Employee or contractor? 5 signs and the ABC test

You hire someone to help you on a job and wonder: is this person an employee or an independent contractor? The answer changes your taxes, your insurance, and your legal risks.

This article is for owners of construction and service businesses (roofing, concrete, landscaping, remodeling) who work with helpers, crews or subcontractors. You will see five signs of employment, California's ABC test, and why no single sign decides the case on its own.

This is general, educational information, not legal or tax advice. Confirm your case with an employment attorney, a tax preparer, CPA, or enrolled agent, or with the official agency.

In short

• There are signs that suggest an employment relationship, but none is conclusive proof on its own.
• For federal taxes, the IRS looks at behavioral control, financial control, and type of relationship.
• California uses the ABC test: the person is presumed to be an employee, and the business must meet all three parts (A, B, and C) to treat them as a contractor.
• Construction has special rules, such as those for licensed subcontractors, that change the analysis.
• Withholding taxes is not a separate test: it is a consequence of already being an employee.

5 signs someone could be an employee

1. You control how, when, and where they work

If you tell him the schedule and how to do the work, and you supervise him, he looks like an employee. An independent contractor decides how to achieve the result.

2. You provide tools and materials

If the worker uses your truck, your equipment, and your materials, that is a sign of employment. A contractor usually has their own tools and expenses.

3. Does the core work of your business

A helper on your roofing crew does exactly what your business sells. This weighs heavily in California, as you will see in the ABC test.

4. The relationship is ongoing

They work with you every week, indefinitely, instead of a project with a start and an end. The more permanent, the more it looks like employment.

5. Has no business of their own or chance to profit or lose

An independent contractor usually has their own business, other clients, charges by the project, and takes on risk. If they work only for you and charge by the hour, the sign points to employment.

Benefits (vacation, health insurance) and tax withholding also show up in the IRS analysis as part of the type of relationship. But withholding taxes does not determine status: if you do it, it is usually because you already treat the person as an employee.

Signs are not conclusive proof

The IRS explains that it uses three categories: behavioral control, financial control, and type of relationship. It does not count how many signs "win." It weighs all the facts. If there is doubt, the IRS offers Form SS-8 to request a determination.

A written contract that says "independent contractor" is also not enough if, in practice, the person works as an employee. What counts is the reality of the work.

California: The ABC Test

In California, the EDD guide explains that anyone who provides a service is presumed to be an employee, unless the business proves the following three conditions:

• A (control): the worker is free from your control and direction, both in the contract and in practice.
• B (usual course of business): the work is outside the normal course of your business.
• C (independent business): the worker habitually has their own trade or business of the same type as the work they do.

If even one of the three fails, the worker is considered an employee. Part B is hard for many businesses: a roofing helper for a roofing company is usually within the usual course of the business.

This test comes from the Dynamex decision (2018) and the AB 5 law, and the DIR page on independent contractors explains it. There are exceptions by occupation and by type of relationship, where a different analysis (called Borello) may apply.

Licensed subcontractors in construction

The Labor Code (section 2781) sets rules for construction subcontracts. Among other requirements, the subcontract must be in writing and the subcontractor must hold a CSLB license for the work they do. If all the requirements are met, the analysis may move on to other rules. According to the EDD, a contractor who hires for work that requires a license may be considered the employer of anyone who does not comply.

The details are technical. Ask an attorney to review your contracts before relying on this exception.

What can happen if you classify wrong

A misclassified worker can lead to back payroll taxes, interest and penalties, and problems with workers' comp insurance. In California, willful misclassification can carry penalties of $5,000 to $15,000 per violation, and $10,000 to $25,000 if there is a pattern, under Labor Code section 226.8. If it was a good-faith mistake, the analysis may be different.

To see how this affects your protection in an accident, read how well protected your business is against a workplace accident.

What to do now

• Make a list of the people who help you and what work they do.
• Note who uses your tools, follows your schedule, and works only for you.
• Check that your subcontractors have a current CSLB license and a written contract.
• Keep contracts, invoices, and proof that they have their own business.
• Consult an employment lawyer or the agency if you have doubts.

When to talk to a professional

Talk to an employment attorney or a tax preparer, CPA, or enrolled agent if you have doubtful cases, if you receive a notice from the EDD or the IRS, or if you plan to change how you pay your team.

How ODC helps you

At ODC, we keep your books up to date (bookkeeping) so you know how much you pay each person and how. For payroll, we work with independent partners; start at payroll and review the documents for new employees.

References

1. California DIR: Independent contractor versus employee — explains the ABC test and employee status in California.
2. IRS: Independent contractor (self-employed) or employee? — explains the IRS's three categories and Form SS-8.
3. California EDD: Employee or Independent Contractor — describes the presumption of employment and the three parts of the ABC test.
4. California Labor Code, section 226.8 — supports the penalties for willful misclassification.

This article is for information and education only. It is not legal, tax or bookkeeping advice. We are a bookkeeping service: for tax matters, consult a tax preparer, CPA or enrolled agent.