How to Hire an Independent Contractor

Classify the Worker Correctly First

Before paying anyone as a contractor, confirm the role actually qualifies as one. The IRS evaluates three categories: behavioral control (does the business control or have the right to control what the worker does and how they do the job), financial control (how the worker is paid, whether expenses are reimbursed, and who provides tools or equipment), and the type of relationship (written contracts, benefits like insurance or vacation, how long the relationship is expected to last, and whether the work is central to the business). The IRS is explicit that there's no "magic" number of factors that decides the outcome; the full relationship has to be weighed. Getting this wrong by treating what is really an employee as a contractor is called misclassification, and it can lead to back taxes, penalties, and owed benefits.

The IRS Test Is Not the Only Test

A worker correctly classified as a contractor under the IRS's rules is not automatically a contractor for every purpose. The Department of Labor applies its own "economic reality" standard under the Fair Labor Standards Act, under a final rule effective March 11, 2024, and some states apply yet another test for wage, workers' compensation, or unemployment insurance purposes. If you're unsure, especially for an ongoing or significant working relationship, talk to an attorney or tax professional rather than relying on a single federal test to cover every legal angle.

Collect a Completed Form W-9

Before the contractor starts work, or at least before you make your first payment, have them complete and return IRS Form W-9, which provides their legal name and taxpayer identification number (a Social Security number or Employer Identification Number). You'll need this information to correctly prepare any Form 1099-NEC at year-end, and collecting it upfront avoids chasing it down after the contractor has already been paid.

Put the Terms in Writing

An independent contractor agreement doesn't have to be complicated, but it should spell out the scope of work, payment amount and schedule, who owns the final work product, and that the worker is responsible for their own taxes and benefits. A written agreement also supports your classification decision if it's ever questioned, since it documents the independent nature of the relationship from the start.

Pay the Contractor and Track What You Owe

Unlike an employee, you don't withhold income or payroll taxes from an independent contractor's pay; the contractor is responsible for their own self-employment tax. Track total payments to each contractor across the year so you know, by year-end, who crosses the reporting threshold.

File Form 1099-NEC When Required

For tax years beginning after 2025, the IRS raised the threshold for reporting nonemployee compensation on Form 1099-NEC from $600 to $2,000 per contractor per year, with the figure set to adjust for inflation starting in calendar year 2027. If you pay a contractor $2,000 or more in a year, file Form 1099-NEC with the IRS and provide a copy to the contractor by the deadline the IRS sets for that filing season. Keep the Form W-9 you collected on file as your supporting record for the information you reported.

Revisit the Relationship If It Changes

If a contractor relationship evolves, you start setting their schedule, providing their equipment, or the work becomes an ongoing, central part of your operations, revisit the classification rather than assuming the original designation still applies. A relationship that looks more like employment over time carries the same misclassification risk as one that was mischaracterized from the start.

Misclassification Risk Grows With the Relationship's Length and Control

A short, narrowly scoped project is generally easier to classify confidently as contractor work than a long-running relationship where you increasingly direct how and when the work gets done. Reassess classification periodically for any contractor relationship that continues for many months or years.

State Rules Can Be Stricter Than Federal Rules

Some states apply a stricter test for classification purposes, particularly for wage and unemployment insurance law, than the IRS's common law factors. Confirm your state's specific standard in addition to the federal rules, especially if you hire contractors regularly.

Form SS-8 Is Available if You're Genuinely Unsure

If you want an official determination rather than making the call yourself, the IRS allows either the business or the worker to file Form SS-8 requesting a classification ruling, though the IRS notes this process can take at least six months, so it's not a quick answer for an urgent hiring decision.

This Is Not Legal or Tax Advice

Worker classification depends heavily on the specific facts of each relationship, and the consequences of getting it wrong can include back taxes, penalties, and owed benefits. Talk to a tax professional or employment attorney before classifying a worker you're uncertain about.

Keep Contractor Records Separate From Employee Records

Keep each contractor's signed agreement, Form W-9, and payment history in its own record, distinct from how you track employee payroll. Clean, separate recordkeeping makes it easier to respond if your classification decisions are ever questioned by the IRS or a state agency.