Liz Weston

Dear Liz: You answered a question from a mother who was concerned that her son didn’t understand the financial implications of being an independent contractor rather than an employee. From what she wrote, the company employing him may not be following the law. The IRS has criteria to determine whether the worker qualifies as a contractor. I have been in that situation on at least two occasions. In one of those, the IRS went after the employer for all the taxes it should have paid even though I had paid all the Social Security and Medicare taxes. This could put the worker in a difficult position if the employer is found to be violating the law.

Answer: Thank you for bringing that up. There’s something called the “ABC test” that many states use to determine whether someone can be classified as an independent contractor. Many of the states use just the first and third test (A and C), but a few states, including California, require all three:

The worker is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact;

The worker performs work that is outside the usual course of the hirer’s business; and

The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hirer.

The second prong is what will trip up a lot of businesses hoping to reduce their costs by classifying workers as independent contractors rather than W-2 employees.