The Internal Revenue Service (IRS) Common Law Rule determines who is an independent contractor or an employee. In California, independent contractors are subject to AB5, the “ABC Test”.
Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
In California, willful misclassification of workers can result in civil penalties, between $5,000 and $25,000 per violation.
More information about these guidelines can be found in the IRS Employer’s Supplemental Tax Guide (Publication 15-A).
