Summary: Contractor paystubs are informal documents that businesses may provide to independent contractors summarizing their payments.

Most businesses provide their employees with paystubs along with their paychecks, either as paper records or, more commonly, as electronic documents. What do self-employed independent contractors do if they need paystubs for proof of their regular income?

Since they don’t get them from the individuals and companies that engage them, they often find that they must issue paystubs for themselves. This quick article will explain why you might need contractor paystubs and how to create them yourself.

What is a Contractor Paystub?

Contractor paystubs are records of independent contractor earnings and deductions over regular periods. While employees are typically issued paystubs by their employers each pay period, contractors and sole proprietors are their own employers. While they already know what they pay themselves and how much they pay in taxes, contractors can create paystubs to demonstrate their income to others when needed.

Because contractors typically receive 1099-NEC forms from the people and businesses that hire them, they’re often referred to as 1099 workers. Therefore, contractor paystubs may also be called 1099 pay stubs.

What Does a Contractor Paystub Include?

Paystubs of all kinds share a few commonalities. They are intended as records of workers’ pay for a set pay period so they include their earnings of all types. They also include the deductions and other taxes that are subtracted from these earnings. 

Contractors have to pay themselves and deduct their own taxes and benefits contributions. Their contractor paystubs typically include:

  • Their name and address
  • Their Social Security Number (SSN) or EIN (Employer Identification Number) to prove their identity for tax purposes
  • Their clients’ information and invoice numbers
  • The number of hours they worked and the date range of the pay period
  • Their gross earnings (what they paid themselves for their contracting activities)
  • Income tax deductions
  • Social Security and Medicare taxes
  • Contributions to benefits programs
  • Net pay

Contractors can normally choose to display this information in any format they desire since the layout of their paystubs isn’t mandated by law. They may choose to use standard paystub codes to detail their earnings and deductions instead of writing out each item in full.

Why are Contractor Paystubs Important?

Employees receive paystubs from their employers as records of their earnings and deductions. They often don’t know exactly how much they should make and where all of their deductions go until they receive these important documents. They can also use their paystubs to check if their earnings, deductions, and net pay are correct.

Contractors, as their own employers, don’t have the same needs. They need to keep track of their invoices and the payments they receive from clients so this is how they know how much they’re being paid.

They use their gross earnings to calculate how much they need to pay in income tax and FICA (Federal Insurance Contribution Act) taxes. In other words, they already know all the details that they put on their own paystubs. 

Why even create them in the first place?

The answer is that contractor paystubs are useful when contractors need to demonstrate their income to others. They may be required in certain situations, such as:

  • Applying for personal loans: Banks and other lenders almost always require proof of income for personal loans. Contractor paystubs are a convenient way to demonstrate to lenders that you have regular income that will enable you to pay them back.
  • Applying for car loans: Auto loans also typically require proof of regular income. Loan companies want to ensure that you have a steady, regular income that will allow you to make your monthly car payments on time so that you’re not a loan risk.
  • Claiming accident compensation: While employees are normally covered by worker’s compensation insurance, independent contractors usually aren’t. As their own employers, they’re responsible for the methods of their own work and protecting their own safety. However, some clients may cause accidents or provide unsafe working conditions that can give contractors legal claims for compensation. They can also make disability claims through Social Security if hurt or made sick on the job and then unable to work. Their claims need to be made against their regular income, and paystubs can be used to prove it.
  • Refinancing a mortgage: Contractors may want to replace their current mortgages with new ones that provide better terms and help them save money. As with other types of loans, new lenders can be shown paystubs to satisfy them that their mortgagees have the ability to make regular repayments.
  • Renting a property: Most landlords require proof of income before they allow people to rent their properties. While employees can provide employment verification letters or bank statements, contractors might find it easier to furnish landlords with their regular paystubs.

How to Produce Contractor Paystubs

If you’re an independent contractor, producing paystubs for yourself isn’t difficult. It’s easiest to produce electronic paystubs that you can edit quickly and keep on file for later use. You can also print out paper copies when you need to submit them as proof of your income.

Here are the steps you should follow to make your contractor’s paystubs:

  1. Enter your personal information: Record your name, address, and tax identification number (SSN or EIN) to formalize the document.
  2. Define the pay period: Write the dates spanning the pay period you’re paying yourself for. You can also show the regularity of your pay by defining the period as monthly, semi-monthly, bi-monthly, or weekly.
  3. Give the pay date: Simply give the date that you paid yourself.
  4. Provide client information: Write the names and addresses of the clients you worked for during the pay period.
  5. Give invoice information: As much for your own records as to prove the work you did, include the numbers of the invoices you were paid for during the pay period. You can also break your income down by invoice if you wish.
  6. Give your gross earnings information: As a contractor, most of your earnings will be the pay you receive from contracts. However, you may occasionally also be paid bonuses or tips from satisfied clients. If so, include these as gross earnings.
  7. Subtract pre-tax contributions: If you contribute to a health savings account or a pre-tax retirement plan, subtract the amount of your contributions for the pay period before you calculate the taxes you owe.
  8. Calculate your income tax obligations: As a contractor, you need to keep track of the federal, state, and local income tax rates you need to pay. Apply these rates to your total gross earnings to subtract these taxes.
  9. Calculate your FICA taxes: Since you are your own employer, you need to pay both the employee and the employer contributions for Social Security and Medicare. For Social Security, you’ll need to pay the mandatory 12.4%, while for Medicare, you’ll contribute 2.9% of your income. 
  10. Provide your net pay: Once you subtract your pre-tax contributions and taxes from your earnings, you’ll end up with your net pay for the pay period.
  11. YTD: As with employee paystubs, it’s a good idea to add your year-to-date (YTD) pay. This is a running total of what you have been paid for the calendar year, and it’s very useful for helping you calculate your year-end taxes and other obligations.

How to Report Payments to Contractors

If you’re a client who has engaged an independent contractor, you can choose to create and provide them with paystubs. While you aren’t required to withhold income or FICA taxes from contractor’s pay, you can still calculate these amounts for them and use them to create paystubs following the outline above.

However, you are obligated to report your payments to contractors to the Internal Revenue Service (IRS). You must use form 1099-NEC, Nonemployee Compensation, to report any income you paid to contractors over a minimum of $600.

Not only do you need to send this form to the IRS, but you also need to furnish the contractor with a copy so they can use the information for their records and filling out their tax return. You can file electronically or on paper.

If you choose to report on paper, you must also include Form 1096, Annual Summary and Transmittal of U.S. Information Returns. You can use one of these forms for up to ten 1099-NEC forms at once, but if you need to submit more than ten information returns of any kind, you must instead file electronically.

1099 or Contractor Paystubs

Whether you refer to them as 1099 or contractor paystubs, these useful documents can help contractors prove regular income for a variety of purposes. Contractors normally prepare their own paystubs which can be useful for record-keeping and for calculating the earnings and deductions on their year-end tax returns.

FAQ

No, these documents aren’t required in any state for tax purposes. However, they can be very useful for contractors who need to submit proof of their income for loan or rent applications and other purposes.

No, clients are the ones who must prepare 1099-NEC forms to report income paid to contractors. They must submit these to the IRS and also provide contractors with copies for their records.