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Contractor invoice for Engineering

hey it's scott owen at cruise consulting and today i'm answering the question how should my startup pay its engineering contractors this is a question we get all the time and you know it's kind of nice to to be there for you and answer these questions so here we go now before we get into it there's there really is a pretty big difference between domestic like i'm assuming you're a united states-based startup um and international contractors so domestic would be contractors who are in the u.s who are building your system your tools your company um and versus people who are outside the u.s and the reason why i differentiate that is because there's different kind of tax applications for different people um so let's go with domestic first so my typical recommendation is to use a bill pay system like build.com ramp racks those are kind of the big three for us and and then have the contractor invoice you every month very or every two weeks however often they want to invoice you and those tools actually do a very good job of setting up the bill pay connecting automatically or electronically to their bank account so it's like an electronic payment no check involved and they also save the invoices into quickbooks which makes life a lot easier for accountant if you're doing accrual based accounting which is consistent with gaap like we do then you actually need to see the invoice because you need to see if this engineering contractor is getting paid like for three months of work or two weeks of work or whatever it is because you have to accrue across that time period and spread the expense out if you're doing gap-based accounting so so that's why we really care also the irs requires a company like your your startup to hold invoices and save them for three years um and so you want to be complying with the irs you want to make your account happy and there's one other reason why i really strongly encourage invoicing is for lack to put it delicately sometimes contractors um are a little more disorganized like you're you're a startup you can hire an accountant cpa like cruz right we're gonna keep you organized keep track of all this stuff that contractor often is just like a one-woman one-man shop right and so they're not like sophisticated accountants and so you're not going to believe this but sometimes they will double bill you or they don't even know that they got paid and they're bugging you to get paid for something you already paid them for whatever it is to be able to send them a screenshot of your bill.com or ramp or brex and say like hey i already paid you here's the invoice money left my account that will say that takes about three minutes to do five minutes maybe um and it will save you an hour going back and forth with this person on the phone or arguing over which invoice you paid or all this kind of stuff right so i'm trying to save you from having to interact with the disorganized person on the other side the invoicing process makes them organized it makes your life easier way better to demand that they send you an invoice it's just it's just the right thing to do right so that's how it works for domestic engineering contractors that's how you should pay them now there's another option for international uh contractors which um i call it kind of the shorthand is called like global peo and deal remote papaya some of those companies are really the pioneers here and they have a software tool that kind of like it's it's it's like how ramp bill.com and rex do it but they basically have like a vendor name and they keep track of some of the documents they sign and they set up payments with the international contractors um and so those are good systems for international you can still use like bill.com can pay internationally at the time of this taping in january 2022 i'm not sure if brexit and ramp can handle international contractor payments yet so i'll put a bow on that one for a second uh but deal and remote and papaya all handle that very well so those are systems that i would use for my international contractors again for me like i do cruises books and i just use build.com for everything because it's it's easy and i like having it in one place instead of having two different systems to work with but you can pick the way you do it and if you're running employees plus contractors internationally then deal or remote mix and buy and make a ton of sense note that when you do pay contractors in the united states and they made over 600 for the year you do have to file a 1099 with the irs and send that to the contractor this is top of mind for me because we're in january and the deadline for that's january 31st and so we're doing tens of thousands of 1099s for our clients it's it's actually kind of overwhelming but you will need to do that for your startup your friendly cpa cruise consulting will handle that for you uh if you are working with someone like us um also note if you have an international contractor that you paid you should file what's called a w8 w8ben it's a tax form that goes to the irs it's an informational tax form so you're not like technically obligated to do it but it's a best practice because what you're basically telling the irs is like hey this is an international person we paid them x number of dollars this is just for your records irs and one of the reasons i like to do this um a the irs recommends it so you always do what the irs says and b it covers you because maybe that contractor's a little slippery and they told you they were international but they actually are based in the united states or maybe they're moving around or maybe they have um tax nexus in the united states somehow that even they don't realize it well this will cover you because you actually filed the w-8 bend with the irs you showed a good faith effort to comply and so if something comes up down the line you still may have some penalties or things like that if the contractor was like fibbing or saying incorrect but you can fall back on like the the good graces the irs and show that you actually filed that w8 then um i call it wave ben is the name of the tax one and uh and that should help you quite a bit in that process so kind of a minor thing but something you should do your cpa firm will do that for you so i hope that helps there's a lot of different systems for making these type of payments remember whatever it is document it collect invoices you want to sync the quickbooks you want to make your accountant's life easier and you want to bring a little bit of structure to your con engineering contractor relationship and that will only help you make your life a lot easier give any other questions on this hit us up at cruiseconsulting.com thanks so much bye