How to Do Payroll for Self-Employed Workers and Independent Contractors

Self-employed individuals and independent contractors don’t go through traditional payroll, since there’s no employer withholding taxes from their pay. Instead, they’re responsible for calculating and paying their own taxes directly, usually through quarterly estimated payments, while the business that hires them handles reporting rather than withholding.

Here’s how it actually works on both sides.

If you’re self-employed and paying yourself

If you run a sole proprietorship, a single-member LLC, or a similar structure, you don’t put yourself on a W-2 payroll. Instead, you pay yourself by transferring funds from the business, often called an owner’s draw, and you’re personally responsible for:

• Self-employment tax, covering both the employee and employer share of Social Security and Medicare, totaling 15.3% on net earnings up to the Social Security wage base

• Federal income tax on your net business income

• Quarterly estimated tax payments, since no employer is withholding anything on your behalf

Note: If you’ve structured your business as an S corporation, this changes. You may be required to pay yourself a “reasonable salary” through actual payroll, with normal withholding, in addition to any distributions you take.

If you’re paying independent contractors

If your business hires independent contractors, you don’t withhold any taxes from their payments. Your responsibilities are narrower but still real:

• Collect a Form W-9 from each contractor before paying them, which provides their taxpayer identification number

• Track total payments made to each contractor during the year

• Issue a Form 1099-NEC by January 31 to any contractor paid $600 or more during the year

• File copies of Form 1099-NEC with the IRS by the same deadline

Unlike employees, contractors set their own schedules, use their own tools, and typically work for multiple clients, which is part of what legally distinguishes them from employees in the first place.

Employee or contractor: getting it wrong is expensive

Misclassifying an employee as a contractor to avoid payroll taxes is one of the costliest mistakes a business can make. If the IRS or a state agency determines a worker was actually an employee, you can be liable for back payroll taxes, penalties, and interest, sometimes going back years.

The core test generally comes down to control: if you dictate when, where, and how someone works, and provide their tools or training, they’re likely an employee regardless of what your contract calls them.

Quarterly estimated taxes for the self-employed

Since no one withholds taxes for a self-employed individual, the IRS expects quarterly estimated tax payments throughout the year, covering both income tax and self-employment tax. These are generally due in April, June, September, and January of the following year.

Underpaying these estimates can trigger an underpayment penalty, even if you pay the full amount owed when you file your annual return. This is one of the most common surprises for people transitioning from a W-2 job to self-employment, since the habit of “taxes are handled for me” doesn’t carry over.

Comparing the two paths

Software still has a role here

Even though self-employment income and contractor payments don’t go through traditional payroll, tracking them accurately still matters. Many payroll and accounting platforms handle W-9 collection, 1099 preparation and filing, and payment tracking even for businesses that have no traditional employees at all, which removes most of the manual recordkeeping burden come January.

Whether you’re self-employed or hiring contractors, the theme is the same: no one is withholding anything for you automatically, so the responsibility for getting the numbers right, and paying on time, sits entirely with you.

Even without traditional payroll, W-9 collection and 1099 filing shouldn't fall entirely on you. PayWow handles contractor payments, W-9 collection, and 1099-NEC filing in one place, so January doesn't turn into a scramble.