The best indicator of long-term business success is your ability to adapt to change. While employees are the heart of your company, you may encounter projects that require special expertise or temporary help. That’s where independent contractors come in, providing more flexibility for projects without the long-term commitment of hiring an employee.
In fact, when we surveyed U.S. business owners for our 2025 BOSS Report, 18% of respondents told us they’d switched from hiring employees to contracting freelancers to cut costs amid inflation. Here’s how to effectively manage your contractors if you find your business in a similar transition.
What you need to know
- Contractor management is your process for coordinating the self-employed people you hire to do a job.
- Managing contractors efficiently involves open contract negotiations, on-time payments, and monitoring performance without overstepping boundaries.
- Contractors offer more flexibility—including negotiable rates and managing their own taxes—but you’ll have less control, stability, and loyalty compared to an employee.
Introduction to contractor management
An independent contractor is a self-employed person you hire to do a temporary or indefinite job. These can be helpful when you need extra support for a temporary project, want someone with specialized skills, or if one of your employees is on leave.
Contractors typically have more freedom over their work conditions than your employees, but also don’t receive the same benefits or labor protections. For example, you’re not responsible for withholding any taxes or benefits from paychecks. Upon completion of a task or pay period, you’ll pay contractors a full paycheck, then, at the end of the tax year, you’ll send your contractors a 1099 Form, which they can use to file taxes.
Contractor management refers to your systems and process for coordinating independent contractors, and is usually handled by you, your HR team, and/or your team managers. You can track costs and expenses with contractor management software. You’ll need to have systems for onboarding, performance monitoring, payment processing, and legal compliance.
Contractor vs. freelancer
A freelancer is a type of independent contractor that you pay per item or project completed. Other types of contractors may get paid hourly or per pay period. As with anyone your business works with, you’re responsible for treating freelancers and contractors well and respecting their rights.
How to manage independent contractors
Sourcing and selecting contractors is similar to finding new vendors and suppliers. After screening and interviewing candidates, follow the best practices below to continue:
1. Plan the contract
Once you’ve selected a contractor, you’ll negotiate their contract terms. Contractors have more control over their terms than employees do, so plan goals, working conditions, and payment with open input from both sides. Set reasonable performance check-ins, incentives, and milestones.
2. Choose an automated payment software
It’s a good idea to automate most or all of your business payments, and paying contractors is no exception. Depending on your agreement, the contractor may send you an invoice, in which case your accounts payable platform can process the invoice and either pay it or prepare the payment for approval. If you agree to pay contractors periodically, you can pre-schedule these payments or ask your contractor to send invoices for approval each pay period.
Some contractors request a down payment before starting, typically to cover materials and supplies. If you agree, be prepared to pay this as soon as possible.
3. Monitor performance and deliverables
Contractors have a lot of freedom to use their time as they wish, but they’re responsible for ultimately delivering the work you asked for. Choose performance metrics before the project begins, and work with your contractor on how you wish to assess performance and provide feedback. Leave some flexibility if timelines aren’t rigid, but try to put a start and end date on the project, with target dates for milestones, and schedules for payment and feedback.
4. Stay compliant with tax and legal requirements
Businesses hiring independent contractors are required to send out a 1099 Form at the end of the year to report contractor earnings. You’re also required to comply with the rights of contractors within your state, which usually includes anti-discrimination clauses and protections requiring timely payments and honored contracts. Your automated accounts payable software should come with tools to help simplify your taxes.
Tips for managing contractors effectively
Contractors are independent entities, and it’s important to treat them that way. Here are some tips on how to navigate that:
Pay contractors on time, always
Don’t hire a contractor if you can’t afford to pay them, and never pay them late. You’ll have decided on payment dates and terms in your contract, and you’re responsible for honoring that agreement. Not paying your contractors on-time will damage your business’s reputation and potentially land you in legal trouble. Automate your accounts payable to avoid these outcomes.
See how Bluevine can help you streamline your accounts payable.
Respect your contractors’ independence
Legally, contractors are self-employed, meaning they’re choosing to work for you based on the terms of your contract. Avoid treating them like employees—this means not unnecessarily requiring certain work hours, tools, communication channels, or work locations. Your contractor’s process is generally their own (unless required by your project), so evaluate them based on the timeliness and quality of their work.
Communicate regularly and comprehensively
Many contractors require minimal supervision while working, but that doesn’t mean you shouldn’t communicate. While negotiating your contract, schedule regular check-ins to answer questions and receive progress updates. You don’t want to micromanage your contractor—remember, you’re required to pay them as long as they deliver the project as outlined in the contract.
Plan for and cultivate long-term relationships
The main benefit of hiring contractors directly—as opposed to using a subcontracting company—is that you can maintain direct relationships with any contractors whose work you enjoy. Contractors who enjoy working for you and receive prompt payment will happily do so again, which eliminates the need to find new contractors for every project. Having a stable rotation of trusted contractors can be invaluable as you grow and scale your business.
When should you hire contractors vs. employees?
There will be times when either an employee or a contractor could complete a project for your company. Here’s how to decide which is best:
Hiring a contractor
| Pros | Cons |
|---|---|
Cost-effective—including negotiable rates, no tax withholding, benefits, or workspace to pay for | Contractors have little stake in company success, and their long-term loyalty depends solely on your relationship with them |
Contractors manage their own taxes and benefits | Contractors may have the same communication channels as you use internally |
| Can provide niche or advanced expertise | You have limited control over work conditions and process |
Hiring a full-time employee
| Pros | Cons |
|---|---|
| Employees have a greater stake in company success | More expensive to hire and manage—including salary, benefits, payroll taxes, and workspace |
| Employees are better able to collaborate with other employees | You have to manage employee payroll, benefits, and compliance. |
| You’ll have more control over work conditions and process | More difficult to end relationship if work is unsatisfactory |
Want more tips for how to hire employees for your small business?
