the nature of the relationship. Calling someone a contractor does not make them one. Misclassification can result in penalties and back taxes.

If you are unsure, consult a professional and review official resources. See our hiring your first employee checklist.

Contractor Agreements

A written agreement clarifies expectations. Common elements include:

• Scope of work and deliverables
• Payment terms and rates
• Deadlines
• Ownership of work product
• Confidentiality
• Termination terms

An attorney can help draft agreements.

Onboarding Contractors

Form W-9

U.S. businesses commonly collect Form W-9 from U.S. contractors to obtain taxpayer identification information. Collect it before making payments.

Foreign Contractors

Contractors outside the United States may require different forms. Consult official guidance or a professional.

Payment Details

Collect payment details securely. Avoid collecting sensitive information over unsecured email.

Payment Methods

Bank Transfers

Direct bank transfers are common and often low-cost.

Payroll Platforms

Many payroll providers support contractor payments and year-end forms. See Gusto vs. ADP.

Accounting Software

Some accounting tools support contractor payments.

Payment Apps

Payment apps can be convenient. Check whether business use is allowed, fees and how payments are reported.

International Payments

International payment platforms handle currency conversion. Compare fees and exchange rates.

Contractor Invoices

Contractors often send invoices. Establish a process for receiving, approving and paying invoices. Track due dates.

Record Keeping

Keep records of:

• Contracts
• W-9 forms
• Invoices
• Payments

Organized records make year-end reporting easier. See bookkeeping basics for small business.

Year-End Reporting

U.S. businesses may need to file information returns, such as Form 1099-NEC, for certain contractor payments that meet reporting thresholds. Thresholds, rules and deadlines can change, so check current IRS guidance. Payroll and accounting software can help prepare forms.

Choosing Tools

Look for:

• Contractor onboarding and W-9 collection
• Payment options
• Year-end form preparation
• Integration with accounting software
• International payments if needed

Compare current pricing and features.

Common Mistakes

• Misclassifying employees as contractors
• Paying before collecting W-9 forms
• Not having written agreements
• Missing year-end reporting deadlines
• Collecting payment details insecurely

Building a Contractor Payment Process

A consistent process reduces errors:

1. Agree on terms in a written contract
2. Collect onboarding forms before work begins
3. Receive invoices in a consistent format and location
4. Review and approve invoices against the agreement
5. Pay on schedule using your chosen method
6. Record payments in your accounting software
7. Prepare year-end forms as required

Documenting this process helps if someone else on your team handles payments.

Setting Payment Terms

Clear payment terms help both sides. Common elements include when invoices are due, how payments are made, how disputes are handled and whether deposits are required for larger projects. Paying contractors reliably and on time builds good working relationships.

Protecting Sensitive Information

Contractor forms contain taxpayer identification numbers and bank details. Use secure portals or payroll platforms to collect them, limit access and store records securely. Avoid collecting sensitive details in chat messages or unsecured email.

Reviewing Contractor Relationships

Periodically review long-term contractor relationships. If a relationship changes over time, such as more control over schedules and methods, classification questions may arise. A professional can help review.

Contractor Payment Checklist

• Classification reviewed
• Written agreement signed
• Form W-9 or appropriate form collected
• Payment details collected securely
• Invoice process defined
• Payment method chosen
• Payments recorded in accounting software
• Year-end reporting requirements checked
• Records stored securely

Paying International Contractors

International contractors bring additional considerations, including different tax forms, currency conversion, transfer fees and local laws in the contractor’s country. International payment platforms can simplify payments, but rules still apply. Consult a professional familiar with cross-border work.

Communicating With Contractors

Clear communication prevents payment disputes. Confirm when invoices are received, let contractors know when payments are scheduled and respond promptly to questions. A shared tracker or project management tool can help both sides see the status of deliverables and payments. See project management tools compared.

Starting Small

If you are paying your first contractor, start with a simple process: a written agreement, a completed W-9 for U.S. contractors, a consistent invoice format and payments recorded in your accounting software. As you work with more contractors, a payroll or contractor payment platform can automate onboarding, payments and year-end forms. Whatever tools you use, keep classification in mind and ask a professional when relationships change. Review your contractor list each year before year-end reporting deadlines so forms can be prepared on time.

