The 1099-only trap: why "cheap payroll" quietly bills you for employees you don't have

You pay three people. All of them are contractors. Every one gets a 1099-NEC in January. You have zero W-2 employees, zero payroll tax to withhold, zero unemployment filings.

So why is your payroll bill $45 a month?

Because most payroll products only sell one thing: a full W-2 payroll engine. Tax withholding, quarterly 941s, state unemployment, year-end W-2s. You are renting all of that machinery. You use none of it. The base fee shows up anyway.

The fix is a real contractor-only plan. Three of the four providers we carry sell one, and they price it three different ways: one charges no monthly base at all, one charges a single flat fee for your whole roster, and one charges a base plus a per-head fee. Which one wins flips at a specific headcount — a low one. Here's the math, with numbers.

What a contractor-only plan is — and isn't

A contractor-only plan pays 1099 workers and does the year-end 1099-NEC filing. That's it. No tax withholding. No W-2 machinery. Because there's no tax engine to run, the plan should cost a fraction of full payroll — and the cheapest of them drops the monthly base to zero and charges you only per contractor paid.

What it is:

• Direct deposit or check to contractors
• 1099-NEC generation and e-filing to the IRS
• Contractor self-onboarding (they enter their own W-9 and bank details)
• A record of what you paid, by person, by year

What it is not:

• Not tax withholding — contractors handle their own
• Not a W-2 payroll run
• Not workers' comp, not unemployment, not benefits admin
• Not a place to run "one W-2 employee on the side" — the moment you have one, you're on a different tier

You don't buy a forklift to move one box. Stop renting a tax engine you never turn on.

The 1099-NEC and year-end forms

If you pay a contractor $600 or more in a calendar year, you file a 1099-NEC. Copy to the contractor by January 31. Copy to the IRS by January 31. Miss it and the penalty runs from $60 to $340 per form depending on how late you are (or $680 per form for intentional failure to file).

A contractor-only plan handles this filing as part of the per-contractor fee. That's the part people forget to price. If you're paying contractors through your bank's bill-pay to save $6 a month, you're doing 1099s by hand in January. The plan pays for itself in the time you don't spend chasing W-9s.

What the four providers actually charge

Here's how the plans line up for a business paying contractors only. Figures are industry-typical and rounded — treat them as the shape of the pricing, not a live quote.

Read the base column against the per-person column, and notice that they aren't the same kind of number. Square charges per head with no base. QuickBooks charges a base and no head fee. Gusto charges both. Which shape is cheapest depends entirely on how many people you pay — and the switch happens sooner than you'd guess.

Square Payroll: no base, pay per payment

Square's contractor-only plan has no monthly base. Around $6 per contractor you actually pay in a given month. Pay nobody in February, pay nothing in February. For a low or uneven contractor count, this is the one that stops charging you for idle machinery — and it's the only plan on our shelf that does.

Disclosure: Keystoneyard earns a referral commission if you sign up with Square Payroll through us. It doesn't change the math above.

QuickBooks Contractor Payments: one flat fee, up to 20 people

This is the plan people miss, because it isn't the QuickBooks Payroll everyone talks about. Contractor Payments is sold on its own — no W-2 tier required — for a flat fee in the neighbourhood of $15–$25 a month, covering direct deposit and 1099-NEC filing for up to 20 contractors. There's no per-head charge inside that limit, so the eleventh contractor is free and the third one isn't cheap. It also posts what you pay into QuickBooks, which is worth real money if your books already live there.

Gusto: a real contractor plan, with a $35 base

Gusto does sell a dedicated contractor plan — but it carries a monthly base of about $35 on top of roughly $6 per contractor. That base is the thing to look at. For a pure 1099 shop it buys you filing machinery you aren't running, and it doesn't drop in a month you pay nobody. What it does buy is a straight path to full W-2 payroll and a sync into both QuickBooks and Xero, which matters if you're about to hire.

Paychex: no standalone contractor tier

Paychex doesn't sell a contractor-only plan at all. To pay 1099 workers you buy quoted, W-2-first payroll — full withholding, 941s, unemployment, none of which you use. If every worker is a contractor and no W-2 hire is imminent, this is the one to cross off first.

