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Tax Concerns of an Independent Contractor in California

California is the land of hopes and dreams. Once a destination for many seeking gold, it’s evolved into one of the places where those with entrepreneurial business aspirations set up shop. Whatever your reason for settling in California, the state is known for its tough tax laws. If you’re an independent contractor, complying with California tax law is vital for your business to flourish, especially when it comes to California independent contractor law Independent contractors are different from employees, and things can get a bit hairy when distinguishing between the two. The IRS has set guidelines to help businesses solve this problem. They make it much easier to differentiate California independent contractors from employees. Key takeaways
  • Independent contractors provide services as a nonemployee
  • Independent contractors should receive 1099s from any individual or business that hired them
  • The Common Law & ABC tests help distinguish an independent contractor from an employee

Table of contents

What is an independent contractor?undefined...Read more

1099s for California Independent Contractorsundefined...Read more

How much is self employment tax in California?undefined...Read more

Common Law Testundefined...Read more

Why is employee classification important?undefined...Read more

The California ABC testundefined...Read more

What is an independent contractor?

Independent contractors are hired by an individual or business and provide their skills and services for certain tasks. Unlike traditional employees, the hiring company or individual can only control the results of an independent contractor's work. The rest is up to the contractor. Usually, the work is done on a contract basis with terms ending once the project or assignment is completed. Contractors can set their own terms, timelines and prices for a project.
What is an independent contractor?
Examples of independent contractors include:
  • A swim instructor who rents pool space to teach swim lessons
  • A landscaper with his own equipment & tools
  • A hairdresser with a private salon in their basement
  • A plumber who uses his own plan & tools
Many businesses misclassified independent contractors until 2020, when California enacted separate laws for California independent contractors in 2020.

1099s for California Independent Contractors

If you're a freelancer or independent contractor earning $600 or more during a tax year from business or contract work, you will receive a 1099-NEC tax form. The business or individual that hired you must send the California 1099 form to the IRS and send a copy to you. As a 1099 worker in California, you are only responsible for the federal portion of your taxes. Before the IRS changed the requirements in 2020, the payments were reported on Form 1099-MISC. Now, all nonemployee compensation is reported on Form 1099-NEC. Calculating taxes is no easy task, but a 1099 tax calculator can help simplify things.
1099s for California Independent Contractors

How much is self employment tax in California?

Anyone self-employed is required to pay self-employment taxes. Independent contractors in California are subject to a 15.3% tax, 12.4% for Social Security and 2.9% for Medicare. When you're on a company's payroll and considered a W-2 employee, your employer pays half the 15.3% tax. But as someone who is self-employed, you are considered by the IRS to be both the employer and employee, making you responsible for paying the total tax amount.

Common Law Test

To help combat the confusion between an independent contractor and an employee, the IRS established the Common Law Test. If you’re a business owner in California, you’ll use this test to classify a worker as an independent contractor or an employee. Common-Law tests, or Right-to-Control Tests, determine whether a business can control what an employee does and how they perform. When an employer can only have control over the results of the work and not what the work is or how it’s done, it usually means the worker is an independent contractor. The Common Law Test looks at three factors:
  • Financial control: Do any parts of the business control the financial aspects of the worker’s job?
  • Behavioral control: Does the company have the right to control how workers do their work?
  • Type of relationship: Are there employee benefits, or is there a written contract?
Financial control Five financial aspects impact a worker’s classification. Profit & loss opportunity Typically, a worker who makes more profit is an employee, while a worker with more loss is an independent contractor. Significant investment Independent contractors usually need to invest their money into their materials, tools and resources. Payment method Employees are added to the payroll based on a set salary amount. Independent contractors are paid on an hourly rate or project basis. Unreimbursed expenses Both employees and independent contractors can incur unreimbursed expenses. But some expenses may be reimbursed for employees. Market services Independent contractors can market their services and acquire more business. Employees need to follow company policy when it comes to side gigs. Behavioral control Four behavioral aspects impact a worker’s classification. Training A business might have a set training protocol in place for employees. Independent contractors might be free from following the training protocol and can follow their own procedures. Instruction type It typically means the worker is an employee if there are specific requirements for how, when and where the work should be performed (resources to use, sequence, etc.). Evaluation system Some businesses measure employee performance, including setting targets and goals. Instruction amount The more instructions there are, the more control the business has over the worker. Independent contractors have more control over their work. Type of relationship The type of relationship between a business and a company is key to distinguishing between an independent contractor and an employee. Benefits Benefits, including vacation days, paid holidays, maternity leave, health insurance and sick days are exclusively for employees. Contracts The contract should include how the worker and business will work together. Both can receive a contract, but the information in the contract can distinguish between the two. Relationship An independent contractor is typically hired for a set period of time. Employees can work at the company for an indefinite period of time.

Why is employee classification important?

How workers are classified impacts taxes. An employee on a payroll receives a W-2, and an independent contractor receives a 1099-NEC. The IRS has strict regulations in place and will impose penalties on businesses that misclassify a worker. Plus, it could trigger a tax audit.

The California ABC test

In 2019, Assembly bill 5, or AB 5, was passed into law by California Governor Gavin Newsom. Effective January 1, 2020, this law uses an ABC to cover the Unemployment Insurance Code and Labor Code. The ABC test got its name from the three essential elements of the test —parts A, B, and C.
The California ABC test
The ABC test requirements
  • A) The worker operates without the company’s control and is free to set their own hours. The work can be accepted or rejected, but the hiring company doesn’t have a say in its execution.
  • B) The work is unrelated to the core of the company.
  • C) The worker works independently in an established occupation, business or trade.
When an employer classifies the worker as an independent contractor, the decision is far from final. The Labor Commissioner, California’s Franchise Tax Board or the Employment Development Department will review the case. Exemptions to the ABC test:
  • Dentists
  • Psychologists
  • Accountants
  • Insurance brokers
  • Veterinarians
  • Attorneys
  • Doctors/surgeons
  • Engineers
  • Architects
The IRS provided an exemption to AB 5 for business-to-business contractors who are a sole proprietor or a business entity formed as a Limited Liability Company (LLC), partnership or corporation, making them exempt from the ABC test. Managing taxes is no simple task. But thanks to cutting-edge technology and the help of A.I., you never have to worry about dealing with taxes on your own. FlyFin will keep track of all your expenses, and its powerful A.I. will find every possible deduction. A team of expert CPAs is there to answer all your questions and file your California and federal independent contractor taxes.

Quick tip

If a worker doesn’t meet all the requirements for the ABC test, they are classified as an employee.

Independent contractor taxes in california

Independent Contractor Taxes in California

Top Independent contractor jobs

Top Independent Contractor Jobs

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Open Business Banking accounts

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Benefits of 1099

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What are Freelance Taxes?

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Independent contractor taxes in california

Independent Contractor Taxes in California

Top Independent contractor jobs

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Freelance Vs Self Employed

Self-employed Vs. Freelancers – What’s Common & What’s Not

What’s FlyFin?

FlyFin caters to the tax needs of freelancers, gig workers, independent contractors and sole proprietors. But anyone can file taxes through FlyFin! FlyFin tracks all your business expenses automatically using A.I. to find every possible tax deduction. Then, our CPA team files a guaranteed 100% accurate tax return for you – to save you a couple of thousand dollars and a ton of time on your taxes. Download the FlyFin app and have your taxes filed in less than fifteen minutes, saving time and more money on your taxes than last year, guaranteed.
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