Can my consulting firm bring in other consultants as 1099 subcontractors?

Greymill AcademyUS4 min readReviewed Oct 202617 primary sourcesUK version

The short answer

A consulting firm that subcontracts consulting work meets the strictest version of the classification tests, especially in California, so check before the first SOW.

The takeaway. Run the federal and state tests before subcontracting consulting. In California, prong B fails, so you need an exemption whose every condition fits, or an employee.

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Written for independent consultants, fractional executives and small consulting firms that use employees or subcontractors.

The short version

  1. Run the two federal tests.For tax, the IRS weighs behavioral control, financial control and the relationship. Federal wage law looks at economic reality.
  2. Run your state's test too.California's ABC test needs work outside your usual business. Consulting for a consulting firm fails that. Massachusetts and New Jersey use ABC tests too.
  3. Fit an exemption, or hire an employee.In California, every applicable condition of the business-to-business exemption must fit. Document how the work really runs; the subcontractor's own LLC is not enough.

Bringing in another consultant as a subcontractor lets a small firm take on bigger work. The catch is that your subcontractor does the same work your firm sells, and that is exactly what the stricter classification tests look at.

Three tests, three possible answers

  1. Federal tax: the common-law test.The IRS weighs behavioral control, financial control and the relationship (Rev. Rul. 87-41). Either party can ask for a determination on Form SS-8, which takes months. Section 530 relief protects a business with a reasonable basis and consistent 1099 treatment.
  2. Federal wage law: economic reality.On May 1, 2025, the Department of Labor's Wage and Hour Division said it would no longer apply the 2024 rule's analysis in enforcement. As of Oct 2026, the 2024 rule still applies in private litigation, subject to controlling circuit law, while the Division follows Field Assistance Bulletin 2025-1.
  3. California and other ABC states.A worker is an employee unless (A) free from your control, (B) doing work outside the usual course of your business, and (C) customarily engaged in an independent business (Labor Code 2775). A consulting firm subcontracting consulting fails prong B. Massachusetts and New Jersey use ABC tests too.
The rule

California's exemptions are narrow

A consulting firm subcontracting consulting needs the business-to-business exemption, which applies only if every applicable condition is met; entity form alone does not establish the exemption or independent-contractor status. A listed professional services exemption may apply instead, and then the older Borello test decides. Willful misclassification carries a civil penalty of $5,000 to $15,000 per violation. As of Oct 2026.

Cal. Labor Code 2775, 2776, 2778 and 226.8

AvoidTreating a subcontractor as independent because they invoice through their own LLC.
Do this insteadChecking every condition of the exemption that applies and documenting how the work is really done: a written agreement, their own entity, insurance and other clients, deliverables-based SOWs and no set hours.

Entity form alone does not settle it. As of Oct 2026, willful misclassification in California costs up to $15,000 per violation.

When you hire instead

  • Exempt salaried consultants. As of Oct 2026, the federal salary floor for the professional and administrative exemptions is $684 a week, after the 2024 increase was vacated (Texas v. Department of Labor, November 15, 2024). California requires twice the state minimum wage for full-time work, $70,304 a year at the 2026 minimum of $16.90 an hour.
  • Pay: a base salary plus a bonus on collected fees or utilization over a target, with the formula written down.

Check the IP clause in your subcontractor agreement too. In California, a work-made-for-hire clause signed with an individual can make that person an employee for workers' compensation and unemployment insurance, so use assignment language instead.

Asked in Greymill

Example question and answer from Staff & HR
You
Small consulting firm in California. I want to bring in another consultant for a six-month client project. They have their own LLC and invoice me, so I can treat them as a 1099 subcontractor, right?
Staff & HR
Not on the LLC alone. In California, their own company does not settle it.

The test: a worker is an employee unless they pass all three parts of the ABC test. Part B asks whether the work is outside the usual course of your business. A consulting firm subcontracting consulting fails it.

Your likely way through: the business-to-business exemption. It applies only if every applicable condition is met. Document how the work really runs:
A written agreement
Their own entity, insurance and other clients
SOWs built on deliverables
No set hours

Why it matters: knowingly misclassifying someone carries a civil penalty of $5,000 to $15,000 per violation (As of Oct 2026).

If no exemption fits, hire them. To pay them as an exempt salaried employee, California requires at least $70,304 a year (As of Oct 2026).

Send me their setup and I'll check it against each condition.

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Your question

I run a consulting business in [state], in the US. I want to bring in [name or role] as a subcontractor on [project], working [hours, location, whose methods and tools], who also works for [other clients] through [their own entity / as an individual]. Run the federal and state classification tests on these facts, tell me which exemption could apply and what I must document, and compare the cost of hiring them as an employee instead.

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Sources

The primary sources behind this lesson, checked Oct 2026.

  1. Publication 15-A (Classification: being A contractor and using one)
  2. FAB 2025-1 pp.1 to 2; 2026 NPRM FAQ Q1 and Q13; Fact Sheet 13 (Classification: being A contractor and using one)
  3. Lab. Code 2775, 2776, 2778 (Classification: being A contractor and using one)
  4. G.L. c.149 s.148B (Classification: being A contractor and using one)
  5. Lab. Code 226.8 (Classification: being A contractor and using one)
  6. 8 CFR 274a.2; 42 U.S.C. 653a (The first W-2 hire)
  7. Fla. Stat. 448.095 (The first W-2 hire)
  8. Lab. Code 3700; NY WCL 10; Fla. Stat. 440.02(17); Tex. Lab. Code 406.002 (The first W-2 hire)
  9. 29 CFR 541.600 (The first W-2 hire)
  10. Lab. Code 515(a) (The first W-2 hire)
  11. Lab. Code 246 (The first W-2 hire)
  12. 17 U.S.C. 101, 204(a); 490 U.S. 730 (1989) (Work product, ip and restrictive covenants)
  13. 18 U.S.C. 1836; 1833(b) (Work product, ip and restrictive covenants)
  14. s.181.988 (Work product, ip and restrictive covenants)
  15. 2025 Wyoming Session Laws Ch.170, W.S.1-23-108(a)(i) to (iv), effective-date section (Work product, ip and restrictive covenants)
  16. RCW 49.62; ESHB 1155 (Work product, ip and restrictive covenants)
  17. C.R.S. 8-2-113 (Work product, ip and restrictive covenants)

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