How to Hire an Independent Contractor: W-9, Agreement, and 1099-NEC

To hire an independent contractor, confirm the worker actually qualifies as one under IRS and Department of Labor tests, collect a signed Form W-9, sign a written agreement covering scope and payment, verify the contractor’s Taxpayer Identification Number before paying, and file Form 1099-NEC after year end if you paid the contractor $2,000 or more during 2026.¹ That threshold, raised from $600 by the One Big Beautiful Bill Act signed in July 2025, is the biggest change hirers will encounter this year.

Confirm the Worker Qualifies as a Contractor

Classification is the step that determines whether the rest of this process is even the right process. Get it wrong and you owe back employment taxes, penalties, and potentially unpaid overtime.

The IRS applies a common-law test built around three types of control:²

Behavioral control. Do you direct how the work gets done, not just what the result should be? Setting specific hours, requiring training on your methods, or supervising day-to-day tasks points toward employment.
Financial control. Does the worker invest in their own tools, cover their own expenses, and stand to earn a profit or take a loss? Someone using their own equipment, marketing to other clients, and invoicing for completed work looks like a contractor.
Relationship of the parties. Is the engagement project-based or open-ended? Is the work a core part of your business? Written contracts and the absence of employee benefits support contractor status, but no single factor is decisive.³

If the call is genuinely close, either you or the worker can file Form SS-8 and ask the IRS for an official determination.⁴

The Department of Labor uses a separate six-factor “economic reality” test under the Fair Labor Standards Act, in effect since March 2024. It weighs profit-and-loss opportunity, the worker’s and business’s investments, permanence of the relationship, control, how integral the work is to your business, and whether the worker’s skill reflects independent business judgment. The central question is whether the worker is economically dependent on your business or in business for themselves.⁵ A worker can pass the IRS test and fail the DOL one, so both matter.

Many states apply a stricter ABC test that presumes employment unless the business proves the worker is free from control, performs work outside the business’s usual operations, and has an independently established trade in the same field. Check your state labor agency’s guidance alongside the federal tests.

Collect a W-9 and Supporting Documents

Before any work starts, have the contractor complete IRS Form W-9. They fill in their legal name on Line 1, any business or DBA name on Line 2, their federal tax classification on Line 3a, and their Taxpayer Identification Number in Part I. Their signature certifies under penalty of perjury that the TIN is correct and that they are not subject to backup withholding.⁶⁷

Ask for proof of general liability or professional liability insurance and copies of any occupational licenses the work requires. These support the position that the contractor operates as an independent business carrying its own risk.

One thing you do not do: Form I-9 employment eligibility verification and E-Verify do not apply to independent contractors. Those requirements cover employer-employee relationships only.⁸

Put a Written Agreement in Place

A written contract protects both sides and reinforces the classification. At minimum, it should cover:

Scope and deadlines. Describe the specific deliverables, any milestones, and the final completion date. Vague descriptions invite scope disputes and make the arrangement look more like ongoing employment.

Payment terms. State whether the fee is flat, hourly, or milestone-based, and specify the invoicing and payment schedule. You will not withhold income tax, Social Security, or Medicare from these payments; the contractor handles their own taxes, including quarterly estimated payments.²

Intellectual property. This is where many hirers get tripped up. Under the Copyright Act, a commissioned work only qualifies as “work made for hire” if it falls into one of nine specific categories (a contribution to a collective work, a translation, a compilation, an instructional text, part of an audiovisual work, and a few others) and both parties sign an agreement designating it as such.⁹ Most custom software, standalone graphic designs, and marketing copy fall outside those categories, so you also need a separate written assignment of copyright to actually own the work.¹⁰

Termination. Spell out when either party can end the engagement early, any notice period, and how partial work and payment are handled.

Indemnification and status. Require the contractor to cover costs from their own negligence, and state explicitly that the worker is an independent contractor and not an employee, partner, or agent. That clause reinforces classification but will not override the actual working relationship if a regulator challenges it.

Sign, Verify the TIN, and Start Paying

Electronic signature is legally valid. Federal law prevents a contract from being denied legal effect solely because it was signed electronically.¹¹ Both sides should get an executed copy immediately.

