Independent contractors get paid directly by clients, in full, with no taxes taken out. You send an invoice after finishing the work (or hitting an agreed milestone), the client pays by ACH transfer, wire, check, or a platform like PayPal, and the gross amount lands in your account. From that point, tracking income, setting money aside for taxes, and paying the IRS every quarter are entirely on you. That is the short version of how independent contractors get paid, and the rest of this guide walks through each piece so nothing catches you off guard.
One boundary before going further: this all assumes you actually are a contractor. If a company sets your schedule, provides your tools, and directs how you do the work, the IRS may treat you as an employee regardless of what your contract calls you. Federal classification standards are in flux, and misclassification carries consequences for both sides. Sort that out before you start invoicing.
What You Give the Client Before the First Payment
Every client needs your tax information on file before they can cut you a check. That means IRS Form W-9, which collects your legal name, your business classification, and your taxpayer identification number. Sole proprietors usually give a Social Security Number; if you operate as an LLC or corporation, use your Employer Identification Number instead.1Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification
Get the W-9 back to the client quickly. If you fail to provide a valid taxpayer identification number, the client is required to withhold 24% of your payments and send it straight to the IRS. That backup withholding continues until the problem is fixed, and you don’t get the money back until you file your return.2Internal Revenue Service. Backup Withholding
Most clients pay electronically, so you’ll also share your bank’s routing number and your account number. Many contractors open a dedicated business checking account to keep personal and business money separate; it makes bookkeeping simpler and tax time much less painful. Some larger clients and government agencies also want proof of insurance (professional liability or errors and omissions coverage is the most common) before they’ll process payments, so read the contract for that requirement before quoting a rate.
Setting Your Rate and Payment Terms
How you charge shapes how you invoice. Three structures cover most contractor work:
- Hourly. You track time and bill for each hour. Good for open-ended workloads where the scope keeps shifting.
- Flat fee. One price for the whole project. Rewards efficiency, but only works if the scope is defined clearly enough that you aren’t absorbing unlimited revisions.
- Milestone payments. The project price is split into installments tied to deliverable phases, with each payment released after the client approves that phase. Common on larger projects, and it protects both sides.
Your contract should also state how quickly the client must pay after receiving an invoice. Net 30 (thirty calendar days) is the most common standard. Net 15 or “due upon receipt” is reasonable for smaller engagements or for clients with a track record of slow payment. Put the term in writing, because that is what makes it enforceable.
A late fee provision gives you leverage when payments slip. A monthly interest charge of 1% to 1.5% on the overdue balance is standard in commercial service agreements. State prompt-payment laws may set additional statutory deadlines and penalties, with timelines ranging roughly from 14 to 42 days depending on the state. Spell your late fee out in the contract and repeat it on every invoice so no one can claim surprise.
What Goes on the Invoice
An invoice is a formal payment request, and a sloppy one delays the money. Each invoice should carry:
- A unique, sequential invoice number (INV-001, INV-002) so both sides can track it.
- Your legal business name and contact information.
- The client’s name and billing address, matching whatever their accounts payable department uses internally.
- A line-by-line description of what you did, when, the quantity (hours or units), and the rate.
- The subtotal, any applicable taxes or reimbursable expenses, and the total due.
- The payment terms and a specific due date, restated on the invoice itself.
- Payment instructions: bank details for direct deposit, or a link to your payment portal.
Send invoices as PDFs so they can’t be edited in transit. Many companies use a centralized vendor portal where you upload the document; others take email submissions to a dedicated accounts payable address. Whichever route the client uses, send the invoice promptly after finishing the work. Late invoices produce late payments, and the delay compounds.
How the Money Arrives
The payment method affects both how fast you get paid and how much of the payment you keep.
ACH transfers, often called direct deposit, move funds bank to bank within one to three business days. Most banks charge little or nothing, which makes ACH the cheapest option for both parties and the default for recurring contractor payments.
Wire transfers are faster but carry bank fees that typically run $20 to $50 per transaction. Save wires for large or genuinely urgent payments.
Paper checks still exist. If a client insists on mailing checks, add the mailing and clearing time to your cash flow planning.
Digital payment platforms like PayPal are convenient but expensive. PayPal’s invoicing fees run 2.99% plus $0.49 per card or wallet payment, or 3.49% plus $0.49 through PayPal Checkout. ACH-based payments through PayPal’s Pay by Bank option are cheaper at 1%, capped at $10 per transaction.3PayPal US. PayPal Merchant Fees On a $5,000 invoice, the 3.49% fee alone costs you $174.50 before the flat fee. If a client wants to pay through a platform, either build the fee into your rate or write into the contract that the client covers processing costs.
The Taxes You Actually Owe
The Forms Clients and Platforms Send You
Any client who pays you $600 or more during the year must file Form 1099-NEC reporting that compensation. The form goes to both you and the IRS by January 31.4Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (04/2025) Check every 1099 you receive against your own records, because errors happen and you’re responsible for reporting the correct amount regardless of what the form says.
