Employee or Independent Contractor

It’s important for business owners to correctly classify workers as either employees or independent contractors. In California, employee wages are subject to state payroll taxes, while independent contractors are not. In general, workers are presumed to be employees unless they meet specific criteria that qualify them as independent contractors. There are various status issues to consider when making an employment determination:

• ABC Test: The ABC test is used to determine if a worker is an employee or an independent contractor unless there is an exception. The worker is presumed to be an employee unless all three conditions are met:
  1. The worker is free from the control and direction of the hiring organization in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  3. The worker is routinely doing work in an independently established trade, occupation, or business that is of the same type as the work being performed.

If all three conditions are not met, the worker is considered an employee unless there is a statutory exclusion or exception:

• ABC Test Exceptions: Under specific situations, a different test called the Borello multifactor test must be used instead of the ABC test.

Other Classes of Employees and Independent Contractors

• Statutory Employee: This is a worker who is considered an employee based on specific laws.
• Exempt Employment: Certain employees and specific types of employment are not subject to one or more payroll taxes, which includes Unemployment Insurance (UI), Employment Training Tax (ETT), State Disability Insurance (SDI), and Personal Income Tax (PIT) Withholding.
• App-Based Drivers: App-based drivers providing services for network companies are generally considered independent contractors if the network company meets certain conditions.

Resources

Learn more about how to determine if a worker is an employee or an independent contractor by viewing the recorded webinar AB 5 Motor Carrier Worker Classification (YouTube).

Additional information is also available through the EDD’s no-fee Payroll Tax Seminars.

Help Us Fight Fraud

It's important for employers to classify workers correctly. The EDD conducts inspections and audits to make sure businesses follow the rules. These efforts make sure state laws protect individuals and prevent unfair competition that may lead to higher taxes and expenses for businesses.  If you think someone is breaking the law, you can report it online or by mail.

Contact US

If you have questions, Contact Payroll Taxes. You can also contact the Taxpayer Assistance Center at 1-888-745-3886 or visit your local Employment Tax Office.