The 1099 Self-Check: Would Your California Workers Pass the EDD's ABC Test?
6 min read · By Tuan Phan, EA · June 6, 2026
Last week we wrote about the DOJ's $32 million nail-salon prosecution — a case built on cash payroll and false 1099s. Most California small-business owners we talk to about that case have the same reaction: "I don't have an off-the-books cash payroll. But I do have some workers on 1099s and I'm not 100% sure they should be."
If that's you, this article is for you. It's not about criminal conduct. It's about a much more common civil exposure that California businesses run into every quarter — and a 60-second self-check that will tell you whether your 1099 workers are actually at risk under California's ABC test.
Why this matters more in California than anywhere else
In 2018, the California Supreme Court decided Dynamex Operations West v. Superior Court and adopted a strict three-part test — the ABC test — for whether a worker is an independent contractor or an employee. The legislature codified that test as AB 5 in 2019 (now California Labor Code § 2775).
Under the ABC test, a worker is presumed to be an employee unless the hiring business can prove all three of the following:
- (A) The worker is free from the control and direction of the hiring entity in connection with the work, both under the contract 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.
All three. Miss any one, the worker is an employee under California law — regardless of what your written contract says, what you've been doing for the last decade, or whether you've been filing 1099-NECs in good faith.
The California Employment Development Department (EDD) is the agency that enforces this. EDD audits run on a routine three-year cycle, but assessments can reach back up to eight years where misclassification is found. The financial picture is rarely pretty.
The 60-second self-check
For each person you currently pay on a 1099, run them through these three honest questions. If you cannot answer "yes" to all three, you have a classification issue worth taking seriously.
Test A — Control
Can this worker decide when they show up, what hours they work, what order they do things, what tools they use, and how they get the result?
Red flags: you set their schedule, you require them to wear a uniform, you tell them how to do the job, you supply their tools or workspace, they cannot send a substitute, they need permission to take breaks.
Test B — Outside Your Usual Business
Is the work this person does different from your core business?
A restaurant hiring an HVAC contractor to fix the walk-in: easy yes (HVAC isn't part of running a restaurant). A restaurant hiring a "1099 prep cook" to make the food it sells: easy no — prep cooking is the restaurant's core business. A nail salon hiring a "1099 nail technician": same problem. A real-estate firm hiring "1099 agents" to sell its listings: same problem (there's a specific carve-out for licensed real estate agents under § 2778, but only when conditions are met).
Test C — Independently Established Business
Does this worker actually run their own business — multiple clients, their own marketing, a registered DBA or LLC, business insurance, invoices on their own letterhead, the ability to lose money if a project goes wrong?
Red flags: you are their only client; they have no business cards or LinkedIn; they invoice through your software; they don't carry liability insurance; they cannot turn down your work.
The most common patterns we see in California
These are the ones that, in our experience, almost always fail the ABC test on audit:
- Restaurant prep cooks, dishwashers, servers, hosts paid on 1099s — fail Test B
- Nail salon technicians and hair stylists labeled as "booth renters" but who actually take customers from the salon's walk-in traffic — fail Test A and often Test B
- "1099 drivers" for delivery, courier, or ride services without a statutory exemption — fail Test B
- Construction subcontractors doing the same trade as the general contractor without a separate contractor's license — fail Test C
- Cleaning, landscaping, and janitorial "1099" crew members who work only for one company — fail Test A and Test C
- Retail employees paid as 1099s during a "trial period" — fail all three
Some categories have specific statutory carve-outs (licensed professionals, certain business-to-business relationships, referral agencies, certain creative occupations under § 2783). Most small-business 1099 arrangements do not benefit from these carve-outs — they are written narrowly and the rules are strict.
What an EDD misclassification assessment actually costs
If EDD reclassifies a worker as an employee, the assessment typically includes:
- Unpaid Unemployment Insurance (UI) tax — currently up to 6.2% of the first $7,000 of wages
- Employment Training Tax (ETT) — 0.1% of the first $7,000
- State Disability Insurance (SDI) — currently 1.2% of all wages (no cap), employer is liable when not withheld
- Personal Income Tax (PIT) — generally 6% of total wages where not withheld
- Penalties — typically 10–50% of assessment for negligence or willful misclassification
- Interest compounding from the original due dates
For a single misclassified worker paid $60,000 a year for three years, a typical full assessment lands in the $20,000–$35,000 range — for that one worker. For a salon or restaurant with 8–12 misclassified workers, the assessment is often six figures. EDD also routinely refers misclassification findings to the IRS, which then assesses federal employment tax on the same wages.
What to do if your self-check raised flags
1. Don't change your filings in a panic.
Reissuing prior-year W-2s in place of 1099s without a plan can create more problems than it solves. Triage the question first.
2. Document what you have, privately.
Make a simple list of each 1099 worker, what they do, when they started, how they're paid, and which of the three ABC tests is the closest call. A tax attorney can review this under privilege.
3. Look at clean-slate options going forward.
For some businesses, the right move is to reclassify going forward and address prior years through structured programs. For others, a particular worker truly does pass the ABC test and just needs the supporting documentation built out. The right answer depends on the specific facts.
4. If EDD has already contacted you, treat it as urgent.
An EDD Notice of Audit (DE 231 or DE 619) starts a clock. You have a short window to gather records, prepare the legal argument for each worker, and make procedural elections that affect the entire audit. Bringing in tax controversy counsel before you respond is almost always less expensive than bringing them in after.
5. Don't ignore correspondence from the Franchise Tax Board.
FTB and EDD share information. If EDD reclassifies workers, FTB typically picks up the personal income tax piece and the business franchise tax adjustments on a separate track. Coordinating the defense across both agencies usually produces a better overall outcome than fighting each one separately.
Want a confidential read on your 1099s? Free 30-minute review.
If you ran the self-check above and you're not sure where you stand, send us a short list of your 1099 workers and what they do. We'll give you an honest, confidential read on which classifications are defensible, which are likely to fall on audit, and what the practical options look like. No obligation.
Request Free Confidential Review →The bottom line
Worker classification in California is one of the cleanest examples of a problem that is much less expensive to fix proactively than reactively. EDD audits do not announce themselves — they arrive in the mail, typically when a worker files an unemployment claim, a competitor complains, or your industry hits the rotation. The owners of the businesses that come through our door for EDD defense almost always say the same thing: "I knew this was a gray area. I wish I had looked at it last year."
This is the moment to look.
Sources: Dynamex Operations West v. Superior Court, 4 Cal. 5th 903 (2018); Assembly Bill 5 (2019); California Labor Code §§ 2775, 2778, 2783; California Unemployment Insurance Code § 1735; Employment Development Department, "Information Sheet: Employment" (DE 231).
About the author: Tuan Phan is an Enrolled Agent with 40+ years representing California businesses in IRS, EDD, CDTFA, and FTB audits. He practices at Tax Resolution Center LLC in San Jose. This article is for general information only and is not legal advice. Reading it does not create an attorney-client relationship.