A Note on Timing

Late payments strain contractor relationships. Paying reliably on the agreed schedule, and communicating early if a delay is unavoidable, builds trust and often leads to better work over time.

A Note on Documentation

Keep each contractor’s agreement, forms, invoices and payment confirmations together in one folder or system. If questions come up later from the contractor, your accountant or a tax agency, having everything in one place makes answers quick and reduces stress for everyone involved.

Frequently Asked Questions

How do I know if someone is a contractor?

Classification depends on legal factors. Consult official guidance or a professional.

Do I need a W-9 from contractors?

U.S. businesses commonly collect W-9 forms from U.S. contractors.

Do I need to file a 1099?

You may for certain payments. Check current IRS guidance.

Can I pay contractors through payroll software?

Many payroll platforms support contractor payments.

How do I pay international contractors?

International payment platforms can help. Check forms and fees.

The Bottom Line

Paying contractors requires correct classification, written agreements, onboarding forms, secure payments, good records and year-end reporting. Use tools that simplify the process and consult qualified professionals for classification and tax questions.

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Editorial note: Biz Benchly is independent and reader-supported. This guide is based on research into manufacturer documentation, published specifications and widely accepted best practices; we have not been paid to mention any product. If we add affiliate links in the future, they will be clearly disclosed per our Affiliate Disclosure.

Hiring your first employee is a milestone. It also brings new responsibilities, including payroll, taxes, paperwork and compliance. Getting organized before your first hire makes the process smoother.

Important: This checklist is general information for U.S. businesses. It is not legal, tax or HR advice. Requirements vary by state and locality and change over time. Use official government resources and consult qualified professionals.

Before You Hire

Define the Role

Write a clear job description, including responsibilities, schedule, location and compensation. Consider whether the role is full-time, part-time or temporary.

Confirm Worker Classification

Determine whether the worker is an employee or an independent contractor. Classification depends on factors defined by law, not on what you call the role. Misclassification can lead to penalties. See our guide to paying contractors and consult a professional if unsure.

Budget for Total Cost

The cost of an employee includes wages plus employer taxes, any benefits, insurance, equipment and payroll software. Plan your budget accordingly.

Registrations and Accounts

Employer Identification Number

Employers typically need an EIN from the IRS. If you formed an LLC, you may already have one. See how to start an LLC.

State Registrations

Many states require employers to register for state payroll tax accounts, such as withholding and unemployment insurance. Check your state’s official resources.

Workers’ Compensation Insurance

Most states require workers’ compensation insurance for employees, with rules varying by state. Check requirements.

Local Requirements

Some cities and counties have additional requirements.

Payroll Setup

Choose a Payroll Solution

Payroll software calculates pay and withholding, pays employees and often files payroll taxes. See Gusto vs. ADP.

Set a Pay Schedule

States may have rules about pay frequency. Check your state’s requirements.

Understand Withholding

Payroll involves withholding certain taxes from employee pay and paying employer taxes. Payroll providers handle calculations, but understand the basics.

Hiring Paperwork

Common paperwork for new U.S. employees includes:

• Form W-4 for federal income tax withholding
• Form I-9 for employment eligibility verification
• State withholding forms where applicable
• New hire reporting to the state, typically required within a set time
• Direct deposit authorization

Check official sources for current forms and deadlines.

Workplace Posters and Notices

Employers are often required to display certain federal and state labor law notices. Check official resources for requirements, including options for remote employees.

Policies and Documentation

• Offer letter outlining role, pay and start date
• Employee handbook or written policies
• Time tracking for non-exempt employees
• Confidentiality agreements where appropriate

An employment attorney can help with documents.

Benefits

Consider whether to offer benefits such as health insurance, retirement plans and paid time off. Some benefits may be required in certain states or cities. Payroll providers often offer benefits administration.

Onboarding

A good onboarding process helps your new employee succeed:

• Prepare equipment and accounts before day one
• Provide training and introductions
• Set clear expectations and goals
• Schedule regular check-ins

Tools can help. See project management tools compared and small-business collaboration tools.

Record Keeping

Employers must keep certain payroll and employment records for set periods. Store records securely and check requirements.

