Legal & IP
Definition
An independent contractor is a self-employed individual or entity hired to perform specific work for a client without becoming an employee. The distinction matters enormously: employees receive benefits and payroll taxes; contractors do not. Misclassifying employees as contractors is one of the most common and costly labor law violations.
The IRS and Department of Labor use multi-factor tests to determine worker classification. The IRS examines behavioral control (does the company control how work is done?), financial control (does the worker have significant investment and opportunity for profit/loss?), and the type of relationship (written contracts, benefits, permanency). The ABC test, used in California and other states, presumes workers are employees unless: (A) they are free from control; (B) they perform work outside the usual course of the hiring entity's business; and (C) they are customarily engaged in an independently established trade. Misclassification consequences include: back payroll taxes (employer + employee share), back benefits, state labor penalties, and private lawsuits. 1099-NEC is issued for contractor payments of $600+. Contractors can deduct business expenses; employees generally cannot. Platforms like Upwork and Expert Sapiens operate in contractor models — the expert is the contractor, the client is the hiring party.
If you are hiring workers regularly for the same type of work, using equipment you provide, or setting their schedule — a court may find them employees regardless of how the contract is labeled. An HR consultant or employment attorney can audit your contractor relationships, restructure agreements to reduce misclassification risk, and advise on state-specific tests that are stricter than federal standards.