The IRS test
The IRS looks at the whole relationship, grouped into three areas:
- Behavioral control: do you control how, when and where the work is done?
- Financial control: who invests in tools, can the worker profit or lose, and do they work for others?
- Relationship: is there a written contract, benefits, and an expectation of ongoing work that's central to your business?
New Jersey's ABC test
For unemployment, disability and wage-and-hour purposes, New Jersey presumes a worker is an employee unless the business shows all three of these: the worker is free from control, the work is outside the usual course of the business or its places of business, and the worker has an independently established trade or business. New Jersey has also stepped up penalties and enforcement for misclassification.
New York
New York generally applies a common-law control test, with stricter rules in specific industries such as construction and commercial goods transportation.
If you've misclassified workers
- The IRS's Voluntary Classification Settlement Program lets eligible businesses reclassify workers going forward with a reduced payment for past federal employment taxes.
- Section 530 relief may protect businesses that had a reasonable basis and treated similar workers consistently.
- Either party can ask the IRS for a determination on Form SS-8.
Frequently asked questions
What is the New Jersey ABC test?
A three-part test that presumes a worker is an employee unless the business proves the worker is free from control, the work is outside the usual course or places of the business, and the worker has an independently established business.
What happens if I misclassify an employee as a contractor?
You can owe back payroll taxes, penalties and interest, plus state unemployment and disability contributions, and New Jersey can impose additional misclassification penalties.
Can I fix misclassification without an audit?
Often yes. The IRS Voluntary Classification Settlement Program lets eligible businesses reclassify workers prospectively with a reduced payment for prior years.
Does a signed contractor agreement settle the question?
No. Agencies look at how the relationship actually works, not just the contract.