The ABC test is used in some states to determine if someone is an employee or independent contractor, with consequences for unemployment insurance payments. It has three conditions, and is simpler than the IRS test but more complicated than other federal agency tests. Two-thirds of states use it, with some requiring all three conditions to be met. The Department of Labor and Social Security Administration use a five-point checklist, while the IRS uses an 11-point test.
The ABC test is a simple checklist used in some states to decide whether someone is an employee or an independent contractor. This has consequences for the company’s payments under state unemployment insurance plans. The ABC test is simpler than the IRS assessment for federal tax purposes, but it is more complicated than that used by other federal agencies.
The ABC test sets out three conditions that must be met for a person to be classified as an independent contractor. The first is that the hiring company does not control or direct the way the person performs the work. The second is that the work is performed at a location other than the company’s business or is otherwise not part of the company’s usual business. The third is that the person is in an established and independent profession or profession, rather than simply working for the company.
About two-thirds of states use the ABC test. Most require all three conditions to be met, but some require only two of the three to be met. If the limit is not reached, the person is automatically classified as an employee. This means that the employer is legally responsible for making employer contributions towards the employee under the state’s unemployment insurance scheme.
The ABC test differs from the test used by the Department of Labor and the Social Security Administration. These agencies use a five-point checklist that covers: the company’s control over the worker, the time the worker has invested in the job, the amount of control a company has over whether the worker makes a profit, the amount of skill and initiative necessary for the company. the worker and the permanence of the relationship between the two. Although the agencies use the checklist, they work with the overarching principle of “economic reality”, which asks if the worker is economically dependent on the company. The criteria used by these two agencies determine whether a company is liable to pay an employer contribution to social security taxes.
The IRS uses an 11-point test. While this is more detailed, it covers three main areas. These are: the control the company has over the worker, the financial arrangements between the company and the worker, and the type of relationship between the two parties. Unlike the ABC test, the IRS test is more of a set of guidelines than a rigorous checklist, and there is no minimum pass or fail score.
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