Many freelancers, consultants, and gig workers in California may not have a clear answer as to whether they are independent contractors or employees. AB 5 defines classification, which can impact workplace rights, as well as income and tax reporting.
[Image: AB5 and taxation in California]California’s ABC Test Explained
The California ABC test is used to decide whether a worker is an independent contractor for most workers. It is typically a requirement of the hiring business to meet all three requirements:
A: The worker is not under the direction or control of the company.
B: Work is performed by the worker outside of the company’s normal course of business.
C: The worker is engaged in an independently established trade, occupation, or business.
If the hiring entity is not able to meet all three requirements, the worker may be considered an employee. But AB 5 has many exceptions, and some professions can be assessed using the Borello test of multiple factors. Look for a professional (like a sales tax attorney Los Angeles) for some additional help.
This is important for freelancers, since an independent-contractor agreement or a 1099 form will not constitute a contractor.
Freelancer vs. W-2 Tax Treatment
The tax implications can vary widely.
Typically, a W-2 employee has federal income taxes and California income taxes withheld from his/her paychecks. In addition, employers pay their portion of Social Security and Medicare taxes and are responsible for any California payroll obligations. In general, employees are not allowed to take the same type of deduction for unreimbursed employee expenses on their California return as a self-employed business owner.
Generally, if a person is self-employed, he or she is an independent contractor. Depending on the payment agreement, income can be reported on Forms 1099-NEC, 1099-MISC, or 1099-K. The contractor is responsible for their own income tax and Federal self-employment tax.
The Estimated Payments are Due Each Quarter
Since contractors are not usually required to have California income tax withheld, they might have to make estimated income tax payments to the Franchise Tax Board.
Generally, the State of California requires estimated payments to be made when the person expects to owe a minimum of $500 after withholding and credits, and doesn’t qualify for the safe-payment requirements for 2026. Most times, there are four estimated payments required in California, but the amounts and schedules are different than federal rules.
A sensible strategy is to allocate a portion of each freelance check, as opposed to waiting until tax time.
Business Expenses May Help to Lower Taxable Income
Qualifying ordinary and necessary business expenses are deductible for self-employed Californians. This can be in the form of:
- Travel and running a business in a vehicle
- Qualified home-office expenses and rent in offices
- Equipment depreciation
- Business interest
- Certain professional expenses
- Expenses for a qualified pension or retirement plan
- Some state and local taxes
Good records are crucial. Save receipts, invoices, and mileage logs, and keep records of business use of property. Hiring an expert like a payroll tax audit attorney is mandatory if you are facing a CDTFA or tax audit in California.
California Freelancers: These Are A Few Tips to Keep in Mind
To reduce surprises:
- Don’t assume that a 1099 is a contractor.
- Keep good records all year round.
- Save money for federal and California taxes on every payment.
- Check estimated payments in case of significant income changes.
- Verify if you have an AB 5 exemption for your profession or contracting agreement.
AB 5 is about more than just paper. Classification may impact withholding, self-employment taxes, estimated taxes, deductions, and reporting requirements for California freelancers and consultants. Knowing the rules early on can help you avoid unanticipated tax bills and expensive classification issues.