Ongoing Responsibilities

• Run payroll accurately and on time
• File and pay payroll taxes
• Provide year-end forms
• Keep records
• Stay informed about changes in laws

Common Mistakes

• Misclassifying workers
• Missing state registrations
• Forgetting new hire reporting
• Not completing Form I-9 on time
• Skipping workers’ compensation insurance

Planning the First Weeks

A simple plan for the first few weeks helps new employees settle in:

Before Day One

• Send a welcome message with start time, location and what to bring
• Set up email, software accounts and equipment
• Prepare required paperwork

Day One

• Complete paperwork
• Provide a tour or virtual introduction
• Review the role, goals and schedule

First Week

• Provide training on tools and processes
• Assign a first project
• Schedule check-ins

First Month

• Review progress and gather feedback
• Adjust training as needed

Protecting Employee Data

Employee records contain sensitive information such as Social Security numbers and bank details. Store records securely, limit access and use payroll and HR tools with strong security features. Avoid sending sensitive information by unsecured email.

Budgeting Time for Administration

Payroll, HR and compliance take time each pay period and each year. Payroll software reduces this work, but plan for time to review payroll, answer questions and keep records current.

First Hire Checklist

• Role defined and job description written
• Worker classification confirmed
• Budget for total cost prepared
• EIN obtained
• State payroll tax accounts registered
• Workers’ compensation insurance in place where required
• Payroll solution chosen and set up
• Pay schedule set
• Offer letter prepared
• Form W-4, Form I-9 and state forms ready
• New hire reporting completed
• Required notices posted or provided
• Onboarding plan ready
• Record keeping system set up

Where to Find Official Information

The IRS, the U.S. Department of Labor, U.S. Citizenship and Immigration Services and your state labor and tax agencies publish resources for employers. The U.S. Small Business Administration also offers guidance for new employers. Use these official sources to confirm current requirements.

Getting Help

Many first-time employers work with a payroll provider, an accountant and, where needed, an employment attorney. These professionals can help you set up correctly from the start, which is usually easier than fixing problems later. Ask them which registrations and filings apply to your state and city, and keep a written list of recurring deadlines.

Frequently Asked Questions

What do I need before hiring my first employee?

Typically an EIN, state registrations, workers’ compensation insurance where required and a payroll solution.

How do I know if someone is an employee or contractor?

Classification depends on legal factors. Consult official guidance or a professional.

Do I need payroll software?

It simplifies payroll and tax filing significantly.

What forms do new employees fill out?

Commonly Form W-4, Form I-9 and state forms.

Do I need an employee handbook?

Not always required, but helpful.

The Bottom Line

Hiring your first employee involves classification, registrations, insurance, payroll setup, paperwork and onboarding. Use official resources and qualified professionals to confirm requirements for your state.

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Editorial note: Biz Benchly is independent and reader-supported. This guide is based on research into manufacturer documentation, published specifications and widely accepted best practices; we have not been paid to mention any product. If we add affiliate links in the future, they will be clearly disclosed per our Affiliate Disclosure.

Payroll is one of the first systems a growing business needs to get right. Paying people accurately and on time, withholding the right taxes and filing on schedule are essential. Gusto and ADP are two of the best-known payroll providers in the United States, and small-business owners often compare them.

This guide gives you a framework for comparing the two. It does not declare a winner, because the right choice depends on your business, and features and pricing change frequently. We do not quote prices. Check each provider’s current plans and get quotes. This article is general information, not legal, tax or HR advice. Consult qualified professionals for your situation.

Overview

Gusto

Gusto is a cloud-based payroll and HR platform that is popular with small businesses and startups. It is known for a modern interface and bundles payroll with features such as employee onboarding, benefits administration and contractor payments, depending on the plan.

ADP

ADP is one of the largest payroll and HR providers, serving businesses of many sizes. It offers several product lines, including options designed for small businesses and platforms for larger organizations. ADP is known for its scale and range of services.

What to Compare

Payroll Processing

Both providers run payroll, calculate withholding and handle direct deposit. Compare:

• How easy it is to run payroll each period
• Whether payroll can run automatically for salaried employees
• Support for multiple pay schedules
• Handling of bonuses, commissions and reimbursements
• Off-cycle payroll runs

Tax Filing

Payroll providers typically calculate, file and pay payroll taxes on your behalf, depending on the plan and jurisdiction. Ask each provider:

• Which federal, state and local filings they handle
• How they handle multi-state employees
• What happens if a filing error occurs and whether they offer any guarantee
• How year-end forms are produced and delivered

Contractor Payments

Many small businesses pay contractors as well as employees. Compare how each platform handles contractor onboarding, payments and year-end forms. See our guide to paying contractors.

