An independent contractor (also known as a freelancer) is a person or entity who agrees to work for another person or entity as a nonemployee. Because of the independent contractor’s status as a nonemployee, the contractor must pay their own Social Security and Medicare (FICA) taxes. And the person or entity hiring the independent contractor has no obligation to withhold income taxes from the contractor’s fees. It is important for the person or entity who hires a worker to properly classify the worker as an employee or as an independent contractor based on the IRS’s right-to-control test.

In California, the classification of a worker as an independent contractor or an employee is governed by state statutes and the application of the 'ABC' test as established by the California Supreme Court in the Dynamex decision and later codified in Assembly Bill 5 (AB 5). Under the ABC test, a worker is presumed to be an employee unless the hiring entity can prove that (A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. If a worker is classified as an independent contractor, they are responsible for paying their own Social Security and Medicare taxes, and the hiring entity is not required to withhold income taxes from the contractor’s fees. Misclassification can lead to legal penalties and liabilities. It is crucial for hiring entities to properly classify workers, and they may use the IRS’s right-to-control test as guidance, in addition to considering state law requirements.