If you’re deploying independent contractors in California, you know how vigilant you need to be in order to ensure compliance and avoid misclassification. In an effort to protect labor, California has some of the most stringent legislation regarding independent contractors (ICs), also known as 1099 workers. In fact, the passing of California Assembly Bill 5 established a new legal standard for IC classification in 2019, which effectively returned 64% of ICs to employee status.
California’s strong regulations have made many new and seasoned independent contractors wary of their IC status and hypervigilant to maintaining it. As a result, your California contractors may have questions about working with your firm. After all, they’ll have guidelines to follow to maintain their IC status, and they might look to your human resources department for help. This is a common occurrence among those working as independent contractors for the first time.
Here are some frequently asked questions from independent contractors along with answers to help guide you.
What is California’s Assembly Bill 5?
As we briefly touched on, in 2019, California created Assembly Bill 5 to protect true employees from being misclassified as independent contractors. This protects them from losing out on worker rights only afforded to W-2 employees, including minimum wage, workers’ compensation, and employer-sponsored benefits. The state legislature created this bill due to the boom of the gig economy to deter widespread abuse of the IC program by corporations looking to save on labor costs.
Assembly Bill 5 made significant changes to the determination of worker classification based on a new three-factor test known as the ABC Test. This three-part test is applied to all hiring entities looking to classify workers as an IC. The hirer must satisfy three specific criteria:
- The worker is free from control and direction from the hiring entity in the work performed, both under contract and in fact.
- The worker performs work that is outside the usual course of the hiring entity’s business.
- The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.
Who decides whether I’m an employee or an independent contractor?
Initially, it’s up to the worker and the firm to determine classification. However, it’s important to note that this decision is subject to review by the IRS, the state’s workers’ compensation agency, and the unemployment compensation agency. These agencies will look at a number of factors when determining whether a worker is indeed an independent contractor under state law.
These factors include:
- Whether you can earn a profit or suffer a loss
- Whether you furnish your own tools and materials for the job
- Whether you are paid by the job
- The number of clients you work for
- Whether you invest in your own equipment and facilities
- Whether you pay your own business expenses
- Whether you have the ability to hire and pay your own assistants
- Whether you set your own hours
Do I have to pay taxes on my freelance income?
Independent contractors pay income tax just like employees. However, rather than the agency withholding taxes on your paychecks to cover income taxes, as well as Medicare and Social Security, it is the IC’s responsibility to save money, calculate the taxes owed, and pay the IRS. Further, while employees pay their taxes in full by April 15, contractors pay their taxes four times a year. While this is an additional burden on the contractor, it does allow for some great tax deductions that employees cannot receive, such as home office and travel deductions.
Will you provide benefits?
Under law, agencies and companies cannot provide employer-sponsored benefits to independent contractors. This includes workers’ compensation. These benefits are provided to W-2 employees only. The contractor must purchase this insurance on their own.
Do I get breaks or overtime pay?
Because independent contractors are considered businesses under the law, they are afforded few protections that employees get. While an IC can set their own working hours and hire an assistant to help, agencies cannot provide breaks or overtime pay to 1099 workers.
Will you reimburse me for expenses or equipment costs?
As a business entity, an independent contractor is responsible for paying their own business and travel expenses while working with clients. Equipment, supplies, and tools are also furnished solely by the contractor.
It’s a good idea for an independent contractor to estimate these expenses in advance and include them in the rate provided to clients for the work to be performed.
How can I ensure that I maintain my status as an independent contractor?
With California’s Assembly Bill 5 returning to the limelight, many human resources departments are getting questions from their 1099 workers about how they can maintain their IC status. ICs are encouraged to look like an independent business to maintain their status.
Steps contractors can take to maintain their status include:
- Using a business name
- Maintaining a separate business bank account
- Obtaining all required professional permits and licenses necessary to run a business
- Carrying your own business insurance, workers’ compensation, and health insurance
Contractors are also encouraged to avoid taking benefits from their clients, including paid vacations, health insurance, overtime pay, and sick days. Instead, they should include these benefits in their rate to pay for the items themselves.
Showing opportunities for profit and loss is also important. This indicates that you indeed do own your own business. The best way to do this is to have recurring expenses, including assistant salaries, equipment costs, office rent, and utilities. This shows that you could face a loss if you do not find enough work to pay your expenses. It’s also a good idea to make your services available to multiple clients to further solidify your IC status, rather than only working with one company.
When you work with an agent of record (AOR) to deploy 1099 workers, the agency should be willing to ensure ongoing classification compliance and work with the IC to ensure they maintain their status through the duration of the project. If you work for a talent procurement organization that deploys independent contractors, reach out to People2.0 for assistance with this process.