Reviewed by – CA Sugandha Bhatia
Contractors or gig workers are people who take on short-term, project or assignment based jobs instead of a long-term, permanent employment.
Businesses like Uber, Zomato and Dunzo employ thousands of gig workers. The benefits of working on a contractual basis are plenty – flexibility, additional income, full autonomy, etc.
Since gig workers are not included in a business’s regular payroll, making payments to gig workers becomes complicated. Here’s a guide to managing contractor payments, with tips to ensure timely and secure transactions.
Table of Contents
What is Contractor Payment?
Contractor payment refers to the payment made by a company or individual to external vendors hired on contract to perform certain services. This could be for construction work, product repairs, transportation, broadcasting and telecasting contracts, catering, etc.
The payment generally covers the contractors’ costs, project expenses and a predetermined profit margin. Timely payments as per contract keep them motivated while non-payment can lead to delays in work or even legal disputes.
Calculating and making payments to contractors can get complicated and time consuming. With solutions like RazorpayX Business Banking+, businesses can automatically calculate and disburse vendor and contractor payments. Features like automated payouts, API payouts and bulk payouts are designed to make payments as seamless as possible.
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Terms of Payment to Contractors in India
Most contracts specify payment terms which could be either:
Recurring payments
Payments can be made on a recurring basis, on a monthly, weekly or fortnightly basis. These terms of payment are set for recurring jobs based on time spent or work completed as per the agreement.
Milestone-based
Some businesses choose to set a milestone-based reward system, where payment is made upon completion of a pre-specified milestone.
Retainer + Project
In this term of payment to contractors, the combination of a fixed monthly fee plus payment is done per assignment.
Lump sum Payment
This approach covers the entire contracted value on satisfactory completion of the job.
So, these are a few of the terms followed while making the payment to contractors in India. Advanced payment can also be made for mobilization costs but full and final settlement should be paid within 60 days of successful project closure or submission. Now that you are clear about the terms, let’s discuss in detail the schedule of contractor payment in the next section.
TDS on Contractor Payments
As per Section 194C of the Income Tax Act, TDS must be deducted at source from payments made to contractors. The standard rate is 1% for individuals and 2% for those other than individuals, which is deducted and deposited to the government within the stipulated timeline:
Monthly payment
If the payment is done monthly, then make sure that it is cleared by the 7th of the following month.
Annual and final payment
If the payment schedule agreed is once a year, then it is essential to get it done by 30th April of the next financial year
Remember that a late fee is charged on delayed TDS deposits. E-filing returns ensures timely compliance and contractors can then claim TDS credit while filing their tax returns.
Exceptions to TDS on Payment to Contractor
TDS is not applicable if the payment to a contractor is ₹30,000 or less in a single payment, or ₹1,00,000 or less in total during the financial year.
FAQs
When is the penalty for a late deposit of TDS?
As per section 234E, a late fee of Rs. 200 per day is charged until the TDS is cleared after the due date. The maximum penalty cannot exceed the amount of TDS default.
Is there any exemption for individuals in filing TDS returns?
Yes, no tax needs to be deducted if total contractor payments in a financial year to an individual do not exceed Rs. 50 lakhs.
