The ABC test determines whether a worker is an employee or an independent contractor for tax purposes and to avoid misclassification. Under the ABC test, a worker is considered an independent contractor if the following conditions are true:
- The worker is free from the control and direction of the hiring organization when it comes to work performance
- The worker’s expertise and workload is different from the hiring entity’s usual business
- The worker has an independently established trade, occupation, or business that resembles the work performed
Do all states use the ABC test?
Many states have adopted the ABC test and some use it only for specific situations, such as determining unemployment or insurance eligibility. Businesses operating in the following states may need to use the ABC test to demonstrate that the worker is truly an independent contractor:
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- West Virginia
Who needs to perform the ABC test?
The responsibility of correctly classifying employees or independent contractors falls to the employer. Therefore, the employer must be able to answer ‘yes’ to all three conditions in the ABC test to classify a worker as an independent contractor.
If the employer answered ‘no’ to any of the conditions, the professional is considered an employee. Businesses may want to err on the side of caution when classifying workers as independent contractors (unless they’re able to prove the worker meets all conditions) because misclassification can result in expensive fines and penalties.
How does the ABC test impact workers?
There’s a huge difference in the responsibilities and treatment of workers when it comes to hiring employees versus independent contractors.
When a worker is an employee, businesses must follow employment laws (minimum wage laws, overtime, benefits, and more). Employers will also need to withhold and pay employment taxes on behalf of the employee.
Employers hiring contractors will not need to withhold taxes, provide benefits, or pay for contractors’ supplies or tools. Additionally, contractors are not obligated by law to work a particular number of hours per the employer’s schedule.