Many companies rely on outside contractors to stay flexible and control costs. There are often times when a business does not have the expertise for a certain task. While this strategy can be smart, it also brings a big responsibility: correctly classifying workers. Treating an employee as an independent contractor may save money in the short run, but it can backfire if the IRS disagrees. The risks include unexpected payroll taxes, penalties, audits, and even lawsuits.

Employee vs. Contractor — What’s the Difference?

The IRS doesn’t provide a single bright-line test, but the key factor is control. If your business directs how, when, and where work gets done, the worker likely counts as an employee. Employees typically use company tools, follow company procedures, and don’t bear financial risk for the job.

Independent contractors, by contrast, usually:

• Work with multiple clients
• Provide their own tools or equipment
• Set or negotiate their own payment terms
• Have the potential to profit — or take a loss — on each project

Employees trigger payroll tax withholding, FICA contributions, unemployment tax, and possibly benefits. Contractors don’t. Instead, you issue them Form 1099-NEC if you pay them $600 or more during the year. For the 2026 tax year, the $600 limit increases to $2,000.

Don’t Skip the W-9

Before sending a check to a contractor, always get a signed Form W-9. This form provides the legal name and taxpayer identification number you’ll need when preparing 1099s. Without it, you may be forced to withhold part of the payment as backup withholding. Or, spend time chasing the information when 1099 filing time rolls around.

Thinking About Form SS-8? Proceed Carefully

If you’re unsure about a worker’s status, you can ask the IRS for an official ruling by filing Form SS-8. But there’s a catch: the IRS tends to favor employee classification, and a request could lead to broader scrutiny of your business. For most companies, it’s better to build strong documentation, use well-crafted contracts, and apply consistent treatment to similar workers.

Protect Your Business

Worker classification is one of those areas where getting it right the first time saves enormous cost and stress later. Setting clear agreements, documenting your decisions, and collecting W-9s from every contractor are simple steps that go a long way toward staying compliant.