5 Mistakes to Avoid When Working with Independent Contractors

Working with independent contractors can offer businesses greater flexibility, specialized skills and cost savings. But to stay compliant, it's essential to understand how this type of work relationship differs from traditional employment. In the eyes of the IRS and the Department of Labor (DOL), contractors must meet specific criteria that set them apart from employees. Get it wrong, and your business could owe back taxes — and face other stiff penalties.

Why Worker Misunderstandings Can Lead to Employer Trouble

Even when employers make every effort to classify workers correctly, problems can still arise — especially when workers don't fully understand what employment as a contractor really means. Many expect the same protections and benefits as employees, such as unemployment insurance or workers' compensation. When they find out those don't apply, it can lead to confusion, frustration — and, in some cases, a formal complaint.

That's often all it takes to put your business under the microscope. One call from a contractor to a government agency, and you could face a full-scale audit into your classification practices.

The IRS even offers Form SS-8, which allows workers to request an official review of their employment status. And while your business may have acted in good faith, a single misclassified contractor can result in costly back taxes, penalties and ongoing scrutiny.

Don't Make These Errors with Independent Contractors

To reduce your risk of misclassification, steer clear of these common pitfalls:

1. Assigning Employees to Help the Contractor

Even if a contractor is working on a major project, it's not appropriate to assign your own staff to assist. Contractors are expected to determine their own resources. Getting involved in how they complete the work can blur the line between contractor and employee.

2. Providing a Dedicated Workspace

Offering a spare office or regular desk space to a contractor may seem helpful, but it's a potential red flag. Contractors should work independently and typically offsite. Giving them an established presence in your workplace can suggest an employment relationship.

3. Offering Paid Time Off or Benefits

Even if you're paying contractors hourly — which is less ideal than per-project — the real issue arises if you extend benefits like PTO or holiday pay. These perks are typically reserved for employees and may be viewed as evidence of an employer-employee relationship.

4. Engaging Contractors Long-Term

Employment as a contractor should be project-based and time-limited. Long-term or ongoing arrangements start to resemble full-time employment. Avoid open-ended work and clearly define the scope and duration of the engagement.

5. Having Contractors Handle Core Business Functions

Independent contractors should support, not run, your core operations. For example, hiring someone to design a website for your construction business is appropriate. But if your business builds websites, and you rely on contractors as your primary designers, that could create compliance issues.

Important: No single factor determines employment classification. Agencies look at the full picture — and the fewer red flags you have, the better.

Protect Your Business from Misclassification Issues

To safely and confidently engage in working with independent contractors, take the following steps:

• Use a written agreement. Clearly label it as an Independent Contractor Agreement and outline payment terms, work scope and a defined end date or deliverable.
• Collect a completed Form W-9 before any work begins.
• File Form 1099-NEC at year-end to report non-employee compensation for contractors who meet IRS guidelines.

When it's time to file your 1099-NEC forms, look no further than efile4Biz. It's the fastest, easiest way to get copies of the forms to your contractors and electronically file with the IRS.

Updated: 07/21/2025