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Subcontractors vs employees: the classification call you cannot wing
The short answer
Calling someone a contractor does not make them one. Federally it is a control-based analysis; in California and other ABC-test states, anyone doing work inside your usual course of business is presumptively an employee — contracts notwithstanding. Misclassification means back payroll taxes, penalties, and wage-law exposure. The fix is boring and effective: classify honestly, paper it properly, and run payroll for the ones who are employees.
How to get it right
- Map your state: ABC states (California foremost) vs common-law states — the same worker can classify differently across a border.
- Apply the test honestly: their tools, their hours, their other clients, work outside your core service = contractor signals; the inverse = employee.
- Paper the real ones: W-9s, genuine independent-contractor agreements, invoices, and 1099-NECs on time.
- Convert the close calls: payroll costs less than an EDD audit.
Frequently asked questions
What tests decide contractor vs employee?
Federally, common-law control factors: behavioral control, financial control, and relationship. California and several states use the stricter ABC test, which presumes employee status unless all three prongs are met — including that the work is outside your usual course of business.
Why does the ABC test hit agencies and consultancies hard?
Prong B: a marketing agency hiring a freelance marketer is hiring inside its usual course of business — which fails the test in ABC states regardless of contracts or invoices.
What are the penalties for misclassification?
Back payroll taxes, penalties and interest, potential wage-and-hour liability, and in California, statutory penalties per violation. Voluntary reclassification programs exist and are far cheaper than being caught.
What paperwork do contractors require?
W-9 on onboarding, 1099-NEC by January 31 for $600+ (threshold rising under recent law), and contracts that reflect genuine independence — their tools, their schedule, their other clients.
Team of 1099s and not sure it holds?
We audit the roster against your state's test and fix the risky ones before an agency does it for you.
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