Hiring an Independent Contractor: What You Must Have Before the First Payment

Why documentation matters before the first payment

When a state Department of Workforce Development (DWD) auditor or IRS examiner reviews your contractor relationships, they are not asking whether you intended to treat someone as an independent contractor. They are asking whether you can prove it — with documentation that was created before, during, and after the engagement.

Documentation collected after an audit notice is treated with skepticism. Documentation collected as a standard part of your contractor onboarding process holds up. The difference is process, not intent.

Pre-engagement checklist

Collect all of the following before you authorize the first payment:

• Signed W-9. The W-9 gives you the contractor's legal name, tax classification (individual, LLC, corporation, etc.), address, and Taxpayer Identification Number. You need this to prepare a 1099-NEC if payments cross $600 during the year. Collect it before — not after — the first payment.
• Written contractor agreement. A written agreement establishes the scope of work, deliverables, payment terms, and the independent contractor relationship in plain terms. It should state that the contractor controls how the work is performed and that no employment relationship is created. Without a signed agreement, you are relying entirely on verbal understanding to defend a classification decision.
• Business identity documentation. If the contractor operates as a business — LLC, sole proprietorship with an EIN, or registered entity — collect evidence of that. A copy of their business license, their EIN confirmation letter, or a Secretary of State filing shows that they have an independently established business, not just a relationship with you.
• Certificate of Insurance (if applicable). For contractors in construction, skilled trades, or any field where liability matters, a current Certificate of Insurance (COI) naming your business provides both protection and documentation of independence. Track expiration dates.

How to pay contractors correctly

Pay contractors against invoices or agreed milestones — not on a regular salary schedule that mirrors how you pay employees. Steady, predictable paychecks with no corresponding invoices can be interpreted as an employment-like payment pattern by auditors, even if the worker has an LLC and a W-9 on file.

Key rules for contractor payments:

• Do not run contractor payments through payroll
• Require an invoice for each payment (or group of payments on a schedule)
• Track total payments per contractor per calendar year for 1099 purposes
• Record the description of services on each payment — not just the amount

Records to retain — and for how long

The IRS generally recommends retaining W-9s and related tax records for at least 4 years after the due date of the return. For audit purposes, retain the full contractor file for the duration of the engagement plus at least 4 years.

For each contractor relationship, your file should contain:

• Signed contractor agreement (with any amendments)
• W-9 (update when the contractor's information changes)
• Invoices and proof of payment for every payment made
• Independence proofs: business license, EIN documentation, COI, website screenshots, evidence of other clients
• Filed 1099-NEC copies if applicable

Signs the relationship is drifting toward employment

No single factor determines whether a worker is an employee or a contractor, but certain patterns raise risk. Watch for these:

• Contractor works exclusively for you, full-time, for an extended period
• You control the hours worked, not just the deliverable
• You provide the tools, equipment, or workspace
• The contractor is doing the same work as your employees
• No written agreement governs the relationship

These don't automatically make someone an employee. But they signal that your documentation needs to be stronger — and that you should be proactively documenting evidence of independence to offset these characteristics.