Bringing on your first contractor is the moment your side hustle starts to look like a business. The work itself is the easy part. The paperwork is what most first-timers skip, and skipping it is how a $1,200 freelancer invoice turns into a penalty notice and a scramble in January. This guide walks the exact compliance loop: classify the worker, collect a W-9 before you pay, track what you paid, and file the 1099-NEC on time.
Education, not advice. The rules below are summarized from official IRS sources. They change, and they depend on your specific situation. Talk to a CPA before you file.
This is the decision that matters most, because misclassification is where the real liability lives. The IRS uses a common-law control test: a worker is your employee if you have the right to control what will be done and how it will be done. A worker is an independent contractor if you control the result of the work but not the means and methods of getting there. The IRS groups the evidence into behavioral control, financial control, and the type of relationship between the parties. The label on the agreement does not govern; the substance of the relationship does.
Quick gut check for a true contractor: they set their own hours, use their own tools, can work for other clients, are paid per project or invoice rather than a salary, and bear some profit-or-loss risk. If you find yourself dictating their daily schedule and supervising the "how," that's an employee relationship in disguise — and employees require payroll, withholding, and a W-2 instead.
Form W-9 is how the contractor gives you their correct legal name and Taxpayer Identification Number (TIN) — either a Social Security Number or an EIN — so you can later report what you paid them. Get it signed before you cut the first check, not in January when you're trying to file. A contractor who has already been paid has far less incentive to send you their tax details.
The W-9 also has the contractor certify they are not subject to backup withholding. If a contractor refuses to provide a TIN, or the IRS notifies you that the TIN is wrong, you are required to apply backup withholding — deducting 24 percent of the payment and remitting it to the IRS. That alone is reason to make a completed W-9 a hard prerequisite for onboarding.
Store the W-9 securely — it contains a SSN. Keep it; do not file it with the IRS. It stays in your records as the backup for the numbers you'll report.
Open a simple ledger (a spreadsheet is fine to start) with the contractor's name, the date and amount of each payment, and the payment method. You're tracking the calendar-year total because the reporting trigger is a dollar threshold.
For the 2025 tax year, you must file a 1099-NEC for each non-employee you paid at least 600 USD for services in the course of your trade or business. Note a coming change: under the One Big Beautiful Bill Act, the threshold rises to 2000 USD for payments made on or after January 1, 2026. Even if you're below the threshold, keeping the running total costs nothing and removes the guesswork.
One important carve-out: payments made through a third-party network or payment card (think PayPal "goods and services," Stripe, or a credit card) are generally reported by that processor on a 1099-K, so you typically do not also issue a 1099-NEC for those. The 1099-NEC is for direct payments — cash, check, ACH, Zelle, and similar.
Form 1099-NEC reports nonemployee compensation. You have two obligations and they share one deadline: furnish a copy to the contractor and file with the IRS. Per the instructions, Section 6071(c) requires Form 1099-NEC on or before January 31 for both the recipient copy and the IRS copy. Unlike some other information returns, there is no later electronic-filing date for the NEC — January 31 is the line.
How to file:
A contractor-compliance system you can run in an afternoon: a folder for signed W-9s, a one-tab spreadsheet of payments, a calendar reminder for January 15 (file before the 31st), and a relationship with a CPA who files the forms for you. Set that up once and every future hire just drops into it.
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Sources: IRS About Form W-9, About Form 1099-NEC, Instructions for Forms 1099-MISC and 1099-NEC (04/2025), Backup Withholding, and Employee (Common-Law Employee).