How to do contractor payments easily for your small business?

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How to do contractor payments easily for your small business?

Contractor payments have become essential in today’s gig economy. Your small business needs to pay its interns or freelancers. Contractor jobs and freelance assignments are becoming increasingly common even in large organizations. How then do you set up contractor payments? Are there specific rules relating to independent workers? Read on to know everything and effortlessly pay your contractors.

In this blog:

Who is eligible to receive contractor payments?

First, let’s try to understand who is termed as a contractor. The primary point of differentiation is, of course, financial control. If an employee is being paid a regular monthly/annual salary, he/she is a salaried or regular employee. However, if the worker is paid a specific amount per job, they fall under the contractors or freelancers category.  

Also Read: Understanding salary structure in India

Additionally, contractor payroll also differs on legal grounds. For example, salaried employees have several tax deductions on their payslips. In contrast, contractors or freelancers are not withheld by Income tax and other deductions. Moreover, employment and labour laws are also different when it comes to contractor payments. 

The relationship between a contractor and employer usually terminates at the end of the signed contract and/or completion of the job. 

Should a small business employ contractors?

Every hiring decision has pros and cons associated with it. When a business is starting out, hiring contractors can help build it with a lot of benefits. As we’ll see later on, contractors do not require health insurance, paid leaves, or fixed salary amounts. This helps keep startup budgets financially intact. Furthermore, contractors can also provide certain business development advantages. Regular employees, on the other hand, can prove to be more loyal and attached to the organization’s values. They are often part of the core business team and manage product divisions.

What are the pros of hiring a contractor?

  • Contractors are paid on a contractual basis and thus have set timelines for completion of work.
  • They can be employed at much lower costs than full-time employees.
  • Startups in their early stages often require subject matter experts in business departments. Eg. tech experts

What are the pros of hiring a full-time employee?

  • Salaried employees are more suited to core competencies in a business.
  • They score higher on loyalty and abiding by the company’s culture.
  • Add more value to the business in the long run.

Which industries require contractors and how do you source them?

The answer to this question lies in the fact that all businesses have different hiring requirements. However, most companies end up hiring contractors or freelancers at some point. With the rising gig economy, the need for contractors and freelance jobs have become widespread. That added to the rise in remote work due to COVID-19 has changed conventional business practices.

  • If you’re looking for contractors in the UX/UI design sphere, check out 99designs.
  • For freelancers, browse through Upwork.
  • For interns in any field, Internshala and KillerLaunch are good options.

4 factors to consider before hiring a contractor

Making the decision of hiring a contractor for a few projects is great. Here are 4 main factors to consider before you move forward:

1.Tax Management

Contractor payments differ from paying your regular employees. Moreover, tax rules and compliances are also different when it comes to independent contractors. In the following section, we’ll see what these rules are and how to manage your contractor’s tax payments.

2. Number of Contractors

The higher number of contractors you employ, the more time you will have to spend on payroll. Instead, draw out a plan on the exact number of contractors you require for specific jobs. This will help save time on collecting tax information, tracking hours, and issuing payments. In addition, keep information relating to the mode of payment at hand after discussing it with the contractor.

3. Frequency of Contractor Payments

This is a key factor to consider. Before venturing into the world of hiring contractors, understand the modes of payment and frequency of making those payments. Furthermore, consider things such as transfer fees, advance payments, one-time payments, etc. Will you be paying the contractor every week? If it’s a long term project, will there be regular payments every month? These are questions you should have answers to beforehand.

4. Location of Contractor

Independent contractors can also be remote workers. Sometimes you may have to hire someone who works outside your state or even national boundaries. As a result, different state rules for taxes or exchange rates may have to be thought of. Additionally, the contracts will have to be designed according to work hours and charges.

Section 194C: The Indian legal guide to contractor payments

 Section 194 C of the Income Tax Department of India provides the laws for tax deductions for contractor and subcontractor payments. It states that any person working within the limits of a contract must deduct tax at source (TDS).

Moreover, this contract must be between a contractor and one or more of the below-mentioned parties:

  1. The Central Government or any State Government
  2. Any local authority
  3. Corporations established by or under a Central, State, or Provisional Act
  4. Any company
  5. Any co-operative society
  6. Authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for the purpose of planning, development or improvement of cities, towns, and villages or for both
  7. Societies registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India
  8. Any trust
  9. Universities or deemed universities
  10. Any firm

What kind of work does section 194C cover?

