Independent Contractor vs. Employee: Developer Rules in 2026
The agreement a startup signs with its first two engineers often says “independent contractor” at the top. The agencies that decide classification look past that heading to the working relationship itself: who sets the engineer’s priorities each morning, whose laptop the code is written on, whether the engineer has other clients, and whether the work is the product the company sells.
For developers, the independent contractor vs. employee question comes down to control and independence. Under the IRS common-law rules, a developer is your employee if you can control what will be done and how it will be done, even when they work remotely. A developer is an independent contractor when they are in business for themselves and you control the result rather than the method. Federal labor law and state tests such as California’s ABC test apply their own standards, and a developer can pass one test while failing another.
This is general information, not legal advice.
How Does the IRS Decide Whether a Developer Is a Contractor or an Employee?
The IRS looks at all the evidence of control and independence in the relationship and groups it into three categories: behavioral control, financial control and the type of relationship. Its guidance on whether a worker is an independent contractor or an employee is explicit that there is no set number of factors that decides the answer and that no single factor stands alone.
Behavioral control asks whether the company controls or has the right to control what the worker does and how they do the job. Financial control covers the business side of the work, such as how the developer is paid, whether expenses are reimbursed and who provides tools. The type of relationship looks at written contracts, employee-type benefits, whether the relationship is expected to continue and if the work is a key aspect of the business.
Remote work gets its own paragraph in that guidance. A person working from a location other than your office is your employee under the common-law rules if you have the right to control the details of how the services are performed, and that holds even when the worker chose to work remotely. For developer teams that have always been distributed, location tells you nothing about classification.
| IRS category | Points toward contractor status | Points toward employee status |
|---|---|---|
| Behavioral control | The developer decides how to build to an agreed specification | You assign daily tasks, set the process and review how they work |
| Financial control | The developer invoices for deliverables, carries their own tools and expenses, and has other clients | Ongoing pay for time, company laptop and accounts, expenses reimbursed |
| Type of relationship | A defined project with an end point and no benefits | Open-ended work on the core product, expected to continue |
If the answer remains unclear, either the business or the worker can file Form SS-8 and ask the IRS for an official determination. According to the IRS, a determination can take at least six months, so the form is a way to settle a recurring question, not a quick check before a start date.
What Is the Federal Labor Rule for Independent Contractors in 2026?
For wage and hour law under the Fair Labor Standards Act (FLSA), the rule on the books is still the Department of Labor’s 2024 rule, but the department is not applying it in its own enforcement and has proposed replacing it. Anyone relying on a federal standard in 2026 needs to know which of these applies to their situation.
The 2024 rule, codified at 29 CFR Part 795 and in effect since March 11, 2024, uses an economic reality test with six factors weighed together: opportunity for profit or loss depending on managerial skill, investments by the worker and the business, permanence of the relationship, nature and degree of control, whether the work is integral to the business, and skill and initiative. The DOL’s Fact Sheet 13 says that rule is the subject of litigation and remains in effect for purposes of private litigation. It also says FLSA employment is broader than the common-law standard, so a developer who looks like a contractor for tax purposes can still be an employee under the FLSA.
In May 2025, the Wage and Hour Division issued Field Assistance Bulletin 2025-1, which told its investigators to stop applying the 2024 analysis in FLSA investigations and to rely instead on the 2008 version of Fact Sheet 13 and a 2025 opinion letter. On February 27, 2026, the department published a proposed rule that would rescind the 2024 rule and readopt the 2021 rule’s analysis with some modifications, which treats control over the work and the worker’s opportunity for profit or loss as the two core factors. The comment period closed on April 28, 2026, according to the DOL’s independent contractor rulemaking page. As of late October 2026, that page listed the proposal and no final rule.
In practice, that means a developer arrangement can face the six-factor test in a private lawsuit and a different analysis in a DOL investigation. Structuring the engagement so it holds up under the broader six-factor analysis is the more cautious position until a final rule is published. Check the rulemaking page before relying on either framework.
How Does California’s ABC Test Change the Answer?
California’s ABC test starts from the assumption that every worker is an employee, and the hiring business must prove all three of the test’s conditions to treat a developer as an independent contractor. AB 5, later amended by AB 2257, wrote the test into the California Labor Code at sections 2775 to 2787, and the state’s explanation of the ABC test sets out the three parts:
- A: The worker is free from the hiring entity’s control and direction in performing the work, both under the contract and in fact.
- B: The work is outside the usual course of the hiring entity’s business.
- C: The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
Part B is where software companies usually have the hardest case. The state’s guidance, summarizing the California Supreme Court in Dynamex, says contracted workers who provide services in a role comparable to that of existing employees will likely be viewed as working in the usual course of the business. A developer writing product code for a company that sells that product is doing the company’s core work.
California does have exceptions in which the older multifactor Borello test applies instead, including a business-to-business exception. That exception comes with a long list of conditions. Among them, the developer must operate as a sole proprietor or business entity, work under a written contract that specifies payment and its due date, maintain a business location separate from yours, be able to contract with other businesses, advertise to the public, provide their own tools and set their own hours and location consistent with the nature of the work. The state itself says these exemptions involve complicated rules and recommends independent advice before relying on one.
California law can also reach a different answer from federal law. The state’s guidance confirms that a worker can have employee status under California law without having it under federal law. Other states apply their own tests, so start with the law of the state where the developer performs the work.
How Do the Tests Apply to a Startup’s First Two Engineers?
The same company can have one engagement that reads as employment and another that reads as genuine contracting. Consider a seed-stage startup building the first version of a product, a scheduling tool for physical therapy clinics, with two engineers starting in the same month.