Benefits Administration

Both providers offer ways to manage benefits such as health insurance and retirement plans, sometimes through partners. Compare which benefits are available in your state, how enrollment works and whether benefits administration costs extra.

HR Features

HR features can include onboarding, document storage, time off tracking, employee self-service and compliance resources. Compare which features are included in each plan.

Time Tracking

Some plans include time tracking or integrate with time tracking tools. If you have hourly employees, this matters.

Integrations

Check integrations with your accounting software, time tracking tools and other systems. See our guide to bookkeeping basics for small business.

Customer Support

Support quality matters when payroll problems arise. Ask about support channels, hours, whether you get a dedicated representative and response times. Read recent reviews from businesses similar to yours.

Scalability

Consider where your business will be in a few years. ADP’s range of products may appeal to businesses planning significant growth. Gusto’s plans also scale, but compare how each handles larger teams, multiple locations and more complex HR needs.

User Experience

Request demos or free trials where available. Run through tasks such as adding an employee, running payroll and pulling a report.

Questions to Ask Each Provider

1. What is included in each plan, and what costs extra?
2. Are there setup fees?
3. Which tax filings are included?
4. How are multi-state employees handled?
5. How do benefits work in our state?
6. What support is available?
7. How are errors handled?
8. Can we export our data if we leave?
9. What are the contract terms?
10. How long does setup typically take?

Write the answers down and compare them side by side.

Switching Payroll Providers

Switching mid-year is possible but requires care. You need to transfer year-to-date payroll data so tax filings and year-end forms are accurate. Many businesses switch at the start of a quarter or year to simplify the process. Ask the new provider how they handle transitions.

Payroll Basics to Understand

Even with software, it helps to understand payroll basics:

• Gross pay vs. net pay
• Withholding for taxes and benefits
• Employer taxes
• Pay schedules
• Recordkeeping requirements

Official government resources and qualified professionals can explain your obligations. See our hiring your first employee checklist.

When Simpler Tools May Work

Very small businesses with only contractors may not need full-service payroll. Some accounting and invoicing tools handle contractor payments. As soon as you have employees, a dedicated payroll solution is usually worthwhile.

Common Mistakes

• Choosing based on a single feature
• Ignoring add-on costs
• Not checking state-specific support
• Skipping demos
• Misclassifying workers. See our guide to paying contractors.

A Simple Comparison Worksheet

Create a worksheet with one row per requirement and one column per provider. Useful rows include total monthly cost for your headcount, setup fees, states supported, tax filings included, contractor payments, benefits options, time tracking, accounting integrations, support hours and contract terms. Fill it in from demos and written quotes rather than from memory or marketing pages. Score each row by how important it is to your business, not just whether the feature exists. A feature you will never use should not tip the decision.

Planning the Setup

Whichever provider you choose, set aside time for setup. You will typically need your EIN, state tax account numbers, bank details, employee information and any prior payroll records for the year. Having these ready before onboarding speeds things up and reduces errors on the first payroll run.

Frequently Asked Questions

Is Gusto or ADP better for small businesses?

It depends on your needs. Compare features, support, pricing and scalability.

Do both handle payroll taxes?

Both offer tax filing services, depending on the plan. Confirm details with each provider.

Can I pay contractors with both?

Both support contractor payments. Check plan details.

Can I switch payroll providers mid-year?

Yes, but transfer year-to-date data carefully.

Do I need an accountant if I use payroll software?

Software handles many tasks, but an accountant can help with tax planning and compliance questions.

The Bottom Line

Gusto and ADP both offer payroll, tax filing, benefits and HR features for small businesses. Compare plans, add-on costs, state support, customer service and scalability, and request demos. Consult qualified professionals for tax and HR questions.

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Editorial note: Biz Benchly is independent and reader-supported. This guide is based on research into manufacturer documentation, published specifications and widely accepted best practices; we have not been paid to mention any product. If we add affiliate links in the future, they will be clearly disclosed per our Affiliate Disclosure.