Guide Applies to: US only
US contractor classification: IRS, Department of Labor, California and New York
In short: for federal tax, the IRS decides employee or independent contractor by looking at behavioral control, financial control and the type of relationship, and no one factor decides it. Wage and hour law uses a different test: the Department of Labor has not applied its 2024 rule in investigations since 1 May 2025, and its February 2026 proposal to replace it is not final. California treats a worker as an employee unless the ABC test is met, and New York requires a written contract for freelance work worth $800 or more. Form 1099-NEC is filed for payments of $2,000 or more from 2026.
Last reviewed . This guide covers US federal law, California and New York only. Part of our hiring legislation hub.
We are recruiters, not lawyers, accountants or tax advisers. Nothing in this guide is legal, tax or financial advice. It is general information with a link to every source. Take professional advice for your own situation before you act. Read more
The IRS common law test
The IRS starts from the business relationship between you and the person doing the work, and whether you have the right to control what is done and how. It groups the evidence into three categories, and says no one factor stands alone: you look at the entire relationship. IRS, contractor or employee
- Behavioral control: does the company control, or have the right to control, what the worker does and how?
- Financial control: does the company control the business side of the work, such as how the worker is paid, whether expenses are reimbursed and who provides tools?
- Type of relationship: are there written contracts or employee type benefits, and is the work a key part of the business?
If you are unsure, you or the worker can file Form SS-8 to ask the IRS for a determination. The IRS says it may take at least six months. IRS, contractor or employee
Form 1099-NEC in 2026
- For tax years beginning after 2025, the minimum reporting threshold rose to $2,000, and it may be adjusted for inflation beginning in calendar year 2027. Before, it was $600. IRS Form 1099-NEC instructions
- You file Form 1099-NEC for each person you paid at least $2,000 in the course of your business for services by a nonemployee. IRS Form 1099-NEC instructions
- You must furnish the payee statement and file with the IRS by January 31. IRS Form 1099-NEC instructions
The Department of Labor rule: where it stands
Wage and hour law under the Fair Labor Standards Act uses an economic reality test: whether the worker is economically dependent on the employer for work, or is in business for themself. DOL Fact Sheet 13
- 2024 rule. On 1 May 2025 the Department told its investigators not to apply the 2024 rule's analysis in current enforcement matters, and to rely on Fact Sheet 13 and the reinstated Opinion Letter FLSA2019-6. DOL, 1 May 2025
- Private lawsuits. Fact Sheet 13 says the 2024 rule, whose legality is the subject of litigation, remains in effect for purposes of private litigation. DOL Fact Sheet 13
- 2026 proposal. On 26 February 2026 the Department proposed a rule that would rescind the 2024 rule. DOL, 26 February 2026 It was published in the Federal Register on 27 February 2026 as a proposed rule. Federal Register, 27 February 2026 It would give more weight to two core factors, the nature and degree of control over the work and the worker's opportunity for profit or loss, alongside skill, permanence and integration. US Department of Labor, 2026 rulemaking
- Comments. The comment period closed on 28 April 2026. US Department of Labor, 2026 rulemaking Dechert LLP reports over 16,500 comments. Dechert LLP commentary, June 2026
- Status as at 29 September 2026. We found no final rule on the Department's rulemaking page, and no final rule on this subject in the Wage and Hour Division's Federal Register documents published since 1 March 2026. No date for a final rule has been announced. US Department of Labor, 2026 rulemaking
- Joint employer. A separate joint employer proposal was published on 23 April 2026, with comments closing on 22 June 2026. Federal Register, 23 April 2026
California: AB 5 and the ABC test
Under the ABC test, the hiring entity must show all three of the following to treat a worker as an independent contractor: California LWDA, ABC test
- A. 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 and in fact.
- B. The worker performs work that is outside the usual course of the hiring entity's business.
