Scope note: This post is about a New Jersey rule. It is not a national standard. The IRS uses a different test (the common-law test) to decide federal tax status [11]. California has its own ABC test, with statutory exemptions and a different test for some workers [2][11]. Other states use their own tests, and some agencies within a single state use different ones [12]. Everything below is about New Jersey’s N.J.A.C. 12:11, which applies when a worker performs services for compensation in New Jersey [5].

I’m a 1099 consultant, and I’d like to stay one. I chose this. I pay self-employment tax, I fund my own SEP IRA, I carry my own risk, and I pick my clients. When New Jersey’s new rule on independent contractor classification became operative on October 1 [3], I read it with one question in mind: what happens to me if a client can’t pass the ABC test?

Under New Jersey law, anyone paid for services is presumed to be an employee. The hiring company must prove all three prongs, and if it fails any one, the law treats me as an employee [1][5]. A 1099, a contractor agreement, or an LLC doesn’t change that on its own [1][6]. However independently I actually work, the client’s inability to prove it overrides the facts. NJDOL says workers aren’t penalized for being misclassified [1], but the consequences still land on me: a terminated contract, a restructured one, or a prospective client who decides hiring an independent New Jersey consultant isn’t worth the risk.

The state says the rule isn’t a new test. Acting Labor Commissioner Kevin Jarvis said it isn’t a new test or a change in enforcement [2], and Gov. Sherrill said that anyone who is a legitimate contractor today will still be one tomorrow [3]. I’d like to believe that, but a promise isn’t a protection. The Department softened its own proposal after public comment, including adding a safe harbor for control a client exercises only to comply with the law [5]. A draft that needed softening wasn’t a pure restatement.

The three prongs, from a consultant’s seat

Having multiple clients, an LLC, a professional license, or liability insurance isn’t enough on its own under Prong C [6].

Software work doesn’t come in the shape this test expects

This is where the test fits consulting worst. Serious software development is deep, context-heavy, and sequential. A software professional cannot responsibly carry many complex projects at once, and clients don’t want that. They hire a developer to hold an entire system in their head for months. One client at a time, for a year or more, is how the work is normally done, and that says nothing about who controls the work.

Yet the factors count it against independence. NJDOL lists the amount of work and the length of time worked for the current client, and how much of your work comes from that client compared with others, as Prong C considerations [1]. The rule lists the share of income from the client as a factor [5]. To be fair about what the rule does: no single factor decides, and NJDOL’s warning signs distinguish an open-ended hire from a specific job with an end date [1]. A defined project helps. But that’s a defense I have to assemble, not a presumption in my favor.

The factor also measures the wrong thing. What Prong C is after is whether the business can survive the end of the relationship [6]. Concentration at one moment is a weak proxy for that. The better evidence is what happens when a project ends: I finish, I invoice, I move to the next client, and my business continues. An employee who is let go has nothing to move on to. A consultant who goes from one long engagement to the next over years, replacing each client with another, is exactly the independent business Prong C says it’s looking for. The summaries I read say the factors count customers and income share, but none says whether sequential clients over time count [5][6], and I haven’t found anything saying they do.

Does working remotely, or from my own office, get me out of this? Do carve-outs invalidate the test?

No on both counts, and it’s worth being precise about why.

The remote rule isn’t a carve-out from the test. It’s a definition inside Prong B. The rule says a worker’s home, where they perform remote work, is not the client’s place of business [5][6]. Since Prong B is an “or,” a remote consultant can usually satisfy it that way even when the client is in the same line of business as the work. But Prongs A and C are separate, and all three are required. Working from home tells the state nothing about whether the client controls you or whether you run a real business.

What if you rent your own office instead of working from home? The rule’s explicit exception covers a personal residence, not a rented office, but the same logic applies. If the office is yours rather than the client’s, and none of the work happens at a location the client owns or uses to run its business [5][14], Prong B’s second route is satisfied.

It doesn’t invalidate the test, either. “Carve-out” means two different things here:

• The remote rule narrows one prong from the inside. That makes the test more workable, not less valid.
• Legislative exemptions remove whole professions from the test. Lawmakers are advancing them for insurance brokers, certain truck drivers, and amateur sports officials [2]. Legally, the test stands. Politically, it’s a strong argument that the test is badly calibrated, because the Legislature keeps patching it one profession at a time. Business groups made that argument too [2][3]. And none of the coverage I read mentions an exemption for software or technology consultants.