The first engineer works from home in Sacramento, joins the daily standup, takes tickets from the founder, uses a company laptop and company accounts, has no other clients and is building the core scheduling engine. The engagement has no end date. Under the IRS categories, the founder controls what is done and how. Under the six FLSA factors, the work is permanent, controlled and integral. Under California’s Part B, the work is the company’s usual course of business. Every test points to employee status, whatever the contract says.
The second engineer runs a small studio in Austin with several clients and is building a one-time data import tool that pulls clinic records from an older practice management system. The startup defines the output and the acceptance criteria, the engineer decides how to build it, invoices against milestones, uses their own equipment and the engagement ends when the import runs cleanly. That arrangement has a much stronger contractor profile under the federal tests. It still needs review against the law of the state where the work is performed, and it can drift if the founder starts assigning the engineer unrelated product tickets after the import is done.
For each person, ask what the working relationship will look like after three months, and judge the classification from that picture.
Who Owns the Code a Contractor Writes?
Without a written agreement that transfers ownership, a contractor may own the copyright in the code they wrote for you. The U.S. Copyright Office’s circular on works made for hire explains that a work is made for hire in two situations: when an employee creates it as part of their regular duties, or when a specially ordered or commissioned work falls into one of nine listed categories and the parties agree in a written instrument signed by them that it is a work made for hire.
The nine categories are a contribution to a collective work, part of a motion picture or other audiovisual work, a translation, a supplementary work, a compilation, an instructional text, a test, answer material for a test, and an atlas. A custom application or website often does not fit cleanly into any of them, which is why contractor agreements for software usually include an express written assignment of copyright rather than relying on a “work made for hire” label alone.
Agency-built work raises the same question one level up. When a marketing agency builds a company’s website and then hands it to an in-house team, the agency’s own developers created the code, so ownership typically sits with the agency until its contract assigns it to the client. Before the handoff, confirm that the assignment covers the site’s custom code, templates and design files. Also list the third-party components, such as a commercial theme, paid plugins and licensed fonts, that stay under their own license terms and may need to be relicensed in the company’s name. The in-house team should leave the handoff with the repository, hosting, domain registrar and content management accounts held by the company rather than by the agency.
How Do You Keep a Contractor Arrangement Consistent With the Work?
Keep the paperwork and the daily practice telling the same story, and review both whenever the work changes. Agencies compare the contract with how the work happens, and the practice carries more weight than the label. California’s guidance is direct on this point: a signed independent contractor agreement, the absence of payroll withholding and a Form 1099 instead of a W-2 do not determine employment status.
A contractor agreement for development work usually sets out defined deliverables and acceptance criteria, payment tied to milestones or deliverables, the copyright assignment and confidentiality terms covering source code and customer data. It also states that the developer controls how the work is done and can serve other clients. Each renewal should come with a fresh scope rather than an open extension.
The review matters most at renewal. If a developer who started on a defined build is now taking daily tickets on core product work, attending every internal meeting and working for no one else, the facts have changed. Take advice before the next renewal rather than renewing on the old paperwork.
The consequences of misclassification depend on which agency finds it. The IRS says that a business that classifies an employee as an independent contractor with no reasonable basis can be held liable for employment taxes for that worker. California adds civil penalties for willful misclassification under Labor Code section 226.8, along with liability for wages, unemployment insurance and workers’ compensation where workers are found to be misclassified.
How Gun.io Fits Into a Developer Engagement
Gun.io is a global technical services company that works with clients through staff augmentation or scoped project delivery. Gun.io handles contracts, payments and compliance as part of the engagement. Contracting still needs terms appropriate to the jurisdiction where each engineer works, and using a partner does not remove the client’s own obligations under the tests above.
For a startup deciding how to bring on its first engineers, the shape of the work comes first: how much direction it needs, where the engineers are and how long it will run. You can see how Gun.io works with startups building their first engineering team, how it approaches security and privacy in engagements, and how the staff augmentation and managed services models assign ownership.
Frequently Asked Questions
Does a 1099 Make a Software Developer an Independent Contractor?
No. A Form 1099 reports payments and does not decide classification. Both the DOL and California’s labor agency say that receiving a 1099 or signing an independent contractor agreement does not by itself make a worker an independent contractor.
Is the DOL’s 2024 Independent Contractor Rule Still in Effect?
Yes, for private litigation, though the DOL does not apply it in its own investigations. The department proposed in February 2026 to rescind it and return to an analysis built on the 2021 rule, and that proposal had not become a final rule as of late October 2026.
Can a Developer Be a Contractor for Federal Tax Purposes and an Employee Under State Law?
Yes. California’s guidance states that a worker can be an employee under California law even when they are not an employee under federal law, because the state and federal tests differ.
Does Forming an LLC Make a Developer an Independent Contractor?
Not on its own. An entity is one condition of California’s business-to-business exception, which also requires a written contract, a separate business location, freedom from your control, other clients and more, and under the ABC test a label assigned by the hiring business does not establish an independent business.
What Happens if the IRS Reclassifies a Contractor as an Employee?
The business can owe employment taxes for that worker, and relief under Section 530 is available only when the business had a reasonable basis for its treatment and meets the other requirements. A separate Voluntary Classification Settlement Program lets eligible businesses reclassify workers going forward with partial relief.
Who Owns Code a Contractor Wrote Without a Written Agreement?
Often the contractor does, because outside employment the work-for-hire rule covers only the listed categories and requires a signed written agreement. A written copyright assignment in the contract is the usual way to make sure the company owns the code it paid for.
Classify by How the Developer Will Work
Decide classification from the working relationship you expect after the first few months, then write the contract and run the engagement to match it. If you are working out how to bring on your first engineers, tell us about the team you’re putting together, where the engineers are and how much direction the work will need.
