Independent contractor agreements: What to include & legal protection for your small business

Published 13 January 2026

Table of contents

• Why written contractor agreements are essential
• How to create an independent contractor agreement
• Manage your contractor relationships with Xero
• FAQs on independent contractor agreements

Key takeaways

• Written independent contractor agreements protect both the business and the contractor. An agreement clearly defines the working relationship, helps prevent the misclassification of employees as contractors, and establishes legal recourse if disputes arise.
• Agreements vary widely according to the contractor, the details of the project, and their role. But each contract should contain key elements like the scope of work, payment terms, timeline and deliverables, independent contractor clauses, intellectual property ownership, and termination provisions.
• Intellectual property clauses should specify that work created is "work for hire" owned by your business, or you risk contractors retaining ownership of deliverables they create.
• Proper contractor classification is critical—agreements should emphasize contractor autonomy, control over how work is performed, and other factors that support independent contractor status under IRS guidelines.

Why written contractor agreements are essential

A written independent contractor agreement is a legally binding document that outlines the terms of the relationship between your business and the contractor you hire. It ensures everyone understands the terms of the relationship and helps minimize any disagreements about payments, work expectations, worker classification, or other concerns.

If you're hiring contractors, a carefully drafted 1099 contractor agreement can also protect you from lawsuits or disputes.

But remember - just because you put a term in a contract, it doesn't mean that it's legally enforceable. The terms must be consistent with federal, state, and local laws. To protect yourself, use a contractor agreement template from a trusted legal source or work with an attorney to draft contracts specific to your needs.

How to create an independent contractor agreement

A well-crafted independent contractor agreement details the scope of work, payment terms, and confidentiality. It not only helps prevent misunderstandings and disputes, but also protects both parties by documenting their rights and obligations in writing. You can modify a contractor agreement template with your specific terms, or work with an attorney to customize an agreement based on your unique needs.

Here's a look at the process:

1. Classify the worker

Make sure to classify workers correctly. If you classify a worker as an independent contractor when the law says they should be classified as an employee, a contract won't protect you. It's not above the law. So before asking someone to sign a 1099 contractor agreement, make sure their role qualifies as an independent contractor.

To distinguish between independent contractors and employees, consider these six points and address them in your contract:

• Opportunity for profit or loss: Employees get paid for all the work they do; contractors run their own businesses and may have a risk of losses if project costs are high, they need new equipment, or the work takes longer than expected.
• Investments: With few exceptions, employees don’t have to invest in their jobs, while contractors often supply their own tools and equipment.
• Degree of permanence: Generally, employees have a relatively permanent relationship with your business, whereas you engage contractors on a contractual (temporary) basis.
• Nature and degree of control: Employees follow processes established by the company, while contractors typically follow their own paths to get the work done.
• Connection to the business: When work is integral to the company, the worker is more likely to be an employee.
• Skill and initiative: Employees are more likely to be trained in house, while contractors tend to bring experience and expertise to the business that they’ve learned elsewhere.

All of these points have nuance and exceptions, and you must consider all six elements together. That's one of the main reasons why an independent contractor contract is critical – it can help to show how the work fits into these conditions.

To learn more, check out the Department of Labor's Final Rule About Contractor Classification and its guide to avoiding misclassification errors.

2. Outline obligations and expectations

The contract should spell out the contractor's role and their relationship with the company. It should outline work expectations and payment terms. It may also include non-compete or non-disclosure clauses as needed for your company, but again, the terms need to be in line with state laws. Here are details to include:

