1099.law / Knowledge
What is an independent contractor?
A worker who runs their own business and provides services on their own terms — and why the distinction from "employee" is one of the most expensive mistakes in small business law.
The plain-English answer
An independent contractor is a worker who controls how their work is performed, operates an independent business, and provides services to multiple clients. They are not employees. They set their own hours, use their own tools, and bear their own business risk.
The legal distinction matters because employees get payroll tax withholding, minimum wage, overtime, unemployment insurance, and often benefits. Independent contractors get none of that — they handle their own taxes, carry their own insurance, and invoice for their work.
A business that calls a worker a "contractor" but treats them like an employee — controlling their schedule, requiring exclusive work, providing tools and training — is misclassifying. The label on the 1099 doesn't change the legal reality.
What it means for your business
The IRS common-law factors
The IRS uses a multi-factor analysis organized into three categories. No single factor is determinative, and the IRS weighs them collectively.
- Behavioral control: Does the company control how the worker does the job — what hours, what methods, what tools? Employees are directed. Contractors set their own process.
- Financial control: Does the worker have a significant investment in their own tools or business? Do they work for multiple clients? Can they profit or lose money? Contractors bear business risk.
- Type of relationship: Is there a written contract? Are there employee benefits? Is the relationship ongoing and indefinite, or project-based? Contractor relationships have defined scope.
The ABC test (California, New Jersey, Massachusetts, and others)
Several states — most prominently California under AB5 — use a stricter three-part test. A worker is presumed to be an employee unless the hiring business proves all three:
- A — Free from control: The worker is free from the company's control and direction in performing the work, both in the contract and in practice.
- B — Outside the usual course of business: The work is performed outside the hiring entity's usual course of business. A graphic designer hired by a design agency probably fails this test. A plumber hired by a software company probably passes.
- C — Independent trade or business: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work they're performing.
Indicia of independence that actually hold up
A well-structured contractor agreement does more than paper over the relationship. It establishes the right facts:
- The contractor sets their own hours and methods — the agreement says so explicitly.
- The contractor has and uses their own tools and equipment.
- The contractor can subcontract or hire helpers (or decline to — but the option exists).
- The contractor works for multiple clients concurrently.
- The relationship is project-based, with a defined scope of work.
- Intellectual property is assigned explicitly — not assumed.
Where 1099.law fits
Our contractor agreements are built to establish independent contractor status correctly. They include the right indicia of independence and avoid the language that gets reclassified. Generic templates from LegalZoom and Rocket Lawyer frequently miss both of these — they look like contractor agreements but contain the employment framing that triggers reclassification.
Both sides of the relationship benefit from clarity:
- If you hire contractors — SMB Essentials ($49/mo) gives you contractor agreements, IP assignment, and NDAs built to withstand classification scrutiny.
- If you are the contractor — a properly structured MSA and SOW are your evidence of independence. Customer Contracting ($79/mo) delivers those as click-through agreements.