To hire an independent contractor the right way, confirm the work genuinely fits contractor status, put a written agreement around a defined result rather than hours, collect a Form W-9 before the first payment, pay against invoices, and file Form 1099-NEC by January 31 for anyone you paid $2,000 or more during the year.
Should this role be a contractor or an employee?
Start with classification, because every later step depends on it. The IRS looks at the whole relationship, and it groups the evidence into three categories: behavioral control (do you direct how and when the work is done?), financial control (who supplies the tools, carries the expenses, and can make or lose money on the job?), and the type of relationship (is there a written contract, benefits, or an open-ended expectation that the work continues?).
A practical test: if you are buying a finished result — a website, a bookkeeping cleanup, a remodel — and the person decides how to deliver it, uses their own equipment, and serves other clients, contractor status usually fits. If you set their schedule, train them in your methods, and they work only for you on core day-to-day tasks, you are describing an employee, whatever the paperwork says. The IRS also notes that a remote worker is still an employee if you control what is done and how. Our 1099 vs. W-2 comparison covers the cost and risk trade-offs in more depth, and states can apply their own, sometimes stricter, tests — ask a tax professional or employment attorney if a role is borderline.
How do you find and vet a good contractor?
Write a one-paragraph brief before you post anywhere: the outcome you need, the deadline, the budget range, and how you will judge the work. A clear brief attracts specialists and filters out generalists who would bill you while they learn.
- Source from referrals first. Ask your accountant, peers in your industry, and other vendors who they use; a referred contractor arrives with a track record.
- Check real samples. Ask for two or three examples of similar work and one client you can call.
- Verify licenses and insurance for trades and professional services. A contractor without general liability coverage can leave you holding the risk on your own premises.
- Start with a paid pilot. A small, fixed-price first task tells you more about quality, communication, and deadlines than any interview.
If you are still deciding whether the work should be done in-house at all, our guide to hiring vs. outsourcing walks through which tasks are worth keeping close.
What should an independent contractor agreement include?
A written agreement protects both sides and supports the classification. Describe the deliverables and acceptance criteria rather than a schedule; set the price as a fixed fee, a per-project rate, or milestone payments; and state payment terms, such as net 15 against an invoice. Spell out that the contractor supplies their own tools, sets their own hours, and is responsible for their own taxes and insurance.
Add the clauses owners most often forget: intellectual property (who owns the code, designs, or content once you have paid for it), confidentiality, termination notice on both sides, and how changes in scope get priced. A contract labeled “independent contractor” does not by itself make someone a contractor — the IRS weighs the actual working relationship — but a scope-based agreement that matches how the work really happens is strong supporting evidence.
What tax paperwork do you need when you hire a contractor?
Before the first payment, have the contractor complete Form W-9, which gives you their legal name, business entity type, and taxpayer identification number. Keep it on file; you will need it at year-end, and a missing or incorrect TIN can trigger backup withholding obligations.
After the year closes, file Form 1099-NEC to report nonemployee compensation. Under the IRS instructions, the reporting threshold rose to $2,000 for payments made in tax years beginning after 2025 (the old figure was $600), with inflation adjustments possible from 2027. Form 1099-NEC is due to the IRS by January 31, and the contractor needs their copy by the same date. You do not withhold income tax or pay Social Security and Medicare on contractor payments — the contractor covers their own 15.3% self-employment tax — which is exactly why misclassification draws scrutiny.
Keep invoices, the agreement, and proof of payment together for each contractor. Clean records make year-end filing fast and are among the documents a lender or funder may review when you apply for working capital.
How do you pay contractors without straining cash flow?
Contractor work is often paid in lumps — a deposit up front, milestones, then a final invoice — while the revenue it produces arrives later. Map those payments onto your cash flow forecast before you sign, and negotiate milestones that line up with when your own customers pay you.
When a project will clearly pay for itself but the timing does not work, short-term working capital can bridge the gap. The Broker Shop is a funding broker, not a lender: one application lets 50+ lenders compete, so you can compare offers side by side. It is free to apply, and checking your options won't affect your credit score. If you are moving from contractors to your first payroll hire instead, see business funding to hire employees.
Frequently Asked Questions
Do I need to file a 1099 for every independent contractor?
Generally you file Form 1099-NEC for each contractor you paid $2,000 or more for services in the course of your business during the year, for tax years beginning after 2025. Payments to most corporations are exempt, and payments made by credit card or through a payment app are reported by the processor instead. Ask a tax professional about your specific vendors.
Can I turn a contractor into an employee later?
Yes. If the role grows into ongoing, controlled, day-to-day work, converting the person to a W-2 employee is often the right move. You would start payroll withholding, employer payroll taxes, and any required insurance from the conversion date, and stop issuing 1099s for work done after it.
Sources: IRS — Independent contractor (self-employed) or employee? · IRS — Instructions for Forms 1099-MISC and 1099-NEC · IRS — About Form W-9
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See What I Qualify For →The bottom line: Classify first, write a scope-based agreement, collect a W-9 before you pay, track every invoice, and file Form 1099-NEC by January 31 for anyone paid $2,000 or more.