What’s the Best Way to Pay Contractors? (Hint: Not With Venmo!)

Be honest — are you using Venmo to pay contractors?

I know, I know, Venmo is easy to use and it’s fun to explain your transactions with emojis. But it’s not an appropriate way to pay your contractors.

Honestly? Pretty much any other payment option is a better choice than Venmo. 

So let’s talk about what those other choices are so you can decide which one is best for your business. I’ll cover invoices, PayPal, and how to keep your documentation straight no matter which one you use. Let’s get started!

How NOT to pay contractors: A cautionary tale of Venmo

There are many reasons that Venmo isn’t the best choice for business transactions, and one of my clients is the perfect example. Sadie (name changed) was using Venmo for all of her business finances. Her clients paid her that way, and then she’d Venmo payments to her contractors. And then she’d just transfer her Venmo balance to her business bank account. 

But the problem was that she didn’t have a good way to keep track of each individual payment. By the time she was transferring money into her bank account, there wasn’t any information showing how much each client paid her or how much she paid each of her contractors. 

When it came time for her to do her taxes and create 1099 forms for her contractors, she was scrambling to figure out how much she paid everyone over the course of the year.

Why do you need to track payments to your contractors?

As long as your contractor payments are less than your income, does it matter what the actual amounts are? Absolutely!

Here are just a few reasons to track your payments:

• Tax forms: You are legally required to create 1099 forms for your contractors every year. January 31 each year is the deadline to file a 1099 form for every contractor you paid at least $600 over the previous year.
• Accuracy: If you’re just paying every money request you get from a contractor, it’s easy to accidentally over- or underpay for their services.
• Financial management: When you know exactly how much you are paying each contractor, you always have the data you need to determine whether that expense is worth it.

You can’t just run your business on approximate data or trust yourself to remember the amount of an invoice six months from now. You need to keep a paper trail of invoices and receipts so you always know what your finances look like.

Why Venmo doesn’t work for business transactions

No shade to Venmo — it’s a perfect way to split a dinner bill with friends or pay your roomie back for the groceries they picked up for you. But it’s not right for official business transactions, and here’s why:

• It’s harder to keep your business and personal transactions separate.
• There’s no automatic tracking, so you have to manually record every transaction yourself, which is tedious and time-consuming.
• It’s not a professional payment service, so using it can make your business seem less official.

Now, there is a “Venmo for Business” option that’s more official. You’ll have to pay processing fees for payments, but there’s more protection for you and your contractors. However, I think there are better payment services for businesses.

Options for business transactions

So, what are some good options for paying your contractors?

• PayPal: This is a great choice because it’s well-known, reliable, and easy to use. It’s got strong purchase protection rules and a clearly defined dispute resolution system. Plus, PayPal can automatically create 1009 forms for you. All you have to do is mark those contractor payments as “goods and services,” and PayPal will automatically create and file those 1099s for you.
• Invoicing: Another option is to have your contractors send you invoices for their services. Then, you can pay them with a debit or credit card — super simple. Plus, most invoicing programs will automatically give you a receipt when you pay an invoice, which makes bookkeeping and documentation easier. There are several great invoicing services: Wave, Stripe, and Dubsado are just a few.

Basically, you want to pay your contractors through official channels and keep track of all those transactions.

Create a good system for paying your contractors

When you have a reliable, trackable process for paying your contractors, it makes things so much better! It’s easier to do your bookkeeping and prepare for tax season every year. Plus, using a reputable payment provider makes your business look more legit.

If you’re using a spreadsheet for your bookkeeping, make sure each contractor payment is clearly marked with the amount and the payee’s name. When it’s time to create your 1099s, you can just filter by name to get the total amount you paid each contractor.

If you’re using an accounting program (like Xero), the process is similar. Make sure each payment includes the contractor’s name so the program can automatically calculate the total yearly payments for each payee. Most accounting programs will create 1099s for you too!

Once you’ve got your payment system set up, remember to keep your books updated with all those transactions. Or if you don’t want to do your bookkeeping yourself, let me take care of it for you!

What do you get when you work with me and my team of bookkeepers?

• Transaction management and categorization (we’ll take the tedious stuff OFF your plate!) by the 15th of every month
• A financial summary delivered each month, so you know where your money came from and went!
• Quarterly custom Loom videos to dive deeper into your financial reports, so we can make sure you feel completely confident in knowing your numbers.
• Access to our entire library of digital products!
• Quarterly visual reports, complete with pie charts, bar graphs, and high-level helpful info about your monthly bookkeeping. This makes it easy to see your numbers in a way that works for your brain — and that isn’t a total snooze.
• Voxer access to me, where you can ask clarifying questions about expenses, get help with your reports, and more!

Interested in that kind of support for YOUR creative online business?