Hiring a Freelancer: Legal Checklist
Quick Answer
When hiring a freelancer, you need a written independent contractor agreement that covers scope of work, payment terms, intellectual property ownership, confidentiality, and termination provisions, and you must ensure the worker is properly classified as an independent contractor under IRS and state guidelines.
Step-by-Step Guide
- 1Verify the worker qualifies as an independent contractor
Before hiring, confirm the worker meets the legal definition of an independent contractor under IRS guidelines and your state's laws. The IRS uses a multi-factor test examining behavioral control (do you control how and when the work is done?), financial control (does the worker invest in their own tools and bear profit/loss risk?), and the type of relationship (is there a written contract? are benefits provided?). Misclassification can result in back taxes, penalties, and legal liability.
- 2Draft a comprehensive independent contractor agreement
Create a written contract that clearly defines: the scope of work and specific deliverables, the project timeline and milestones, payment terms and rates (hourly, per-project, or retainer), who provides tools and materials, the contractor's responsibility for their own taxes, insurance, and benefits, termination procedures, and dispute resolution mechanisms. The agreement should explicitly state that the worker is an independent contractor, not an employee.
- 3Include intellectual property assignment provisions
Unlike employees, independent contractors generally retain ownership of the work they create unless the contract explicitly assigns IP rights to you. Include a clear provision assigning all work product, inventions, and creative works to your company. For software developers, include assignments of source code, documentation, and related materials. For designers, include assignments of designs, mockups, and related assets. This clause is critical and often overlooked.
- 4Add confidentiality and non-disclosure provisions
Include a confidentiality clause or attach a separate NDA that protects your trade secrets, business plans, customer information, and proprietary processes. Define what constitutes confidential information, the permitted use of that information, the duration of the confidentiality obligation (2 to 5 years is typical, or indefinite for trade secrets), and the remedies for breach.
- 5Collect required tax documentation
Before making any payment, collect a completed IRS Form W-9 (Request for Taxpayer Identification Number) from the contractor. You will need this information to issue a Form 1099-NEC at the end of the year for any contractor you pay $600 or more. You are not required to withhold income taxes, Social Security, or Medicare from payments to independent contractors, as they are responsible for their own tax payments.
- 6Verify insurance coverage
Depending on the type of work, require the contractor to maintain appropriate insurance, such as general liability insurance, professional liability (errors and omissions) insurance, and, if applicable, workers' compensation insurance. Request a certificate of insurance naming your company as an additional insured. This protects you from liability if the contractor causes damage or injury while performing work for you.
- 7Establish clear communication and payment procedures
Define how progress will be reported, who the contractor reports to, how changes to scope will be handled (a formal change order process is recommended), and the invoicing and payment schedule. Avoid over-managing the contractor's day-to-day activities, as excessive control is a key factor courts consider when determining worker classification. Pay promptly according to the contract terms.
State-by-State Differences
| State | Key Difference |
|---|---|
| California | California uses the strict ABC test (Dynamex/AB 5) to determine worker classification. A worker is presumed to be an employee unless the hiring entity proves all three conditions: (A) the worker is free from control, (B) the work is outside the usual course of the hiring entity's business, and (C) the worker has an independently established business. This makes it harder to classify workers as independent contractors than in most other states. |
| Texas | Texas uses the common law "right to control" test similar to the IRS multi-factor test (Tex. Lab. Code 201.041). Texas courts focus on whether the hiring entity controls the means and details of the work, not just the result. Texas is generally more permissive toward independent contractor classification than states using the ABC test. |
| Florida | Florida uses a multi-factor test under Fla. Stat. 440.02(15)(d) that considers 10 factors including whether the worker can realize a profit or loss, whether the worker has a continuing business relationship, and whether the work requires a specific skill. Florida does not use the ABC test and is generally considered a moderately permissive state for contractor classification. |
| New York | New York uses different tests depending on the context: a common law test for tax purposes and a more stringent "degree of control" test for labor law purposes. New York courts look closely at the economic reality of the relationship. The state has increased enforcement actions against misclassification in recent years, particularly in the construction and transportation industries. |
| Illinois | Illinois uses the ABC test for unemployment insurance purposes (820 ILCS 185/5) and a multi-factor test for other employment law purposes. The Illinois Employee Classification Act imposes additional penalties for misclassification in the construction industry, including penalties of $2,500 per violation for a first offense and up to $5,000 for repeat violations. |
Common Mistakes to Avoid
Treating a freelancer like an employee by controlling when, where, and how they work
Consequence: If the IRS or a state agency determines the worker was misclassified, you owe back employment taxes (the employer's share of Social Security and Medicare, typically 7.65%), unemployment insurance premiums, potentially workers' compensation insurance, and penalties of 1.5% to 40% of the wages paid. The worker may also be entitled to retroactive employee benefits.
Not including an IP assignment clause in the contractor agreement
Consequence: Without a written assignment, the contractor owns the intellectual property they create, including software code, designs, written content, and inventions. You may be left with only a license to use the work, and the contractor could sell or license the same work to your competitors.
Failing to collect a W-9 before making payments
Consequence: Without the contractor's taxpayer identification number, you cannot issue the required 1099-NEC. The IRS can impose backup withholding of 24% on all payments, and you may face penalties of $50 to $280 per form for failing to file correct information returns.
Using a verbal agreement instead of a written contract
Consequence: Without a written contract, you have no enforceable agreement on deliverables, deadlines, payment terms, IP ownership, or confidentiality. Disputes become he-said-she-said situations that are expensive to resolve and nearly impossible to win. A written contract also supports the independent contractor classification.
Documents You'll Need
Independent Contractor Agreement
Freelance Contract
Non-Disclosure Agreement
Service Agreement
Frequently Asked Questions
Related Guides
This website provides legal information, not legal advice. The information on this page is for general informational purposes only. No attorney-client relationship is formed by using this site. Laws vary by jurisdiction and change frequently. For advice specific to your situation, consult a licensed attorney in your state.