Before we get into the particulars of tax and payments, let’s understand what ‘work’ is defined as for Indian contractors. As stated in Section 194C, ‘work’ for contractors or sub-contractors includes:

  • Advertising
  • Broadcasting and telecasting; programs for broadcasting or telecasting
  • Carriage of goods and passengers by any transport excluding railways
  • Catering
  • Manufacture and/or supply of products by purchasing material only through a direct relationship with the customer

How to do contractor payments easily?

We established who a contractor is and the work they are legally permitted to do. Next let’s answer the question of how to do contractor payments.

Asanify Payroll simplifies and automates contractor payments for you. We not only calculate and track the payments but also help disburse the payments from any bank to any bank account. Next we look at the steps needed to add a contractor in Asanify.

Contractor payments summary

1: Enter the name of the contractor

2: Give employee/internal ID

3: Provide work email address

4: The date of joining and department of the contractor

5: Review the basic details and proceed to enter bank and payment details


Payroll software cta

When does TDS get deducted for contractors?

Under section 194C, tax is deducted for contractor payments either at the time of the amount being credited or at the time of payment. Additionally, this payment can be either in the form of cash, cheque, or other modes. 

Consequently, any amount credited to the account of the contractor or sub-contractor is taxable at the source by the employer. 

How much TDS is deducted for contractor payments?

According to Section 194C, there are 2 TDS rates applicable for contractor payments: 

  1. If the recipient is an individual/ Hindu undivided family: 1%
  2. If the recipient is any other person: 2%

Furthermore, there are a number of points to consider when paying your contractors. 

  • The surcharge or health and education cess are not applicable to contractor payments. 
  • If the contractor does not provide the employer with his/her PAN card, a 20% tax is deducted. 
  • If the contract corresponds to the manufacturing or supply of a product, TDS is deducted from the invoice value. This does not include the value of the material purchased if amounts are provided separately. But in cases where raw materials are not denoted by a separate component, TDS is deducted from the entire invoice value. 
  • In addition, for contractor payments, no tax is deducted on the ‘GST on services’ component if charged separately. Instead, taxes such as IGST, CGST, SGST, and UTGST are included. 

When is TDS not deducted on contractor payments?

There are a number of provisions as given by Section 194C for non-deduction of TDS.

1. Tax is not deductible if the credited amount does not exceed INR 30,000. Additionally, it is also not deductible if the aggregate contractor payments do not exceed INR 1,00,000.

2. For transport contractors (plying, hiring, or leasing goods carriages) tax deductions are not applicable if:

  • The contractor owns at least 10 goods carriages at any time during the year. He/she must also provide PAN card details to the payer.

3. In case of contractor payments for personal purposes, no tax is deducted on the credited amount. 

4. The Assessing Officer is the main authority in whether contractors can avail of tax exemption or be taxed at a lower rate. Moreover, this application must be through Form No. 13 and must carry PAN details. 

Wrap Up

Contractor employees or freelancers are not going anywhere anytime soon. We have seen how important they can prove to be for task completion as well as business development. Here’s a quick recap of what I covered:

  • Definition of a contractor and the differences between the former and salaried employees
  • Looked into the pros and cons of why a startup should/should not hire contractors
  • Industry-wise contractor examples and where to find them
  • Factors to consider before hiring a contractor: Taxes, Number of Contractors, Frequency of Payments and Location
  • A deep dive into Section 194C of the Indian IT department which covers tax rules for contractor payments
  • A step-by-step guide to setting up a contractor payments account using Asanify Payroll
  • Insights into the TDS deductions for Indian contractors, freelancers, and interns

So the next time you’re looking for a contractor, pull up this article and get started with Asanify for free!


What makes someone an employee vs a contractor?

The main point of difference is the type of payment employees receive. It is a fixed salary that is taxable and has certain benefits and allowances. For contractors, the salaries are negotiable and depend on the project duration and type. Furthermore, compliances also vary for contractors and freelancers.

Is it better to be an employee or an independent contractor?

The job profiles of a full time employee and a contractor are very different. You must take into consideration several factors such as desired salary, benefits, job type, job role, and taxes.

How do contractors get paid?

Contractors or freelancers get paid on the basis of the contract signed with an employer. These contracts are usually time-bound and correspond to specific tasks or projects. Contractor payments can be made through cheques, credit cards, payroll software, wire transfers, (NEFT) etc.