Independent contractors get paid by sending an invoice to the client under the terms of a written agreement that fixes the price, the schedule, and the method of payment for a defined scope of work. There is no paycheck and no withholding: the contractor bills for completed work, the client pays the gross amount, and the contractor handles taxes, insurance, and benefits on their own. How much arrives, when it arrives, and what happens if it doesn’t all come down to what the contract says and what the law fills in when the contract is silent.
The Pricing Model in the Contract
Before any invoice goes out, the contract sets how the price is calculated. Four models are common, and each shifts the financial risk differently.
- Fixed price (lump sum). One total price for the whole project. Finish under budget and the savings are profit; run over and the contractor absorbs the loss. Best when the scope is nailed down before work starts.
- Time and materials. Actual labor hours at an agreed hourly rate, plus the cost of materials, often with a markup. Suited to work where the full scope is hard to predict.
- Cost-plus. The client reimburses documented project costs and pays an added percentage, typically between 5% and 25%, as the contractor’s fee for overhead and profit. The client sees actual spending but gives up certainty on the final number.
- Unit price. Each measurable unit of work (a square foot of flooring, a linear foot of fencing) has a set price, and the bill adjusts with the quantity actually completed.
Deposits, Milestones, and Retainage
Most contractor agreements open with an upfront deposit, commonly 10% to 33% of the total price, to secure availability and cover early costs like materials and permits. Some states cap the deposit a contractor can collect, so the allowable percentage depends on local law.
After the deposit, payments are tied to defined milestones or completion percentages. A remodel might call for 30% at demolition, 30% at framing and rough-in, and the balance at final inspection. Each milestone should be spelled out clearly so both sides agree on when a payment is earned, and the client verifies the work before releasing it.
On larger jobs, especially in construction, the client holds back a portion of each progress payment, typically 5% to 10%, until the project is finished and inspected. That withheld amount is called retainage. It keeps the contractor financially motivated to complete punch-list items, and it is released once the work meets the contract’s requirements.
The Paperwork That Unlocks Payment
Form W-9
Before the first check goes out, the contractor gives the client a completed IRS Form W-9 with legal name, business name if different, mailing address, and taxpayer identification number (either a Social Security number or an Employer Identification Number).1IRS. Form W-9 (Rev. March 2024) The client keeps that information on file and uses it to prepare the year-end Form 1099-NEC.2Internal Revenue Service. Instructions for the Requester of Form W-9 (Rev. March 2024)
The Invoice
A valid invoice includes the contractor’s name and contact information, a unique invoice number, the date the work was performed, an itemized description of the completed tasks or delivered materials, the total amount due, and the payment deadline. Vague line items are the most common reason invoices get bounced back for revision, so specificity gets you paid faster.
Lien Waivers
On construction and renovation work, clients often require a lien waiver with each payment. A lien waiver is a signed document confirming the contractor received a specific payment and giving up the right to file a legal claim against the property for that amount. Conditional waivers take effect only after the payment actually clears the bank; unconditional waivers are effective the moment they are signed. Signing a conditional waiver keeps lien rights intact until the money is really in hand.
Proof of Insurance
Many clients require a certificate of insurance before work begins. Issued by the contractor’s carrier, it confirms the types of coverage in place (general liability, workers’ compensation), the policy limits, and the policy dates. Clients use it to verify they will not be exposed if the contractor causes property damage or a worker is hurt on the job.
How the Money Actually Moves
Once the invoice is approved, funds transfer through one of several channels:
- ACH transfer. Bank-to-bank electronic transfer that settles in one to three business days with minimal fees. The most common method for recurring contractor payments.
- Wire transfer. Faster, often same-day, but banks charge fees, usually $15 to $30 for domestic wires. More common for large one-time payments.
- Paper check. Still widely used by small businesses, but mailing and bank processing add days. A check dropped in the mail on the due date may not arrive for the better part of a week.
- Digital payment platforms. Services like Zelle, Venmo business accounts, and PayPal move money quickly, with fees that vary. Venmo business accounts charge 1.9% plus $0.10 per transaction; Zelle does not charge a transaction fee for sending or receiving.
The contract should specify both method and timing. “Net 30” means the full balance is due within 30 days of the invoice date. Some contracts sweeten early payment: “2/10 Net 30” gives the client a 2% discount for paying within 10 days, otherwise the full amount is due by day 30.