What the remote rule does change is where the fight is. For a remote consultant, Prong B stops being the problem. That deflates one of the loudest critiques, but it narrows everything to Prongs A and C, which are the ones you can control and document.

Some caveats:

• Time at the client’s location. If you work at the client’s office, or in space the client provides, Prong B’s second route is at risk. The rule treats a location as the client’s place of business when the client carries on a core part of its business there, especially if you also work from that location [5][14].
• Out-of-state clients. I haven’t found guidance on a New Jersey-based consultant whose client is out of state. That’s a question for a lawyer.

Can I be 1099 federally and an employee in New Jersey?

In principle, yes. The federal government and New Jersey use different tests, and passing one doesn’t mean passing the other. The ABC test is generally stricter than the IRS common-law test, so a relationship that’s defensible federally can still fail an ABC test [11][12]. One tax-practitioner analysis of California’s ABC law says a business could properly treat a worker as an independent contractor for federal tax and employment law purposes and still have to treat that same worker as an employee under California law [11].

A state finding doesn’t rewrite my federal return. The ABC test governs New Jersey’s laws, and the IRS decides federal worker status by its own process [9].

In practice, though, I doubt many clients would live with that split. Treating me as an employee under New Jersey law means paying state unemployment and disability contributions and meeting wage and hour obligations, all while keeping me as a contractor for federal purposes. That’s an administrative headache. I expect most clients would either convert me to an employee outright or end the engagement. The client’s decision, not the state’s ruling, is what would end my self-employment on that income.

What happens to my SEP IRA?

Reclassification happens client by client, so only the affected engagement would change. For a consultant who bills through an LLC and funds a SEP IRA, there are two separate questions: what happens to the money already in the account, and what happens to future contributions.

The money already in the account

The account itself is safe. A SEP IRA is a traditional IRA that I own [13], and reclassification doesn’t freeze, confiscate, or move it. The real question is whether the contributions I made, and the deductions I took for them, would hold up if income that supported them were later treated as wages.

Here’s why it’s a question at all. A SEP contribution is capped by compensation, and for a self-employed person, compensation means net earnings from self-employment [8]. If income that counted toward those earnings is later treated as wages, the earnings supporting my contributions shrink. Any contribution above the resulting limit becomes an “excess contribution.”

The IRS has a standard correction for excess SEP contributions: the excess, adjusted for earnings, comes back out of the account, and the sponsor doesn’t get a deduction for it. Leaving it in requires a formal IRS correction with a sanction of at least 10% of the excess, plus fees [8]. So as a worst case by analogy, some of my contributions would come back out and I’d lose the deduction on them, which would mean amended returns [10].

Some important limits on that worst case:

• It’s an analogy, not a prediction. The IRS guidance covers contributions that exceed the limit. I found no guidance on what happens to a contractor’s SEP when income is reclassified.
• It requires federal recognition. New Jersey’s ABC test governs New Jersey’s laws, and the IRS decides federal worker status by its own process [9]. A state finding alone doesn’t change my federal return.
• The size depends on the numbers. How much would be excess depends on how close I contributed to the limit and how much self-employment income remains from clients who weren’t reclassified.

Future contributions

Going forward, the picture is clearer:

• Today, my LLC is the SEP sponsor, not the client. My LLC bills the client, the revenue is my business’s income, and my contribution is calculated from my net earnings from self-employment. (If an LLC were taxed as an S corporation, the calculation would run off the wages the LLC pays its owner instead. Either way, it’s based on what my own business earns.)
• If a client had to treat me as its employee, it would be paying me wages. As I understand it, those wages aren’t my LLC’s revenue, so they produce no SEP contribution capacity. Income from clients who aren’t reclassified is unaffected.
• Only the client could contribute to a SEP on those wages, as my employer, and only if it sponsors one. That’s the client’s choice, not mine. Only an employer can contribute to a SEP, which is why an employee can’t fund one for themselves [13].
• What I could still do on my own is make regular traditional IRA contributions, including into my existing SEP IRA account [13], subject to the usual IRA limits and deduction rules. That limit is in the low thousands of dollars, a small fraction of what a SEP allows on a consulting income.

