Paying engineering contractors depends on where your startup is located and where your contractors are located. There are options for both US-based contractors and international contractors, and both have different tax implications. As part of your startup’s agreement with the engineering contractor, specify that the contractor needs to invoice you for their services. Typically they will invoice you every two weeks or once a month.
Paying US-based engineering contractors
Once you have the invoices, we recommend using a bill pay system. Most of our clients use Bill.com, Ramp, or Brex. These are tools that can connect to your bank account and make electronic payments without issuing paper checks. In addition, those payment systems will save the invoices into Quickbooks every month, which simplifies your accounting.
A record of the invoice is important for accrual-based accounting which is consistent with GAAP. Also, the IRS requires your startup to save invoices for three years. Finally, the invoicing process is an important payment record for you. Occasionally contractors will make mistakes and double-bill you, and it’s easy for your accountant to prove they were paid by accessing the billing system and sending them the information. Finally, if you’re paying engineering contractors in the US and they earn more than $600, you’ll need to send them an IRS Form 1099 and file it with the IRS. This can be overwhelming, so we handle these forms for Kruze Consulting clients,
How to pay international engineering contractors
If your startup is using engineering contractors outside the US, your best option may be to use an international payroll organization that operates globally, like Deel, Remote, Papaya, or another company. Bill.com can still be used to pay international contractors as well. PEOs can help you pay employees as well as contractors, so it makes sense for you to look at the options based on your startup’s needs.
Note that if you paid an international contractor, you should file a W-8BEN with the IRS. It’s not an obligation but it is a best practice so that you have a record with the IRS of what contractor you paid and how much. The W-8BEN will protect your company if the international contractor hasn’t reported everything correctly to the IRS. Again, we file these for clients of Kruze Consulting.
Choose the best system for your startup
There’s a lot of different systems for making these types of payments, so you’ll want to look at your requirements and review the options. Generally speaking, you want your system to document and store invoices and sync with your accounting system. That will help you with both managing contractors and reporting your transactions to the IRS. If you need more information about different payment systems that can help your startup, contact us.