Can I hire independent contractors instead of employees?

Hiring Independent Contractors in California

In California, you can hire independent contractors instead of employees, but it requires careful consideration to comply with state regulations and avoid misclassification risks.

Key Operational Considerations

• Understand the ABC Test: As of 2026, California uses the ABC test to determine worker classification. To classify a worker as an independent contractor, you must confirm:
  • (A) The worker is free from your control and direction in performing the work.
  • (B) The work performed is outside the usual course of your business.
  • (C) The worker is engaged in an independently established trade or business.
• Review Operational Impact: Hiring contractors affects payroll, tax withholding, and benefits. Contractors handle their own taxes and insurance, reducing your payroll tax responsibilities but requiring clear contracts.
• Maintain Proper Documentation: Use detailed written agreements specifying the contractor relationship, scope of work, payment terms, and duration. Keep records for compliance and potential audits.
• Consider Insurance and Liability: Contractors typically carry their own liability insurance. Verify coverage to protect your business operations.
• Plan for Reporting and Payments: Issue Form 1099-NEC for payments over $600 annually to contractors. Ensure bookkeeping systems track these payments separately from employee wages.

Practical Steps to Hire Contractors

• Evaluate the nature of the work and confirm it meets the ABC test criteria.
• Draft and sign clear independent contractor agreements.
• Set up bookkeeping categories to track contractor payments accurately.
• Verify contractor licenses or business registrations if applicable.
• Consult with a tax or HR professional to align hiring practices with compliance and operational efficiency.