Affiliate disclosure: Some links on this page are affiliate links; we may earn a commission at no extra cost to you. I only recommend tools I would use for my own clients.
No W-2 employees? You usually do not need full payroll—you need reliable 1099 payment tracking and year-end NEC filing. Contractor-focused payroll can run as little as $6/month per contractor on Gusto's Contractor Only promo ($0 base for your first 6 months) or a flat $25/month with QuickBooks Contractor Payments.
- Payroll vs AP tools (Melio/BILL) explained clearly
- Feature comparison table for top contractor picks
- When to upgrade after your first W-2 hire
1099-only ≠ full payroll
Do you legally need payroll software?
IRS rules require Form 1099-NEC when you pay a nonemployee $600 or more for services in a tax year (threshold rises to $2,000 for calendar year 2026 payments). You must collect Form W-9, track payments, file with the IRS, and furnish copies to contractors by January 31.
You do not withhold income tax from true 1099 contractors—but you may still need an EIN, state withholding accounts if backup withholding applies, and workers' comp in some states even for contractors.
Software is not legally required; it reduces TIN errors, automates e-file, and creates an audit trail. Break-even vs spreadsheet + IRS FIRE filing is usually around 3+ contractors or quarterly pay runs.
New to payroll tools? Start with our payroll software guides hub for full-service options once you add W-2 staff.
DIY vs software
Spreadsheet + IRS e-file
- Lowest software cost for 1–2 contractors
- You own W-9 storage and payment logs
- Manual NEC filing via IRS FIRE or paid service
Contractor payroll platform
- Automated 1099-NEC e-file (usually included)
- Direct deposit with pay stubs / portal
- Easier upgrade path when you hire W-2 staff
Best options for contractors-only
Gusto Contractor Only
$35/mo + $6/contractor (limited-time $0 base for 6 months). 1099 e-file included; 4-day direct deposit; easy upgrade to W-2 plans. See Gusto pricing (2026).
Try GustoQuickBooks Contractor Payments
$25/mo includes 20 contractors (+$2 each after). Cheapest Intuit path with 1099 e-file—no W-2 payroll. Bundle with Simple Start ($50/mo) if you need bookkeeping too.
View QuickBooksPatriot & OnPay (mixed teams)
Both pay 1099s in the same account as W-2s. Patriot Full Service: $37 + $5/worker (~$42 for one contractor). OnPay: $49 + $6/worker (~$55)—1099 e-file included but $49 base hurts pure-contractor shops vs the Gusto promo.
Wave Payroll
$40 base + $6/contractor—poor fit for contractor-only (same base as W-2 payroll). Only consider if you already use Wave Accounting and may add employees.
Not payroll: Melio and BILL (AP alternatives)
Melio and BILL are accounts-payable platforms—they pay vendor invoices via ACH or card and sync to Tax1099 or native 1099 filing. They do not run payroll, withhold taxes, or issue W-2s. Use them when you pay contractor invoices through AP workflows, not structured pay runs. Melio Core ($25/mo) adds W-9 collection but Tax1099 e-file fees apply on top. BILL Essentials is $49/user/mo plus per-payment ACH fees. See our Melio review and Bill.com review for full pricing and AP feature detail.
Feature comparison table
| Platform | Monthly cost (3 contractors) | 1099 e-file included | Direct deposit | Contractor portal | W-9 collection | W-2 ready? |
|---|---|---|---|---|---|---|
| Gusto Contractor (promo base) | $18 | Yes | Yes (4-day) | Yes | Yes | Upgrade path |
| Gusto Contractor (after promo) | $53 | Yes | Yes | Yes | Yes | Upgrade path |
| QuickBooks Contractor Payments | $25 | Yes | Next-day | Via QBO | Yes | Separate product |
| Patriot Full Service | $52 | Yes (Full Service) | Yes | Yes | Manual | Yes |
| OnPay | $67 | Yes | Yes | Yes | Yes | Yes |
| Melio Core (AP) | $25 + Tax1099 fees | Via Tax1099 (extra) | ACH/card | Vendor portal | Yes (Core+) | No |
Common mistakes
- Misclassifying employees as 1099 — software collects W-9s but does not determine worker status
- Skipping 1099-NEC when over threshold (verify $2,000 rule for 2026 tax year payments)
- Staying on contractor-only after hiring W-2s — triggers withholding, 941 deposits, and new-hire reporting overnight
- Using Melio/BILL alone when you also have W-2 employees who need payroll tax engine
- Venmo/Zelle without records — still reportable; no substitute for W-9 and NEC filing
EA perspective
Red flags for misclassification: set schedules, company-provided tools, exclusive work, and behavior control. If a "contractor" looks like an employee, fix classification before year-end—not during an audit.
Upgrade to full W-2 payroll mid-year when you hire your first employee. Gusto and OnPay make that transition smoother than AP-only tools. Gusto Contractor Only explicitly excludes backup withholding services—if IRS sends a B-notice, you need a full payroll tier or manual process.
Verdict by scenario
- 1–5 contractors, budget-first: Gusto Contractor Only promo ($0 base for 6 months) or QuickBooks Contractor Payments ($25/mo)
- 1–5 contractors, want polish + upgrade path: Gusto Contractor Only
- Already on QuickBooks: Contractor Payments ($25/mo, 20 included)
- 10+ contractors or mixed W-2/1099: OnPay ($49 + $6/person) — unlimited runs, included 1099 e-file
- Tightest full-service budget with W-2s coming: Patriot Full Service — see cheapest payroll guide
- Invoice-based AP, no pay runs: Melio or BILL — not a payroll substitute
FAQ
Do 1099 contractors need workers' comp?
Depends on state law and work performed—not on how you pay them. Some states require coverage even for contractors in certain industries. Payroll software does not replace insurance advice.
Can I pay contractors through Venmo or Zelle?
You can, but you still need W-9s, payment records, and 1099-NEC filing when over the threshold. Payment apps do not replace compliance documentation.
What about international contractors?
Gusto Contractor Only is domestic U.S. bank accounts. Gusto global contractor payments are $5/payment. Melio and BILL support international wires with FX fees—still not W-2 payroll.
When should I switch from contractor-only to full payroll?
The day you issue a W-2 or withhold taxes on anyone treated as an employee. Run onboarding with W-4, set up state accounts, and file new-hire reports before the first W-2 paycheck.
Related: Gusto pricing · Patriot review · OnPay review · Cheapest payroll (2026)
Affiliate disclosure: Some links on this page are affiliate links; we may earn a commission at no extra cost to you. I only recommend tools I would use for my own clients.
Thomas Camp Jr., EA
Thomas is an Enrolled Agent and tax accountant with over 14 years of experience helping small businesses choose the right payroll, accounting, and operational tools. His recommendations come from hands-on implementation—not just feature lists. Verify EA credentials →
