What are California's rules for classifying workers as 1099?
California presumes every worker is an employee. Under AB5, which took effect in 2020, the state uses the ABC test to determine if someone can be classified as an independent contractor. You have to satisfy all three prongs or the worker is an employee by default.
Prong A requires that the worker is free from your control and direction in how they perform the work. You can define the end result, but you can’t dictate when they show up, what tools they use, or how they get the job done. Prong B is the one that trips up most trade businesses. The worker must perform work that is outside the usual course of your business. If you run a plumbing company and hire a plumber on a 1099, that fails prong B because plumbing is your business. Prong C requires that the worker has an independently established trade or business of the same type. They need to be marketing their services to others, not just working for you.
The good news for construction and contractor businesses is that AB5 includes an exemption for licensed subcontractors. When you hire a sub who holds a valid CSLB license, the older Borello test applies instead of the ABC test. The Borello test looks at multiple factors like who controls the work, whether the sub supplies their own tools, whether they can profit or lose money on the job, and whether the relationship is permanent or project-based. It is more flexible and more closely matches how subcontracting actually works in construction.
But the exemption has requirements. The sub needs a current contractor’s license. They need to be operating their own business, meaning they have their own insurance, their own tools, and the ability to work for other companies. If someone only works for you, shows up when you tell them to, and uses your equipment, calling them a 1099 sub won’t hold up regardless of what your contract says.
The penalties for misclassification are serious. The EDD can go back years and assess unpaid payroll taxes, unemployment insurance, and disability insurance plus penalties and interest. You could also face Labor Code violations for unpaid overtime, meal breaks, and benefits the worker should have received as an employee. It adds up fast.
If you are unsure about a worker’s classification, the safest move is to get it reviewed before you start paying them. A CPA who works with construction businesses can look at the actual working relationship and tell you whether a 1099 classification holds up under California law. Getting it right from the start costs a fraction of what fixing it later does.
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More Questions
What happens if I misclassify a worker as 1099?
You'll owe back payroll taxes, penalties, and interest at the federal level. In California, the consequences are even steeper thanks to the ABC test under AB5, which makes it harder for trade and construction businesses to classify workers as independent contractors.
Read answerShould I track mileage or use actual vehicle expenses?
It depends on the vehicle and how you use it. For contractors and trades businesses driving trucks, actual expenses often save more. But both methods require solid mileage records.
Read answerWhat's a reasonable monthly fee for bookkeeping services?
Most small service businesses pay between $200 and $600 per month for professional bookkeeping. The actual number depends on transaction volume, how many accounts you have, and whether your industry requires specialized tracking.
Read answerWhat's the difference between a W-2 employee and a 1099 contractor?
A W-2 employee works under your direction and you handle their payroll taxes. A 1099 contractor runs their own business and handles their own taxes. The distinction matters because misclassifying workers can result in serious penalties, especially in California.
Read answerHow do I avoid red flags on my tax return?
The best way to avoid red flags is to report accurate numbers backed by real documentation. Most red flags come from sloppy bookkeeping, not intentional fraud. Clean books and honest reporting keep you off the IRS radar.
Read answerHow do I set up payroll for my small contracting business?
Register for federal and California state employer accounts, get workers' comp insurance, choose a payroll system, and classify your workers correctly before running your first paycheck.
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