An individual is generally considered an independent contractor when the payer controls only the result—not the means—of the work, and the worker maintains control over how and when the work is performed, per IRS guidelines as of 2026.
How do you determine if someone is an employee or independent contractor?
Workers paid a flat fee per project or job are typically classified as independent contractors, whereas those paid a regular salary or hourly wage are usually considered employees.
According to the IRS, the key factor is the level of control the employer has over the worker’s schedule, methods, and work process. Independent contractors operate with autonomy, choosing how to complete tasks, while employees follow company-set procedures. Get this wrong, and you’re looking at back taxes, penalties, and potential legal trouble for the company. That’s not a risk worth taking.
How many criteria does the IRS have to determine independent contractor status?
The IRS uses 20 common-law factors, but no single factor is decisive; the totality of the relationship determines status.
These factors cover everything from financial control to how long the relationship lasts, and whether the worker invests in their own equipment. The IRS doesn’t expect anyone to check every single box—just that the overall picture leans toward contractor or employee status. For the full list, check out the IRS website. When in doubt, talk to a tax pro. Honestly, this is the best approach for avoiding headaches later.
Can you evaluate an independent contractor?
No, you should not evaluate an independent contractor using your employee performance review process.
Independent contractors aren’t subject to your usual supervisory oversight or company policies. Instead, focus on whether they delivered what the contract promised. Paying them through payroll or including them in benefits? That’s a quick way to trigger a reclassification nightmare.
What is the ABC test for independent contractors?
The ABC test presumes a worker is an employee unless all three conditions are met: (A) free from employer control, (B) work outside the employer’s usual business, and (C) engaged in an independent trade or business.
As of 2026, over 30 states use some version of the ABC test to decide contractor status. If you’re in one of these states, document how your worker fits each prong. Miss even one, and you could face misclassification penalties under laws like California’s AB5. Don’t gamble with this.
Can you tell an independent contractor when to work?
No, telling an independent contractor when to work risks reclassifying them as an employee.
Independent contractors set their own schedules, pick their tools, and decide where they work. If you start dictating hours, requiring daily check-ins, or forcing them into company meetings, you’re crossing into employee territory. The U.S. Department of Labor has made this clear in their misclassification guidance.
What are examples of independent contractors?
Common independent contractors include electricians, plumbers, carpenters, hair stylists, wedding planners, auto mechanics, and florists.
Freelance writers, graphic designers, consultants, and IT freelancers also fall into this category. These roles usually require specialized skills, tools, or licenses. The Bureau of Labor Statistics tracks these workers annually, so you can see trends in self-employment.
What is the difference between self-employed and independent contractor?
All independent contractors are self-employed, but not all self-employed people are independent contractors—some are sole proprietors or gig workers without contracts.
Self-employment is a big umbrella that includes freelancers, gig workers, and business owners. An independent contractor is a specific type of self-employed worker who operates under a written contract with clear deliverables. For taxes, both report income on Schedule C, but only contractors have those contractual obligations.
Is it better to be independent contractor or employee?
Employees typically receive better benefits (health insurance, retirement matching, paid time off), while independent contractors retain full control and deduct business expenses.
Contractors can charge higher rates to make up for the lack of benefits, but they’re stuck paying both the employer and employee portions of Social Security and Medicare taxes (that’s 15.3%). According to the BLS, full-time employees got benefits worth about 30% of wages in 2023—something contractors have to fund themselves.
Can an independent contractor work for only one company?
Yes, an independent contractor can work exclusively for one company—there is no legal limit on exclusivity.
What matters is whether they control their own work. If they set their own hours, use their own tools, and serve other clients, exclusivity alone won’t flip their status. But if they’re locked in with no ability to take on other work, auditors might get suspicious.
What states use the ABC test for independent contractors?
As of 2026, 12 states use the ABC test or a modified version to determine contractor status.
| State | ABC Test Type | Key Notes |
|---|
| California | Strict ABC Test | AB5 codified the ABC test; exemptions apply for licensed professionals |
| Massachusetts | ABC Test | Applies to most service workers |
| New Jersey | ABC Test | Presumption favors employee status |
| Illinois | A&B or C | Uses A&B or C depending on occupation |
| Washington | ABC Test | Includes exceptions for real estate agents and insurance agents |
| Connecticut | ABC Test | Applies to most non-exempt workers |
| Oregon | ABC Test | Presumption of employee status unless all three prongs are met |
| Vermont | ABC Test | Used for unemployment insurance and workers’ comp |
| Virginia | A&B or A&C | Alternative options reduce burden on employers |
| West Virginia | ABC Test | Used in unemployment insurance cases |
| New Mexico | ABC Test | Applies to construction and certain service workers |
| Colorado | ABC Test | Used in unemployment insurance determinations |
Laws change fast, and these tests get challenged in court all the time. Always double-check your state’s latest guidance on the Department of Labor or IRS websites.
What is the penalty for classifying an employee as an independent contractor?
Willful misclassification penalties range from $5,000 to $25,000 per violation under federal and many state laws, plus potential back taxes and benefits.
In California, for example, AB5 adds penalties of up to $10,000 for first violations and up to $25,000 for repeat offenses. The U.S. DOL can also hit you with civil fines up to $1,000 per violation if they spot a pattern. And don’t forget the unpaid payroll taxes, overtime, and benefits you’ll owe. The bill adds up fast.
Do you need a license to be an independent contractor?
Yes, in most states, independent contractors need a business license to operate legally.
Rules vary wildly by state and profession. Construction, cosmetology, and auto repair contractors often need state-specific licenses. Some cities even require a local business license on top of that. Skip this, and you could face fines—or worse, lose the ability to enforce your contracts. Check with your Small Business Administration office or state licensing board to avoid surprises.
What type of test is used to determine if an independent contractor?
The ABC test is the primary method used in 12+ states, while others use the common-law “right-to-control” test.
The common-law test looks at behavioral control, financial control, and the nature of the working relationship. The IRS uses this at the federal level, and some states mix both approaches. Laws shift with new legislation and court rulings, so always verify your state’s current standard before making a call.
What industries are exempt from AB5?
Professional services like doctors, lawyers, architects, engineers, accountants, brokers, and private investigators are exempt from AB5’s ABC test.
- Licensed healthcare providers (doctors, dentists, psychologists, veterinarians)
- Licensed legal professionals (lawyers, paralegals in some states)
- Licensed design professionals (architects, engineers, landscape architects)
- Licensed financial professionals (accountants, securities brokers, investment advisers)
- Investigative professionals (private investigators, detectives)
These exemptions only apply if the worker has a valid license and operates independently. For the full list and updates, check the California Legislative Information site.
What is the independent contractor rule?
The independent contractor rule allows businesses to avoid paying minimum wage, overtime, or providing benefits under the Fair Labor Standards Act.
This rule comes from the FLSA, which excludes bona fide independent contractors from protections like overtime pay and employer-sponsored health insurance. But—and this is a big but—if you misclassify someone, the rule doesn’t protect you. The DOL has been cracking down, including a 2024 rule that spells out exactly who counts as an employee versus a contractor. Play it safe or pay the price.
