Independent Contractor vs Employee California Chamber of Commerce

Companies often use independent contractors to avoid hiring staff for short-term needs. LegalZoom is not a law firm and does not provide legal advice, except where authorized through its subsidiary law firm LZ Legal Services, LLC. Use of our products and services is governed by our Terms of Use and Privacy Policy. When the hiring party controls the way work is carried out and a product is delivered, the relationship between the parties is employer/employee. C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. Independent contractors typically have the opportunity to make a profit or incur a loss as part of their work.

• What matters to the DOL is whether the employer has the legal right to control the details of how and when services are performed.
• The ABC test is used by some states, such as California, Massachusetts, and New Jersey, to classify workers.
• If workers incur unreimbursed expenses, this is an indication they’re an independent contractor.
• But to set yourself up for success, you’ll also need to think about your business name, finances, an operating agreement, and licenses and permits.

The final factor is whether the services provided by the worker are a key activity of the business. For example, if you hired someone to mow your lawn, they would not be considered an employee as landscaping https://www.bookstime.com/ is not a key activity of your business. However, if you hired someone to design a website for your business, they’re more likely to be considered an employee as website design is a key activity.

DOL Adopts New Independent Contractor Test

See Publication 1976, Section 530 Employment Tax Relief RequirementsPDF, for more information. An individual working remotely, for example, performing services for you from a location other than an office operated by you, is your employee under the common-law rules, if you can control what will be done and how it will be done. What independent contractor vs employee matters is that you have the right to control the details of how the services are performed. The IRS recently announced that beginning in 2020, instead of reporting compensation for independent contractors on Form 1099-MISC, Miscellaneous Income, employers should expect to use a new form, 1099-NEC, Nonemployee Compensation.

On the other hand, independent contractors typically don’t receive these types of benefits. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, then you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). Under the economic reality test, no single factor (or set of factors) automatically determines a worker’s status as either an employee or an independent contractor. Instead, the economic reality factors are all weighed to assess whether a worker is economically dependent on a potential employer for work, according to the totality of the circumstances. The rule emphasizes a balanced approach applying a “totality of the circumstances” test and clarifying that no single factor or subset of factors should be given more weight than others. This is a departure from the Trump-era independent contractor rule (now rescinded), which relied on similar factors, but placed greater weight on factor 1 (opportunity for profit and loss) and factor 4 (degree of control over the work).