How to add and pay contractors

You can pay independent contractors using Wave Payroll. Because of their special tax status, contractors are considered 'vendors' in Wave. This keeps your accounting accurate and your business compliant!

Contractors in the US

In this article


What is an independent contractor?

In practical terms, independent contractors aren’t that different from employees. They help your business complete certain predefined tasks and in exchange you pay them an agreed upon amount for their work.

For employees, the employer is the one who controls what work must be done, pays taxes on the employees’ behalf, and covers operating costs, amongst other things.

Independent contractors are the ones who control how works get done, provide their own tools, and pay their own taxes. Some examples of roles like this are consultants, personal trainers, and real estate agents. If you’re unsure whether a worker is an employee or an independent contractor, you can submit Form SS-8 to the IRS for an official designation.

Learn more about independent contractors here: What’s the difference between an employee and an independent contractor


Add a contractor in Wave

Add independent contractors that require a 1099 tax form in Wave. Here’s how:

    1. On the left navigation menu, click Purchases > Vendors.
    2. Click Add a vendor.
    3. Enter the Vendor name.
    4. Select Type: 1099-NEC contractor.
      Make sure you select the correct vendor type. The 1099-NEC contractor type allows you to generate 1099-NEC tax forms at year end, and pay bills by direct deposit. Both generating tax forms and paying contractor bills by direct deposit require a Wave Payroll subscription.

Next, identify if your contractor is an Individual (a single person not registered as a business or not doing business under an official name) or a Business (registered as a business or doing business under an official name).

For contractors you pay as individuals, enter a valid Social Security Number (SSN) in the XXX-XX-XXXX format. For contractors you pay as a business, enter a valid Employer Identification Number (EIN) in the XX-XXXXXXX format. 

You should make every effort to ensure that you have the correct type of number reported in the correct format. This will ensure tax ID verifications and 1099-NEC form submissions are accurate.


View & pay contractor bills

Step 1: Create a contractor bill

When you pay an independent contractor, you will log it as a purchase from a vendor. Here’s how:

    1. On the left navigation menu, click Purchases > Bills
    2. Select Create a bill
    3. Fill in the required details (select vendor, date of service, due date, bill number, etc).
    4. Select the relevant Expense Category. If you don’t yet have a relevant expense account, you can create one by following these steps.

      If you’re unsure of which expense account to select, or how to set up your chart of accounts with the correct expense accounts, we recommend speaking with a bookkeeper. Wave Advisors offer bookkeeping services, which you can learn more about here.

    5. When your bill is complete, click Save.

If you are paying a flat rate for contractor services, leave the Item Quantity as 1 and enter the dollar amount. If you pay contractors by the hour, enter the hours worked into Item Quantity.

Step 2: Pay contractor bills

You can view all contractor bills under Purchases > Bills. Sorting is also available on this page, either by vendor or by date:

If you made a contractor bill payment outside of Wave, you will need to record the manual payment in Wave. There are two ways to do this. 

The first is applicable if you do not import your bank transactions to Wave, you can record a manual payment:

    1. On the left navigation menu, click Purchases > Bills.
    2. Locate the contractor bill.
    3. Under Actions, click Pay Contractor.
    4. Select the payment method, then enter the amount and payment date.
    5. Click Save.

The second is if you import your bank transactions to Wave, you can categorize the expense transaction from Accounting as a Payment sent for a bill in Wave, which will link the transaction to the bill:

    1. On the left navigation menu, click Accounting > Transactions
    2. Locate the contractor payment expense transaction.
    3. Click the transaction line to edit transaction details.
    4. In the Category field, select Payment sent for a bill in Wave.
    5. Select the outstanding bill to apply the payment to.
    6. Click Save.

Pay by direct deposit

If you want to use Wave to pay with direct deposit, you’ll need to set up direct deposit for payroll before paying contractors with this option. When direct deposit is set up, you can take the following steps to add the bill to your next payroll:

    1. On the left navigation menu, click Purchases > Bills.
    2. Locate the contractor bill.
    3. Under Actions, click Pay Contractor.
    4. Select Pay with direct deposit.

The contractor bill will be added to your next payroll in Wave, which you can review and approve from Payroll > Run Payroll. Learn more about paying on time by direct deposit here

Contractors paid with direct deposit will be paid during your regular payroll schedule. Ensure you create your contractor bills and add them to the pay period before you approve your next payroll.

Contractors in Canada

Add a contractor

You can add a contractor under Purchases > Vendors. If they are a contractor, instead of a regular vendor, make sure to mark them as a T4A contractor

Make sure you select the correct vendor type. The T4A contractor type allows you to generate T4A slips at year end, and pay bills by direct deposit. Both generating tax forms and paying contractor bills by direct deposit require a Wave Payroll subscription.

Wave does not currently support contractors located in Quebec.

Indicate whether you will be paying the contractor by direct deposit.

If you’re setting up Wave Payroll for the first time, you’ll also have the option to add contractors during this process.

Contractors are distinct from other vendors who provide goods or services to your business, like your utility or phone provider. They are usually individuals who are providing a an agreed upon service specific to your business.

Depending on your business, you may need to file additional forms with the CRA at tax time.

If your business obtains more than 50% of its income through construction activities, you'll need to report all debits and credits from those subcontractors on a form called T5018 instead of a T4A. Wave doesn't generate this form, but you can learn more about T5018 and download the form on the CRA website.

 

Pay a contractor

To pay a contractor, create a bill for their services. You can do this by clicking on Create a Bill under Purchases > Bills. From here, create a bill as your normally would. You can add multiple line items for the contractor’s services, as needed.

Make sure you select the relevant Expense Category for regular services, reimbursements, supplies, etc. If you don’t yet have a relevant expense account, you can create one by following these steps.

If you’re unsure of which expense account to select, or how to set up your chart of accounts with the correct expense accounts, we recommend speaking with a bookkeeper. Wave Advisors offer bookkeeping services, which you can learn more about here.

If you are paying a flat rate for contractor service, leave the item quantity as 1 and enter the dollar amount. If you are paying by the hour, enter the number of hours in the quantity column, and the hourly rate in the amount column.

You can see the status of all contractor bills on the Bills page under Purchases:

  • For unpaid bills, under Actions select Pay contractor. There are two options:
    • If your contractor is on direct deposit, you can select "Pay by direct deposit", which adds the bill to your next payroll.
    • If your contractor is not on direct deposit, you'll need to select record a manual payment and enter the payment details.
  • Any bills that have already been added to your next payroll will be marked as pending.
  • If you use direct deposit, bills included on a payroll that is currently being processed will be marked as scheduled.
  • Paid bills, whether by check or direct deposit, will be marked as paid.

If you're paying your contractor using direct deposit, Wave will automatically add a payment transaction for that bill, which marks it as paid. If you are paying by check, you'll need to manually add a bill payment.

Contractors will be paid on your regular payroll schedule. Make sure you add them to the payroll that runs when you want them to be paid. For example, if you run payroll for your regular employees bimonthly, but you’ve agreed to pay your contractor at the end of the month, make sure to add them to the second payroll for that month.

What about the accounting?

When you create a bill for your contractor and run payroll for that bill, Wave will create the accounting entries for you. You will see a liability transaction when you create the bill, and a payment transaction when you run payroll. All the accounting is automatically taken care of!

How much does it cost?

Paying contractors through Wave Payroll costs $6 per contractor paid per month, in addition to your payroll base fee. You will not be charged the $6 fee on months you do not pay the contractor.