What the free trials actually cover

All four run promotions, and they aren't the same kind of offer. Check the live terms before you count on any of them — these move, and a promo month often disqualifies you from a discount you'd rather have had:

• Square Payroll: typically no open-ended free trial on the contractor plan — you're billed from the first payment run. Since the base is $0, a trial wouldn't save you much anyway.
• QuickBooks: usually a 30-day free trial or a discounted first few months, not both. On a flat-fee plan the discount is normally worth more than the trial.
• Gusto: commonly a free or discounted first month for new accounts rather than a standing trial. On a $35 base that's the promo that actually matters.
• Paychex: often advertises several months free for new payroll customers — but it's bundled into a quote, so the "free" months come with the W-2 plan you didn't need.

The math: 3 contractors vs 10 contractors

Assume you run a payment every month of the year, and take QuickBooks at the middle of its range — $20 flat. Paychex isn't in this comparison because it has no plan to compare.

3 contractors

• Square Payroll: $0 base + (3 × $6) = $18/month → $216/year
• QuickBooks Contractor Payments: $20/month flat → $240/year
• Gusto: $35 base + (3 × $6) = $53/month → $636/year

At three contractors, Square and QuickBooks are within a couple of dollars of each other and Gusto costs roughly three times either one. The $35 gap is the base — machinery you're renting and not switching on. Over a year that's about $420 more than Square for the same three payments.

10 contractors

• QuickBooks Contractor Payments: $20/month flat → $240/year
• Square Payroll: $0 base + (10 × $6) = $60/month → $720/year
• Gusto: $35 base + (10 × $6) = $95/month → $1,140/year

The order flips. QuickBooks charges the same $20 for ten contractors as it did for three, because the fee covers the roster, not the head. Square's per-head model is now three times the price. Gusto is still carrying its base on top of the same per-head fee Square charges, so it stays the most expensive of the three at every count.

Where the crossover lands

Set Square's per-head cost against QuickBooks' flat fee: $6 per contractor versus about $20 a month. They meet between the third and fourth contractor. Take QuickBooks at the low end of its range ($15) and the crossover moves down to between two and three; at the high end ($25) it moves up to four or five. So the rule is blunt: up to about three contractors, no-base wins; from about four to twenty, the flat fee wins — and it keeps winning all the way to the 20-contractor ceiling. Don't assume the plan with "$0 base" is cheaper at every size. Run your own count against both shapes.

Where each one actually wins

• Square Payroll — one to three contractors, or a count that swings month to month. Nothing to pay in a quiet month is worth more than a lower unit price.
• QuickBooks Contractor Payments — four to twenty contractors paid every month. Also the pick at almost any count if your books are already in QuickBooks, because the posting saves you the January scramble as well as the monthly fee.
• Gusto — you're hiring W-2 staff inside the next few months, or your books are in Xero. Its $35 base only makes sense as pre-payment on machinery you're about to need.
• Paychex — never, for a pure 1099 shop. Revisit it when you're at fifteen to twenty W-2 employees and HR depth starts to matter.

The moment you hire your first W-2 employee

The day you put one person on W-2, the contractor-only plan is done. You now need tax withholding, a 941, state unemployment, and a W-2 at year-end. That's a full payroll tier.

What changes:

1. You move up a tier. On Square that's the jump from the no-base contractor plan to full payroll — a base around $35 plus $6 a person. On Gusto the base you were already paying starts buying something. Either way the base is not a penalty; it's the tax machinery you now actually use.
2. A standalone contractor plan stops making sense. QuickBooks Contractor Payments doesn't run W-2 payroll, so your one employee forces you onto full QuickBooks Payroll — where the flat contractor fee is replaced by a W-2 base plus per-person for everybody. Run that number before you hire, not after.
3. Mixed shops change the answer. Two W-2 employees and eight contractors is a different spec than ten contractors. Count both. The provider that wins for pure-1099 is often not the one that wins for a mix.

Plan for this before it happens. If you know a W-2 hire is six months out, the smart move may be starting on the provider that prices your future mixed setup well, not the one that's $40 cheaper today.

The short version

• 1099-only with a handful of people? Square Payroll is the only plan here with no monthly base — about $6 per contractor you actually pay, nothing in a quiet month.
• Four to twenty contractors every month? QuickBooks Contractor Payments is a real standalone plan at a flat ~$15–$25 for the whole roster, and it posts into QuickBooks.
• Gusto's contractor plan is real but carries a ~$35 base. Worth it only if you're about to hire W-2 staff, or your books are in Xero.
• Paychex has no standalone contractor tier. You'd buy quoted W-2 payroll to send 1099s. Skip it for pure 1099.
• Read the base against the per-head. Per-head models win small, flat-fee models win from about four people up.
• Your first W-2 hire changes everything. Spec for the mix you'll have, not just the one you have today.