- C. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
- AB 5 took effect on 1 January 2020 and was later amended by AB 2257. The rules are in Labor Code sections 2775 to 2787. California LWDA, employment status FAQ
- Some relationships, including business to business and certain professional services, can use the older Borello test instead of the ABC test, if specific conditions are met. California LWDA, employment status FAQ
- Employee wages are subject to California payroll taxes, and the Employment Development Department audits classification. California EDD
New York: Freelance Isn't Free
On 28 August 2024 the Freelance Isn't Free Act added Article 44-A to the New York General Business Law. New York State Department of Labor
- Who is covered. A freelance worker is an individual, or an organisation of no more than one person, hired as an independent contractor for $800 or more, alone or added to all contracts with the same hiring party in the previous 120 days. Sales representatives, licensed attorneys, licensed medical professionals and construction contractors are excluded. NY General Business Law s1410
- Written contract. The contract must be in writing and include both parties' names and mailing addresses, an itemisation of the services, their value, the rate and method of pay, the payment date or how it is set, and the date by which the freelancer must submit a list of services completed. The hiring party keeps it for at least six years. NY General Business Law s1412
- Payment. Pay by the date in the contract, or if none is given, no later than 30 days after the work is completed, and do not make timely payment conditional on accepting less. NY General Business Law s1411
- Complaints. Workers can complain to the New York State Attorney General, and the Department of Labor publishes a model contract. New York State Department of Labor
- New York City. The city has its own Freelance Isn't Free Act, Local Law 140 of 2016, enforced by the Department of Consumer and Worker Protection. NYC DCWP
Penalties and remedies
| Rule | What can happen | Source |
|---|---|---|
| IRS employment taxes | A business that treats an employee as a contractor without a reasonable basis may be held liable for employment taxes for that worker. | IRS, contractor or employee |
| IRS VCSP | Eligible businesses that reclassify workers pay 10% of the employment tax that would have been due for the most recent tax year, calculated under the reduced rates of section 3509(a), with no interest or penalties on that payment. | IRS VCSP FAQ |
| California | Civil penalties of between $5,000 and $25,000 per violation for willful misclassification under Labor Code section 226.8. | California LWDA, employment status FAQ |
| New York State, no contract | Statutory damages of $250. | NY General Business Law s1414 |
| New York State, late or short payment | Double damages, plus reasonable attorneys' fees and costs. | NY General Business Law s1414 |
| New York State Attorney General | Civil penalties up to $1,000 for a first violation, $2,000 for a second and $3,000 for later ones, and up to $25,000 for a pattern or practice. | NY General Business Law s1414 |
The IRS offers relief in some cases: Section 530 relief if its conditions are met, and the Voluntary Classification Settlement Program on Form 8952. Workers who believe they were misclassified can use Form 8919 to report their share of uncollected social security and Medicare taxes. IRS, contractor or employee
Practical checklist
Our checklist as recruiters, built from the sources above. Your employment attorney or CPA should confirm it for your business.
- Assess each contractor against the IRS categories, and keep a written record. IRS, contractor or employee
- Collect the details you need to file Form 1099-NEC for anyone you pay $2,000 or more in 2026. IRS Form 1099-NEC instructions
- For California workers, test the relationship against all three parts of the ABC test, or confirm an exemption applies. California LWDA, ABC test California LWDA, employment status FAQ
- For New York freelancers, use a written contract for work of $800 or more, pay within the agreed time, and keep the contract for six years. NY General Business Law s1412
- Watch for the final Department of Labor rule, and remember private claims can still rely on the 2024 rule. DOL Fact Sheet 13
How we hire in the US
In New York and San Francisco we recruit permanent and executive technology hires. Our contract desk supplies contractors in the UK only, and our contractors page is for UK contractors.
Sources
Every source below was fetched and read on 29 September 2026. We use primary sources first, and name any commentary. How we research these pages.
- IRS: Independent contractor (self-employed) or employee?The common law test, Form SS-8 timing, employment tax liability, Section 530 relief, Forms 8952 and 8919. Checked .
- IRS: Instructions for Forms 1099-MISC and 1099-NECThe $2,000 threshold for tax years beginning after 2025, possible inflation adjustment from 2027, the 31 January deadline. Checked .
- US Department of Labor: Fact Sheet 13, employment relationship under the FLSAThe economic reality test, and that the 2024 rule remains in effect for private litigation. Checked .