• Scope of work: Define the contractor's tasks and responsibilities. Emphasize the contractor's autonomy and independence in determining how work gets done, to minimize the risk of classification errors.
• Timelines: Include deadlines, project milestones, and, if relevant, the number of work hours expected over a project’s timeframes.
• Subcontractors: Outline whether the contractor can subcontract some or all of their work.
• Payment terms: Explain compensation rates, payment schedules, and invoicing expectations, such as due dates for invoices or payment terms. Also, explicitly state that all earnings are 1099 income and that the contractor is responsible for their own taxes.
• Location of work: Specify if the contractor will be working on site at your office, in the field, or at their own home or office.
• Confidentiality clauses: Protect your sensitive information with non-disclosure agreements (NDAs) or other confidentiality clauses. Work with an attorney to make sure the NDA is legally enforceable and remember that state laws vary.
• Intellectual property rights: Explain who owns the finished work, especially where the contractor is engaged in creative output or is developing products or processes. Work-for-hire language in the contract can help establish that you, the payer, own the intellectual property created as part of this relationship.
• Non-compete clauses: If needed, consider a non-compete clause to limit the contractor from performing certain services for themselves or other clients that compete with your business, but be aware that the laws vary from state to state.
• Dispute resolution: To avoid unnecessary litigation, consider including a section explaining how you’ll resolve disputes.
• Termination conditions: Specify how long the relationship lasts, when it may be extended, and how it can be terminated by either party.

These are just the standard terms every contract should have – each contract is unique, because every contractor and each job is different. In all cases, get the contract signed before you start working with the contractor to protect everyone involved.

3. Make changes if needed and get signatures

The contractor might ask for changes. This is common – you're hiring a professional freelancer who runs a business selling their services, and they may have needs or expectations that aren't outlined in the contract. Make the necessary changes until everyone’s agreed to the terms. Then, sign it, keep a copy for your records, and set a reminder to update the contract periodically as the nature of your relationship changes. Ensure both parties sign before work begins.

The IRS has links to resources for independent contractors and the companies that work with them.

Manage your contractor relationships with Xero

Contractors have different needs than employees – including the need to issue 1099-NECs at the end of the year. Xero helps manage your contractors easier. It stores W-9 forms, tracks contractor payments to claim as business expense deductions, and generates your 1099s at the end of the year.

And Xero isn’t just for contractor payments. It also helps with all your small business accounting admin, and it's super easy to use.

Get one month free

FAQs on independent contractor agreements

An independent contractor agreement should be one of the first steps you take when forging a relationship with a new contractor – you should insist on a contract to protect your rights, minimize scope creep, and outline payment terms.

Independent contractor agreements are confusing, so you probably have lots of questions – here are answers to the most common ones.

Do I need a lawyer to create a contractor agreement?

Not usually – you can use a template or come up with your own agreement. But to avoid errors, you could ask an attorney to check the terms, or have them draft the agreement.

Can I use the same agreement for all contractors?

Only if they're in the same role and subject to the same payment terms. Because contractors and role types vary so widely, you should customize the agreement based on each contractor's unique situation.

What if a contractor refuses to sign an agreement?

If the contractor isn't comfortable with your terms and expectations, that might mean they're not the right fit for your company – or it might just mean that you need to adjust the contract. Talk with them about their concerns, see if you can find common ground, and rework the terms of the agreement as needed.

Should I include a non-compete clause?

It depends. First, check your state laws to see if non-competes are allowed in your area. If so, consider whether your business needs that protection – a non-compete clause can make it hard to find quality help.

How long should I keep signed contractor agreements?

Keep all agreements for at least 3 years – that's generally how long the IRS has to audit payroll returns. But it’s a good idea to keep them even longer – the IRS can audit returns indefinitely in cases of fraud. And if the contractor brings a lawsuit against your company, you want to be able to prove the contractual nature of your relationship.

What happens if I don't have a written agreement?

If there’s nothing in writing, you don't have much recourse if the contractor claims they should have been classified as an employee or tries to claim that you didn't pay them the agreed-upon amount. So put everything in writing to protect you from lawsuits or misclassification claims.

Can I require a contractor to sign an NDA?

Yes, you can, but not if the agreement violates public policy. For instance, you can't make contractors sign an NDA to hide illegal activity. Check the laws in your state or ask an attorney first.

Do I need separate agreements for each project?

Possibly. If a contractor's role changes a lot from project to project, it’s a good idea to outline new expectations, obligations, and payment terms in a new contract for each project.