Employee or 1099 Contractor? The ABC Test and the IRS Rules
How California’s ABC test, its construction-subcontractor exemption and the IRS common-law test decide whether a helper is an employee or a contractor.
By Seayora Editorial Team · Published · Facts checked · 4 min read
Short answer: Two tests matter most for a contracting business. For federal taxes, the IRS weighs behavioral control, financial control and the relationship of the parties under the common law. In California, a worker is presumed to be an employee unless all three parts of the ABC test are met, including that the work is outside the hiring business’s usual course. A construction subcontractor can be judged under the older Borello test instead, but only if seven conditions are met, including a written subcontract and a contractor’s license covering the work.
Key takeaways
- IRS: the common-law test looks at behavioral control, financial control and the relationship of the parties; Form SS-8 asks the IRS to decide.
- California: a worker is an employee unless the hiring business proves all three parts of the ABC test (Labor Code § 2775).
- Part B is the hard one for contractors: a helper doing the same trade work as your business usually fails it.
- California’s construction exemption needs a written subcontract, a license covering the work and five more conditions (Labor Code § 2781).
- California presumes an unlicensed worker doing licensed work is an employee (Labor Code § 2750.5).
Why does classification matter?
An employee is paid through payroll, with tax withholding and the protections that come with employment. An independent contractor runs their own business and is usually paid on a Form 1099. Getting it wrong is easy in construction and property maintenance, where a helper may work alongside your crew for months. The label in a contract does not decide it; the tests below do.
| Test | Where it applies | What it asks | Source |
|---|---|---|---|
| Common-law test | Federal employment taxes and income tax withholding | Behavioral control, financial control, and the relationship of the parties | IRS Topic 762 |
| ABC test | California Labor Code, Unemployment Insurance Code and wage orders | A: free from control; B: work outside the usual course of the hiring business; C: independently established in that trade | Labor Code § 2775 |
| Construction exemption (Borello) | California construction subcontracts meeting all conditions | Written subcontract, license, separate location, own hiring, insurance or bonds, independent business | Labor Code §§ 2781, 2750.5 |
How does the IRS decide?
The IRS applies “the usual common law rules” and looks at three kinds of evidence: behavioral control (whether the business can direct what work is done and how, through instructions or training), financial control (unreimbursed expenses, the worker’s investment in tools, availability to the market, how they are paid, and whether they can make or lose money), and the relationship of the parties (written contracts, employee-type benefits, permanency, and whether the work is a key part of the regular business). A business that is unsure can ask the IRS to decide with Form SS-8, and a voluntary program lets a business reclassify workers as employees with partial relief from federal employment taxes (IRS, Topic 762). If the workers are contractors, the year-end forms are covered in our Form 1099 guide.
What is California’s ABC test?
For the Labor Code, the Unemployment Insurance Code and the wage orders, “a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied”: (A) the person is free from the hiring entity’s control and direction, “both under the contract for the performance of the work and in fact”; (B) “the person performs work that is outside the usual course of the hiring entity’s business”; and (C) the person is customarily engaged in an independently established trade, occupation or business of the same nature (Cal. Labor Code § 2775). For a plumbing or remodeling company, a helper doing plumbing or remodeling work is doing work inside the usual course of the business, which is why part B is where most construction arrangements fail.
What is the construction subcontractor exemption?
The ABC test does not apply to a contractor and an individual working under a construction subcontract, and the older Borello standard (with Labor Code § 2750.5) governs instead, if the contractor shows all of these: the subcontract is in writing; the subcontractor is licensed by the Contractors State License Board and the work is within that license; the subcontractor has any required local business license; it keeps a business location separate from the contractor’s; it can hire and fire its own workers; it takes financial responsibility for its work through insurance, indemnity, bonds or warranties; and it is customarily engaged in an independently established business of the same nature (Cal. Labor Code § 2781).
Under that older standard there is “a rebuttable presumption … that a worker performing services for which a license is required … is an employee rather than an independent contractor,” and proof of contractor status looks at factors such as control over the manner of the work, an independently established business, a substantial investment beyond personal services, pricing by the project rather than by time, supplying the tools, and holding the license the work requires (Cal. Labor Code § 2750.5).
What should a contracting business keep on file?
- A written subcontract for each subcontractor, describing the job and the price.
- The subcontractor’s contractor’s license number and its scope, checked before the work starts.
- Certificates of insurance, any bonds, and the subcontractor’s business license where required.
- A completed Form W-9 for each contractor you will pay.
- For anyone who works under your direction on your usual trade work, payroll rather than a 1099.
Frequently asked questions
Is my helper an employee or a contractor in California?
Presumed an employee unless all three parts of the ABC test are met. A helper doing the same trade work your business does usually fails part B, unless the construction subcontractor exemption applies.
What does the California construction exemption require?
A written subcontract, a contractor’s license covering the work, any required business license, a separate business location, the right to hire and fire, financial responsibility for the work, and an independently established business.
How do I get the IRS to decide a worker’s status?
File Form SS-8 with the IRS, which will determine the worker’s status for federal employment taxes and income tax withholding.
Sources
- Topic No. 762, Independent contractor vs. employee, Internal Revenue Service
- California Labor Code § 2775 (ABC test), California Legislative Information
- California Labor Code § 2781 (construction subcontracts), California Legislative Information
- California Labor Code § 2750.5, California Legislative Information
How Seayora helps
Vendor and subcontractor management: Keep each subcontractor’s license, insurance and W-9 on file, the records the construction exemption looks for.
This article is general information, not tax advice. Tax rules change and your situation is your own, so confirm the treatment with a CPA or enrolled agent before you file.
How we write and check these guides: editorial standards.
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