Late Payment Interest
A well-drafted contract includes a late payment clause with a stated interest rate on overdue balances. In private agreements, 1% to 1.5% per month is common. For federal government contracts, the Prompt Payment Act requires agencies to pay within 30 days of receiving a proper invoice, and interest accrues automatically if they miss that deadline.3Acquisition.GOV. 52.232-25 Prompt Payment The federal prompt payment rate for the second half of 2025 is 4.625% per year.4Federal Register. Prompt Payment Interest Rate – Contract Disputes Act Many states have their own prompt payment statutes with different rates and deadlines.
Taxes You Pay on Every Dollar Received
For a contractor, “getting paid” means receiving the gross amount. Nothing is withheld, and the tax bill lands later.
Self-Employment Tax
Employees split payroll taxes with an employer. Contractors pay both halves. The self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.5Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax The Social Security portion applies to net self-employment income up to $184,500 in 2026; the Medicare portion has no cap.6Social Security Administration. Contribution and Benefit Base Above $200,000 (or $250,000 for married couples filing jointly), an additional 0.9% Medicare surtax applies to the excess.
One partial offset: half of the self-employment tax is deductible as an adjustment to gross income, which reduces income tax.7Internal Revenue Service. Schedule SE (Form 1040)
Quarterly Estimated Payments
Because no one is withholding, the IRS expects contractors to pay estimated taxes four times a year:
- January 1 to March 31 income: due April 15
- April 1 to May 31 income: due June 15
- June 1 to August 31 income: due September 15
- September 1 to December 31 income: due January 15 of the following year
These deadlines cover both federal income tax and self-employment tax.8Internal Revenue Service. Estimated Tax Missing a quarter or underpaying triggers a penalty calculated on the shortfall, the days it stayed unpaid, and the IRS’s published quarterly interest rate.9Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
1099-NEC at Year End
For the 2026 tax year, any client who pays a contractor $2,000 or more during the calendar year must report those payments to the IRS on Form 1099-NEC and provide a copy to the contractor by January 31 of the following year.10Internal Revenue Service. Form 1099-NEC and Independent Contractors Contractors owe tax on all income whether or not a 1099 arrives; the form is a reporting requirement on the payer’s side.
When a Client Won’t Pay
Mechanic’s Liens
When a contractor improves real property and the owner refuses to pay, the contractor can file a mechanic’s lien with the county recorder’s office where the property sits. The lien attaches to the title and blocks the owner from selling or refinancing without first settling the debt.
Filing deadlines vary sharply by state, from 60 days to eight months after work is completed, and missing the deadline forfeits the right to file. Most states also require a preliminary notice to the owner before or shortly after starting work; without that notice, a lien filed on time can still be invalid. Check the local rules well before a dispute arises, not after.
Prompt Payment Laws
Federal and state prompt payment statutes set deadlines for payment and impose automatic interest for missed ones. Federal agencies must pay within 30 days of receiving a proper invoice, with interest accruing automatically on late payments.11Bureau of the Fiscal Service. Prompt Payment Frequently Asked Questions Most states have parallel laws covering public and private construction, with interest rates and deadlines that vary by jurisdiction.
Small Claims Court
For smaller disputes, small claims court is a faster and cheaper path than full civil litigation. Recovery limits depend on the state, ranging from a few thousand dollars up to $25,000 in some jurisdictions. Filing fees are low, and the process is designed for parties to represent themselves.
Arbitration and Mediation
Many contractor agreements require disputes to go to arbitration or mediation instead of court. Mediation is a voluntary negotiation with a neutral third party and only produces a resolution if both sides agree. Arbitration is more formal: an arbitrator hears evidence and issues a binding decision. Arbitration clauses often limit discovery and shorten timelines, which usually makes the process faster and less expensive, but arbitration awards are extremely hard to appeal.
Getting Paid When the Job Ends Early
Not every project runs to completion. If a client cancels midway through, the right to payment turns on the contract’s termination clause and the reason for the cancellation.
A termination for convenience clause lets the client end the contract without the contractor being at fault. Under federal contracting rules, the contractor is entitled to payment for all completed and accepted work, reimbursement for costs already incurred on the terminated portion (including reasonable overhead), and a fair profit on the work performed.12Acquisition.GOV. 52.249-2 Termination for Convenience of the Government (Fixed-Price) Private contracts follow whatever the parties negotiated, so an agreement with no termination clause offers weaker protection.
Without a written contract, or where the contract never fixed a price, a contractor may still recover the reasonable value of services already provided under a theory called quantum meruit, meaning “the amount deserved.” The claim requires showing that services were provided, the client accepted them, and the client would be unjustly enriched by not paying. Quantum meruit does not apply where a valid contract already sets the price; it fills gaps, it does not override agreed terms.