Payments through third-party platforms may also produce a Form 1099-K. Under the One, Big, Beautiful Bill Act, that reporting threshold reverted to $20,000 in gross payments and more than 200 transactions per year from a single platform.5Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One, Big, Beautiful Bill You owe tax on all of your income whether or not any 1099 shows up. The forms are reporting tools, not the trigger for the tax.
Self-Employment Tax
This is the part that catches new contractors off guard. You pay both the employer and employee shares of Social Security and Medicare, combined into a self-employment tax rate of 15.3%: 12.4% for Social Security and 2.9% for Medicare.6Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The Social Security portion applies only to net earnings up to $184,500 in 2026; income above that is subject to the 2.9% Medicare portion only.7Social Security Administration. Contribution and Benefit Base
One partial offset: half of the self-employment tax you pay is deductible when calculating your adjusted gross income. It goes on Schedule 1 of Form 1040 and reduces the income on which you owe regular income tax.8Internal Revenue Service. Topic No. 554, Self-Employment Tax
Schedule C and Schedule SE
You report business income and expenses on Schedule C, which flows into your personal Form 1040. Revenue in, deductible expenses out, net profit at the bottom.9Internal Revenue Service. Instructions for Schedule C (Form 1040) (2025) That net profit then moves to Schedule SE, where you calculate the self-employment tax owed.10Internal Revenue Service. About Schedule SE (Form 1040), Self-Employment Tax
Quarterly Estimated Payments
Since no employer withholds anything from your checks, the IRS expects you to pay tax as you earn it using Form 1040-ES. Due dates for tax year 2026 are:
- First quarter: April 15, 2026
- Second quarter: June 15, 2026
- Third quarter: September 15, 2026
- Fourth quarter: January 15, 2027
You can skip the January 15 payment if you file your 2026 return and pay the balance in full by February 1, 2027.11Internal Revenue Service. 2025 Form 1040-ES, Estimated Tax for Individuals Miss a deadline and you’ll face an underpayment penalty even if you end up owed a refund at year end.12Internal Revenue Service. Estimated Taxes
The practical habit most contractors settle on: park 25% to 30% of every payment received in a separate savings account earmarked for taxes. That range covers self-employment tax plus a moderate income tax bracket for most earners.
Expenses That Lower What You Owe
Every legitimate business expense you claim on Schedule C reduces your net profit, which lowers both income tax and self-employment tax. Track expenses as you go, not in April. Common contractor deductions include:
- Home office. A space used regularly and exclusively for business qualifies. The simplified method allows $5 per square foot up to 300 square feet, for a maximum $1,500 deduction. The actual-expense method involves calculating the business-use percentage of rent or mortgage interest, utilities, insurance, and repairs.13Internal Revenue Service. Simplified Option for Home Office Deduction
- Vehicle. Business miles are deductible at the 2026 standard mileage rate of 72.5 cents per mile, plus parking and tolls. You can instead track actual vehicle expenses and deduct the business-use share.14Internal Revenue Service. 2026 Standard Mileage Rates
- Health insurance premiums. If you aren’t eligible for an employer-sponsored plan, premiums for you, your spouse, and dependents are generally deductible, including Medicare premiums.
- Business travel and meals. Airfare, lodging, and transportation for business trips are fully deductible. Business meals are 50% deductible.
- Software, equipment, and supplies. Tools bought for the work, from a laptop to a project management subscription, are deductible in the year of purchase or over their useful life.
- Professional development. Courses, certifications, and training that maintain or improve skills used in your current work count as business expenses.
Keep receipts and records for all of it. A mileage log, digital copies of receipts, and a clear accounting system are your protection if the IRS ever questions a deduction. Mixing personal and business spending on one card makes that job harder than it has to be.
When a Client Won’t Pay
Nonpayment is one of the biggest risks of contract work, and most contractors run into it eventually. Escalate in stages.
Start with a direct conversation. Invoices genuinely fall through the cracks sometimes, and a polite call or email referencing the invoice number and due date clears many late payments without friction.
If that fails, send a formal demand letter. State the facts (what work you did, when, and the agreed price), the amount owed, a firm payment deadline, and what happens next if payment doesn’t arrive. Keep the tone professional. Send it by certified mail with return receipt so you have proof of delivery.
Small claims court is the next step for amounts within its jurisdiction. Limits range from $2,500 to $25,000 depending on the state. You usually don’t need a lawyer, and if the client fails to appear, you typically get a default judgment for the full amount.
For debts above the small claims limit, you’ll file in regular trial court, and a business attorney can help you pursue options like garnishing the client’s bank account or placing a lien after obtaining a judgment. Few collection disputes actually reach trial; the prospect of a judgment usually prompts a settlement.
The best defense against all of this is a clear written contract with defined payment terms, milestone billing that limits your exposure on large jobs, and a willingness to stop work when invoices go unpaid. Contractors who keep working while hoping a delinquent client will eventually pay are writing off their own time.