Insights
How to Hire a Contractor in the USA: Classification, 1099 and State Rules (2026)
Insights · By Chen ChunJie · Updated 6 November 2026
You can hire and pay an independent contractor in the USA without a US company, as long as the person is genuinely independent. The IRS looks at who controls the work, and several states presume employment unless an ABC test is met, so how the work runs matters more than the contract.
Last reviewed in November 2026 against IRS and Department of Labor guidance and state rules. General information, not legal or tax advice.
Contractor or employee: how the US decides
The IRS weighs behavioural control, financial control and the type of relationship. Under the Fair Labor Standards Act, the Department of Labor looks at economic reality; it stopped enforcing its 2024 rule in 2025 and proposed a replacement in February 2026 that focuses on control and the chance of profit or loss. Either party can ask the IRS for a ruling on Form SS-8.
| Points to a contractor | Points to an employee |
|---|---|
| Own tools and own schedule | Hours and methods set by the client |
| Several clients and an own business | Works only for one client |
| Paid by project or invoice | Paid for time on a payroll schedule |
| Decides how the work is done | Trained and supervised like staff |
| Bears the chance of profit or loss | No business risk |
State ABC tests
Some states are stricter than federal law. Under an ABC test, the person is an employee unless all three parts are met:
- A: Free from control. The person is free from the company’s control and direction in doing the work.
- B: Outside the usual business. The work is outside the usual course of the company’s business.
- C: Independent business. The person is customarily engaged in an independently established trade or business.
California applies the test under Labor Code 2775, with exemptions for some professional services and business-to-business arrangements (California DIR). Massachusetts applies the strictest version, and New Jersey’s rule took effect on 1 October 2026.
Tax forms and withholding
| Item | What applies |
|---|---|
| Form W-9 | Collected before the first payment |
| Form 1099-NEC | Filed by 31 January for payments of US$2,000 or more from 2026, up from US$600 |
| Backup withholding | 24% if there is no valid taxpayer number |
| State filing | Many states require their own 1099 filing |
| Contractor’s own tax | Self-employment tax of 15.3% plus income tax, paid quarterly |
| Foreign individuals in the US | 30% withholding on US-source pay unless a treaty exemption is claimed on Form 8233 |
Work done entirely outside the US by a foreign contractor is generally foreign-source income, with no US withholding; keep a Form W-8BEN on file. Source: IRS Publication 515.
What happens if a contractor is reclassified
- Back taxes. Employer FICA and income tax withholding, at reduced rates under section 3509 where it applies, plus penalties and interest.
- Unemployment insurance. FUTA and state contributions.
- Wage claims. Minimum wage and overtime back pay, plus equal liquidated damages.
- State penalties. In California, US$5,000 to US$25,000 per violation for willful misclassification.
- Benefits. Claims to plan eligibility.
- Section 530 relief. Protection from federal employment tax where there was a reasonable basis and 1099s were filed. It does not cover state law or the FLSA.
Unsure which side of the line a role falls on? We review this before work starts. See On-Demand Talent in the US.
How to hire a contractor in the US, step by step
- Define the work. Write the scope, deliverables, deadlines and budget before you look for anyone.
- Check the signals. Apply the federal test and the test of the state where the person works.
- Find and vet. Check experience, work samples and availability.
- Collect the tax form. A W-9 from US persons, or a W-8BEN from people working abroad. Check work authorisation for foreign nationals working in the US.
- Sign a written agreement. Do this before any work starts, including the IP assignment.
- Pay against invoices. Keep the contract, invoices and accepted work together.
- File the 1099-NEC. By 31 January for each contractor paid US$2,000 or more.
- Review regularly. Roles change, so re-test long-running engagements.
What the contract should cover
- Scope, deliverables, deadlines and acceptance
- Fees, invoicing and payment terms
- The contractor’s own tools, schedule and freedom to work for other clients
- Confidentiality and data protection
- A written IP assignment; in California, avoid a work-made-for-hire clause with an individual
- Termination and handover
Foreign nationals
A foreign national needs US work authorisation to work as a contractor inside the US; a visitor visa does not allow it. Contractors working from abroad for a US company do not need US work authorisation. For a foreign specialist working for you in the US, see Expat Employment in the US.
FAQ: contractors in the USA
Can a foreign company hire a contractor in the USA?
Yes, if the person is genuinely independent. Without your own US company, see On-Demand Talent in the US.
What is the 1099-NEC threshold in 2026?
US$2,000 for payments made from 2026. The form is due by 31 January.
Which states use the ABC test?
California, Massachusetts and New Jersey are the best known, and Illinois uses it for unemployment insurance.
Do contractors pay their own taxes?
Yes. They pay 15.3% self-employment tax plus income tax, through quarterly estimated payments.
Who owns the work a contractor creates?
The contractor does unless it is assigned in writing. Work made for hire covers contractors only for nine categories of work.
Are non-competes enforceable for contractors?
Not in California. Elsewhere they depend on state law and the facts.
Need specialist work done in the US?
We find and vet independent professionals, sign the agreement, pay them and file the 1099-NEC, and check first that a contractor arrangement fits. Tell us what you need delivered.
Related
How we find, contract and pay contractors in the US.
Rules that apply if the work is employment.