Thinking about adding independent contractors to your team?
You aren’t alone. Independent contractor hiring has consistently outpaced employee hiring for decades, and with an all-time high of 70.4 million Americans working freelance in 2025, there’s never been a larger pool of contractors.
But here’s the thing…
Engaging contractors is way more than sending an email. There’s classification, paperwork, deadlines, and tax reporting software. Mess any of that up and you’re looking at hefty fines.
This article walks you through everything a growing business needs to know.
What you’ll discover:
- Why More Businesses Are Hiring Contractors
- Contractor vs Employee — The Critical Difference
- The Paperwork You Can’t Skip
- Common Mistakes That Cost Businesses Big
Why More Businesses Are Hiring Contractors
The shift towards contractor hiring is huge.
Why? Contractors allow businesses flexibility that full-time hires do not. There are no long term commitments when you hire a contractor. 71% of business leaders reported they are hiring contractors at least in part to save money. Need we say more.
But money isn’t the only reason…
Contractors have specialized skills you may only need for one project. Need to build a new website? Contract someone. Need assistance on a marketing campaign? Contract someone. There’s no reason to pay a full time salary for temporary work.
Some other big benefits include:
- Scale Quickly: Bring on contractors as needed
- No benefits costs — contractors handle their own insurance, retirement, and taxes
- Specialised expertise — you get experts on demand without long-term contracts
- Reduced overhead — no office space, equipment, or training costs
Before hiring any contractor, it’s critical that you have the proper documentation ready. The right tax reporting software will manage your contractor 1099 filing process so growing businesses can focus on running their operations rather than drowning in IRS paperwork. Improper filing can lead to missed deadlines and costly penalties.
Contractor vs Employee — The Critical Difference
This is where things get tricky.
What matters to the IRS is not what you call your workers… it’s how you treat them. Misclassifying an employee as a contractor is one of the biggest financial mistakes growing businesses make. Upwards of 10-30% of employers are guilty of misclassification (National Employment Law Project).
That’s a lot of businesses getting it wrong.
So how do you tell the difference? The IRS uses three main tests:
Behavioural Control
Do you instruct the worker as to when, where, and how the work is to be done? If yes, then they are likely to be considered employees. Contractors decide when and where they work, and how they will do the work.
Financial Control
Do contractors pay for tools, equipment and expenses? Usually they bring their own equipment and pay their own business expenses.
Relationship Type
Are you looking for an ongoing relationship or project based? Contract workers only complete assigned projects that have an expiration date. Employees are permanent additions to your staff.
Mess this up and there will be regret. We’re talking interest on back taxes, penalties, fines AND possible criminal prosecution.
FYI: If you’re ever unsure about how to classify a worker, file an IRS Form SS-8. They will make a determination for you. It’s not quick, but it may be worth it to avoid liability for thousands of dollars.
The Paperwork You Can’t Skip
Ok. Now on to the mundane (but necessary) stuff. If you have determined that you have a contractor, there are forms you NEED to complete.
W-9 Form
Every contractor you hire should provide you with a W-9 before you pay them. It provides you with their tax id number and contact information. No W-9, No Pay.
Get this signed and on file before any work begins.
1099-NEC Form
This is the big one.
When you pay a contractor $600 or more in one calendar year, you must fill out and send them a 1099-NEC form by January 31st of the following year. You also send a copy to the IRS.
You get fined for each form if you miss the deadline. Now let’s say you have 20 contractors. That can really pile up.
That is why good tax reporting software is invaluable. Attempting to recreate this in Excel will only end in tears.
Written Contract
Always (and we do mean ALWAYS) get a written contract with every contractor. It’s not just for legal reasons–it also provides proof of contractor status if the IRS ever inquires.
Your contract should cover:
- Scope of work and deliverables
- Payment terms and amounts
- Project timeline and deadlines
- Termination conditions
- Intellectual property ownership
- Statement confirming independent contractor status
Don’t do this. It may feel friendly to just go with a handshake agreement, but it leaves you wide open.
Common Mistakes That Cost Businesses Big
Even smart business owners make these mistakes…
Here are the biggest ones to avoid.
Treating Contractors Like Employees
This is the number one mistake.
You contract a worker. Then you begin dictating their hours, supplying equipment, and making them come to meetings. Now that contractor seems like an employee to the IRS.
The penalties are steep. If the misclassification is deemed inadvertent, then the employer pays $50 for each Form W-2 the employer did not file, plus 1.5% of the wages, plus 40% of the FICA taxes not withheld from the employee and 100% of the matching FICA taxes that the employer did not pay.
Missing 1099 Filing Deadlines
The IRS doesn’t care if you forgot.
Late filing fees can be anywhere from $60 to $310 per form based on how late you file. Times that by the number of contractors you have and now you have a hefty fine for an innocent mistake.
Set reminders. Use software. Don’t miss the deadline.
Paying Without Documentation
Some businesses pay contractors with cash or untracked transfers… thinking they’re saving on paperwork. Wrong. You need a paper trail for every payment.
You can’t properly file 1099s without good documentation. The IRS can second-guess your entire contractor program when auditing you.
Not Verifying TIN Numbers
The Taxpayer Identification Number you put on your W-9 must match the IRS record. If it does not, your 1099 filing will be rejected and penalties will apply.
Always verify TINs before you file.
Final Thoughts
Contractors are one of the best resources available to growing businesses that need to scale. Gain access to specialized skills and flexibility with less overhead. Avoid the commitment of a full-time hire.
However, there are rules. To remain compliant with the IRS:
- Classify workers correctly using the IRS three-factor test
- Get a signed W-9 before any payment goes out
- Issue 1099-NEC forms by January 31st each year
- Always have written contracts with every contractor
- Use proper tax reporting software to handle filings
Set up the right systems now.