Before you send the first payment, run the contractor’s name and TIN through the IRS’s free TIN Matching program to confirm the two match IRS records.¹² If the name and number don’t match, or if the contractor never provides a TIN, you are required to withhold 24 percent of each payment as backup withholding and remit it to the IRS.¹³

File Form 1099-NEC After Year End

For 2026 and later tax years, you must file Form 1099-NEC for each contractor you paid $2,000 or more during the calendar year. The One Big Beautiful Bill Act (P.L. 119-21) raised the threshold from $600 in July 2025, and the $2,000 figure will be adjusted for inflation starting in 2027.¹ Payments below the threshold remain taxable income for the contractor; you’re just no longer required to report them on a 1099.¹⁴

The 1099-NEC must reach the contractor and the IRS by January 31 of the year following payment. That deadline applies to paper and electronic filings alike.¹⁵

Some payments to contractors go on Form 1099-MISC instead: rent, royalties, prizes and awards, medical and health care payments, and certain attorney gross proceeds. If you pay a contractor for services and separately pay them rent, the service payments go on the 1099-NEC and the rent goes on the 1099-MISC.¹⁵

Late-filing penalties for returns due in 2026 climb with time:

Up to 30 days late: $60 per form
31 days late through August 1: $130 per form
After August 1 or never filed: $340 per form
Intentional disregard: $680 per form¹⁶

These apply per form, so a business with several contractors can accumulate liability fast.

If the Contractor Is Not a U.S. Person

Different rules apply. Collect Form W-8BEN instead of a W-9; it certifies foreign status and allows the contractor to claim any tax treaty benefits.¹⁷ If the work generates U.S.-source income, you generally must withhold 30 percent (or the lower treaty rate) and report the payment on Form 1042-S rather than a 1099-NEC. Form 1042-S is required even if a treaty eliminates the withholding entirely.¹⁸ Foreign contractor payments are considerably more complex than domestic engagements, and most businesses benefit from consulting a tax professional.

Keep the Records

The IRS requires records supporting your tax returns for at least three years from the date you file.¹⁹ If a contractor is later reclassified as an employee, employment tax records must be kept for at least four years after the tax becomes due or is paid.²⁰ The safer practice is to retain contracts, W-9s, 1099 copies, insurance certificates, and payment records for at least four years. If you underreport gross income by more than 25 percent, the retention period stretches to six.

What Misclassification Costs

When the IRS reclassifies a contractor as an employee, you owe the employment taxes you should have withheld. If you filed 1099s for the worker, federal law reduces your liability to 1.5 percent of wages for income tax withholding and 20 percent of the employee’s share of Social Security and Medicare taxes, plus the full employer share.²¹ If you didn’t file 1099s, those reduced rates double. Interest and additional penalties can push the total higher.

The Department of Labor can separately pursue minimum wage and overtime claims under the FLSA. Workers denied overtime because they were labeled as contractors may be owed back pay for hours worked beyond 40 per week.²²

If you discover you’ve been misclassifying workers, the IRS’s Voluntary Classification Settlement Program lets you reclassify them prospectively for 10 percent of the employment tax liability on the most recent year, with no interest or penalties on that amount and no employment tax audit for prior years. Eligibility requires consistent past treatment as contractors, all required 1099s filed for the past three years, and no current IRS or DOL audit of those workers.²³

1
Internal Revenue Service. 2026 Publication 15
2
Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
3
Internal Revenue Service. Independent Contractor Defined
4
Internal Revenue Service. About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
5
U.S. Department of Labor. Frequently Asked Questions – Final Rule: Employee or Independent Contractor Classification Under the FLSA
6
Internal Revenue Service. Form W-9 (Rev. March 2024) Request for Taxpayer Identification Number and Certification
7
Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification
8
E-Verify. Subcontractors, Independent Contractors, and Affiliates
9
Office of the Law Revision Counsel. 17 USC 101 – Definitions
10
Office of the Law Revision Counsel. 17 USC 201 – Ownership of Copyright
11
Office of the Law Revision Counsel. 15 USC Ch. 96 – Electronic Signatures in Global and National Commerce
12
Internal Revenue Service. Taxpayer Identification Number (TIN) Matching
13
Internal Revenue Service. Backup Withholding
14
Internal Revenue Service. Form 1099 NEC and Independent Contractors
15
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
16
Internal Revenue Service. Information Return Penalties
17
Internal Revenue Service. About Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)
18
Internal Revenue Service. Instructions for Form 1042-S
19
Internal Revenue Service. How Long Should I Keep Records?
20
Internal Revenue Service. Employment Tax Recordkeeping
21
Office of the Law Revision Counsel. 26 USC 3509 – Determination of Employers Liability for Certain Employment Taxes
22
U.S. Department of Labor. Misclassification of Employees as Independent Contractors Under the Fair Labor Standards Act
23
Internal Revenue Service. Voluntary Classification Settlement Program