For smaller jobs, where somebody shows up and completes the project in one visit, the question of when to pay is simple; when they are done. Somebody shows up, presents pricing for approval, and then completes the work. You should then inspect the work and pay for it.
Most contractors will request a downpayment to add you to their schedule and also to ensure the project continues to move forward after the contractor has purchased materials. Reputable contractors are happy to negotiate a downpayment, including the amount and payment terms.
You should pay for the documented work that is completed. A competent, established contractor does not need to get a payment for work that isn't yet done.
Legal Considerations and Regulations
For example, in some states, like California, the law stipulates that for home improvement projects exceeding $500, a contractor cannot ask for a deposit of more than 10% of the total cost or $1,000, whichever is less.
Never pay in full until the job is done. Some large jobs require a retainer fee of some amount to start the work (but only a small payment-basically you're showing that you have the money to keep the big job going through multiple phases and subs).
How quickly you should pay. Tradespeople will expect the final payment on the job's completion. It is common and reasonable to pay within seven days of completion but once you're happy, the project has been signed off and it complies with Building Regulations, it's best to pay as soon as possible.
However, you must do so legally, and you must be prepared to prove that your cash payments to contractors were legal in the event that your company is audited by the California Employment Development Department (EDD) or the Internal Revenue Service (IRS).
The exact deposit amount contractors ask for upfront varies and is especially dependent on the size of the project. For relatively small jobs, like a $16,000 bathroom remodel, contractors may ask for a 50% deposit. For large jobs, like a $100,000 full-home renovation, a 10%–20% deposit is more typical.
The best way to be certain is to inspect the invoice, ask questions, and do not settle for vague explanations. If you're suspicious about being overcharged, talk to a lawyer about getting an expert to review your invoice.
Here's a quick breakdown: Builder Deposit: Typically paid upfront before construction begins, around 10% of the total cost. Interest-Only Payments: During construction, if you have a construction-only loan. Full Mortgage Payments: Begin once the home is completed and you close on your mortgage.
A few states require that down payments be no more than one-third of the total price, while other states do not have any such restrictions. In California, however, the state has strict guidelines for down payments to building contractors: the legal limit is either 10% of the total cost or $1,000, whichever is less.
If the handyman is an employee, tipping him/her would be a great idea. But remember that this is not a necessity and is not expected.
Net 10, Net 30, or Net 60 (found on the invoice) simply indicates that the contractor's payment is due 10, 30, or 60 days from the date of the invoice, respectively. Risks: This is the most common payment term for independent contractors, and there are few risks associated with it.
Paying a contractor upfront is never a good idea. With full payment in hand, what leverage do you have if the contractors don't do a good job or even start the job? You'll come across contractors that ask for payment upfront, but they are usually scammers.
Contractors typically accept cash, check, debit, and credit card payments. You can also use a home improvement or home equity loan to pay contractors. Contractors will specify payment schedules in their contracts.
Some people prefer paying tradesmen by bank transfer. You can offer electronic payment by direct debit, standing order and BACS payments. These methods might be more practical on high-value jobs or where you want part payment.
Few, if any, contractors will not require a deposit. That's because the initial deposit helps contractors purchase materials, pay their workers, and provide project oversight. It's also a goodwill gesture on the part of the business, indicating they have already invested in the project.
There are many ways small business owners can pay independent contractors, including checks, wire transfers, credit cards, direct deposit, ACH bank payments, online payment methods, accounting software, and cash.
Make sure to be reasonable and tactful. Explain nicely and firmly that you are spending a lot of money under the original budget and need to be frugal with change orders and extra costs. Let the contractor know you are willing to compromise on cost, but the price needs to be reasonable to you based on your research.
Some contractors may also request payments in cash to avoid their tax liabilities, which means they will likely avoid providing appropriate tax documentation.
Cash payments of $600 or more to an independent contractor should be reported on a 1099 form, regardless of the payment method. Neglecting to issue the appropriate tax forms for cash payments can lead to tax implications and penalties.