- US Department of Labor news release, 1 May 2025Investigators told not to apply the 2024 rule in enforcement; Fact Sheet 13 and Opinion Letter FLSA2019-6 used instead. Checked .
- US Department of Labor news release, 26 February 2026The proposal announced on 26 February 2026 and that it would rescind the 2024 rule. Checked .
- Federal Register: Employee or independent contractor status under the FLSA, FMLA and MSPA (proposed rule, 27 February 2026)Publication date, proposed rule status and the proposed test. Checked .
- US Department of Labor: Notice of proposed rule, employee or independent contractor status (RIN 1235-AA46)The 2026 proposal, its two core factors, and the comment period closing on 28 April 2026. Checked .
- Dechert LLP: DOL proposes independent contractor and joint employment rules (11 June 2026)Over 16,500 comments received on the 2026 proposal. Checked .
- Federal Register: Joint employer status under the FLSA, FMLA and MSPA (proposed rule, 23 April 2026)The joint employer proposal and its 22 June 2026 comment deadline. Checked .
- California Labor and Workforce Development Agency: ABC testThe three parts of the ABC test. Checked .
- California Labor and Workforce Development Agency: employment status FAQAB 5 from 1 January 2020, AB 2257, Labor Code 2775 to 2787, Borello exemptions, $5,000 to $25,000 penalties. Checked .
- California Employment Development Department: AB 5 and employment statusEmployee wages are subject to state payroll taxes and EDD audits classification. Checked .
- New York State Department of Labor: Freelance Isn't Free ActArticle 44-A added on 28 August 2024, the model contract, complaints to the Attorney General. Checked .
- New York General Business Law section 1410 (definitions)Freelance worker definition: $800 or more, alone or over the preceding 120 days, and exclusions. Checked .
- New York General Business Law section 1412 (written contracts)Written contract contents and six year retention. Checked .
- New York General Business Law section 1411 (payment)Payment by the contract date or within 30 days of completion. Checked .
- NYC Department of Consumer and Worker Protection: Freelance Isn't Free Act (Local Law 140 of 2016)That New York City has its own law, enforced by DCWP. Checked .
- IRS: Voluntary Classification Settlement Program (VCSP) frequently asked questionsWhat VCSP costs (10% of the section 3509(a) liability for the most recent tax year) and eligibility. Checked .
- New York General Business Law section 1414 (violations)Statutory damages, double damages and Attorney General civil penalties. Checked .
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US classification questions
How does the IRS decide if a worker is an employee or a contractor?
It looks at behavioral control, financial control and the type of relationship, and says no one factor stands alone. You or the worker can ask for a determination on Form SS-8, which may take at least six months.
What is the Form 1099-NEC threshold for 2026?
$2,000 for tax years beginning after 2025, up from $600. The IRS says it may be adjusted for inflation beginning in calendar year 2027.
Which Department of Labor contractor rule applies now?
Since 1 May 2025 the Department's investigators have not applied the 2024 rule, using Fact Sheet 13 and Opinion Letter FLSA2019-6 instead. Fact Sheet 13 says the 2024 rule remains in effect for private litigation. The February 2026 proposal to replace it was not final as at 29 September 2026.
What is California's ABC test?
A worker is treated as an employee unless the hiring entity shows they are free from its control, do work outside the usual course of its business, and are customarily engaged in an independent trade of the same nature.
Do I need a written contract with a New York freelancer?
Yes, for work worth $800 or more, alone or with other contracts with the same freelancer in the previous 120 days. You must pay by the contract date or within 30 days of completion.
What are the penalties for misclassifying a worker in California?
The Labor and Workforce Development Agency says civil penalties of between $5,000 and $25,000 per violation can apply for willful misclassification under Labor Code section 226.8.
Do you supply contractors in the US?
No. Our contract desk supplies contractors in the UK only. In New York and San Francisco we recruit permanent and executive roles.
Is this guide legal or tax advice?
No. We are recruiters, not attorneys or CPAs. Use this guide to prepare, and take professional advice for your business and state.
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