• Heather Ferrer

Essential Steps for Hiring an Independent Contractor

If you are planning to hire an independent contractor for your business or organization, here are the basics of what you’ll need to legally do so.



An independent contractor is a person or business entity that is hired as a ‘self-employed’ worker that will undertake a specific job or jobs in return for an agreed-upon payment, rather than being employed in a permanent position. This type of worker is often desirable when there is specific and short-term help needed in an area for which your organization is not skilled, your organization is navigating a changing economic climate, flexible working hours with little oversight and specific control over projects are advantageous for the task at hand, and cost-saving is a factor in the required work. 

For many organizations and small businesses, hiring of independent contractors to meet needs is preferential to hiring of employees for several reasons: not having to pay federal and state payroll taxes, employee benefits or provide workers’ compensation; reduced liability and exposure to lawsuits surrounding labor law violations; and lastly, independent contractors use their own equipment and office space. However, it is important to ensure that you have taken the necessary steps to properly classify any new hire as an independent contractor because your classification is ultimately subject to review by multiple government agencies, including:

  • The IRS

  • The State’s Tax Department

  • The Department of Labor

  • State Labor Department Regulations

  • The State’s Workers’ Compensation Insurance Agency

  • The State Unemployment Compensation Insurance Agency Rules

If any of the above agencies determine that an employee has been misclassified as an independent contractor, there may be penalties, fines and back taxes imposed.

If you are planning to hire an independent contractor for your business or organization, here are the basics of what you’ll need to legally do so.

1) A written contract: 

Before you hire an independent contractor, be sure to create a written agreement and have the independent contractor (IC) sign it. Within the agreement there should be details enumerating contractor requirements and pay rates, as well as confidentiality and non-disclosure sections. With independent contractors, your organization or business can control only the resulting product or the quality of the work performed, but not the specifics or methods or work hours through which the work is completed. If you are hiring an IC to create intellectual property, you may want the IC to sign a non-compete agreement (or Assignment of Inventions) in order to clarify ownership of such creations.

2) Form W-9

This form is similar to the Form W-4 signed by employees, but it is not necessary to file with the IRS. However, be sure to keep it on file with your business or organization as it will contain the IC’s Tax Identification Number which is necessary for filing Form 1099-MISC. Also, as it helps determine the hire as an independent contractor, it will help prevent you from having to remit backup withholding.

3) Form 1099-MISC

This form is typically due by January 31 of the year in which the independent contractor was under contract with you. Any IC who has been paid $600 or more in the course of the year, will need a Form 1099-MISC. You will file this form with the state tax agency, as well as the IRS.

4) Invoices

Independent contractors are to be paid according to submitted invoices, not expense reports. Therefore, be sure that any ICs that are utilized are submitting invoices. Their mileage, equipment and other similar items form part of their business expenses, not yours. Maintain a file of the collected invoices and be sure that they coordinate with Form 1099-MISC

5) Certificate of Insurance:

In addition to the above paperwork, it is important that you have your independent contractors supply you proof of insurance. This can be obtained in the form of a certificate and the type of insurance they need can be a condition of them doing work for you. Types of insurance they may own include: 

  • Professional Liability Coverage – this insurance protects both the hiring entity and the IC in the event that something goes wrong (e.g. equipment breakage and injuries to the contractor or anyone else as a result of their work).

  • Commercial Auto Coverage – this insurance protects the hiring entity and the contractor. If driving is a part of the job the IC was hired to perform, and an accident occurs, this insurance will cover the damage, rather than the client. 

  • Disability Insurance – this insurance is particularly advisable for independent contractors. This type of insurance pays a predetermined weekly benefit to the worker in the event that he or she is unable to work due to a disability (whether on or off the job, so it is prudent for all independent contractors regardless of occupation).

  • Performance Bond – this type of bond ensures satisfactory work. If the work is unsatisfactory, the money is released to complete or repair the product. It is a coverage that protects the hiring party from incomplete work due to disability or receiving inferior work. Instead of the risk of having assets seized to pay for damages or being sued personally, this bond protects contractor and hiring entity alike by guaranteeing satisfactory and timely project completion. 

Any of these certificates should be secured from the contractor prior to the commencement of their work. 

6) In some states, you are required to report all new hiring of independent contractors:

  • Alabama

  • California

  • Connecticut

  • Iowa

  • Maine

  • Massachusetts

  • Minnesota

  • Nebraska

  • New Hampshire

  • New Jersey

  • Ohio

Be sure to check the specific requirements of your state.