How to Pay Contractors and Bill Clients for Their Work

Every contractor hour has two prices: the bill rate you charge the client, and the cost rate you pay the contractor. The difference is your margin, and it has to cover project management, sales, tools and the hours nobody can bill.

Here the margin is 37.5% of what the client pays. Keep cost rates private to the people who run the business; contractors and clients each see only their own rate.

Have contractors log their hours on the client's projects in the same system you invoice from, with a description on each entry. When their hours live in their own spreadsheet, someone has to retype them, and that's where hours go missing or get billed twice.

Give each contractor only the projects they work on, and set their weekly hours if you expect a certain number.

A weekly timesheet that the contractor submits and you approve is the checkpoint between their hours and your invoice. Approve it, or send it back with a note, before the hours go on an invoice. Approved weeks should lock, so the hours on the invoice match the hours you pay for.

Then invoice the client from the approved hours at the client's rate. Line items stay in the client's terms (the work and the dates), and the contractor's cost never appears.

Agree on two things in the contract before the first week:

• When they're paid: on a set schedule (every two weeks, monthly), or after the client pays you (“pay when paid”). A set schedule is simpler for the contractor; pay-when-paid shifts the risk of a late client onto them, so spell it out.
• What they're paid from: their own invoice to you, or a statement of approved hours at their cost rate. Either way, both of you should see the same hours.

The payment itself goes through your bank, payroll provider or payment app.

• Form W-9: collect one from each US contractor before the first payment. It gives you their legal name and taxpayer ID.
• Form 1099-NEC: file one for each contractor you paid $2,000 or more for services in the year, for payments made in 2026 and later (it was $600 before). It's due to the IRS and the contractor by January 31 of the following year.
• Card and payment app payments to contractors are reported by the payment company on Form 1099-K, so leave them off the 1099-NEC.
• Contractor or employee? It depends on how much control you have over how, when and where they work, whatever the contract calls them. The IRS and many states have their own tests, and getting it wrong is costly.