So going forward, the cost is lost contribution capacity on the reclassified income. Looking backward, the money stays mine, and the exposure is limited to contributions and deductions that the reclassified income no longer supports.

What reclassification would cost me

The state’s guidance lists what employees get: overtime, unemployment, workers’ compensation, sick leave, and family leave [1]. For people pushed into a 1099 so a company could dodge those obligations, those protections are real, and I have no quarrel with going after companies that do that. NJDOL itself says misclassification is most prevalent in construction, trucking, housecleaning, in-home care, stagecraft, and online platforms [1]. Consultants aren’t on that list.

But many of us aren’t forced into anything, and the rule has no way to tell the difference. The state’s own FAQ says that even a worker who knew about the classification and agreed to it isn’t thereby a contractor [1]. My informed preference counts for nothing under the test.

If my income were reclassified, here’s what I’d be exposed to:

• Past self-employment tax doesn’t come back. Nothing in the rule or the coverage I read provides for refunding it.
• My contract, and my pipeline. The client’s extra payroll cost has to come from somewhere. My expectation, which is an opinion, is that it lowers my rate or ends the engagement, and that new clients become harder to land.
• Business deductions go with the status. Employees and contractors are taxed differently, and I’d want a CPA to model exactly what I’d lose.
• My SEP contributions. Going forward, see the section above. Looking backward is murkier, and that’s the next section.

Real but unproven is the point

I can’t tell you whether my past SEP contributions are safe, and nobody else can either. One practitioner source warns that a reclassified worker can have deductions such as a SEP IRA disallowed and may have to file amended returns [10]. But that source is describing reclassification in general, not New Jersey’s rule specifically. I don’t know how likely it is after a state-level reclassification, and I haven’t found anyone who does.

That is the problem. A clear rule would let me look at my situation and know where I stand. Instead I have to guess at three separate unknowns:

1. Will my client keep me, convert me, or drop me?
2. Will a New Jersey finding spill over into my federal tax treatment?
3. Will past deductions be challenged?

The uncertainty is itself the cost. It pushes clients toward the cautious choice and consultants toward leaving the state or the business, and that’s before a single contractor has actually been reclassified.

The critique

The test is a 1936 statute applied to a remote economy. NJBIA’s Jack Kelly says applying it to remote work and the modern gig economy misses the mark [2]. The pile of exemption bills is the evidence.

The uncertainty is the product. The factors are non-exhaustive, no single one decides, and the hiring company carries the burden. A risk-averse New Jersey client doesn’t have to be convinced you’re an employee. It only has to be unable to prove you aren’t.

Prong C measures concentration, not independence. The factors reward working for many clients at once and penalize a long engagement with one. That’s backwards for software, where deep focus on one system for a year is the job. The right question is whether the consultant controls their own business: sets the rate, bears the risk, can say no, is free to take other work, and has a record of replacing clients. Advertising and a visible storefront weren’t written for a referral-based consultant either, and neither tells you whether the client controls the work.

Reassurance isn’t a rule. The governor says anyone who is a legitimate contractor today will remain one [3], and the commissioner says no one has named a provision that differs from prior law [2]. Neither can bind a client’s lawyer, a future administration, or a court applying a fact-sensitive, case-by-case test. If the rule truly changes nothing, the state should be willing to put that in a form that protects people, such as a safe harbor for consultants who meet clear criteria.

The numbers don’t describe me. The state cites audits finding about 14,000 misclassified workers, $1.3 billion in underreported wages, and $32.5 million in missed contributions [2]. That’s serious. But audits go where the state looks, and the state’s own list of high-prevalence industries leaves out professional services [1].

I won’t claim the sky is falling. The presumption of employment isn’t new, and with the remote rule, “nearly impossible to qualify” [4] overstates it. But the accurate criticism is damning enough: a presumption of employment, applied to people who chose independence, enforced through their clients, with no way to know the answer in advance.

What I’d ask for: a safe harbor or exemption for professional and technical consultants who meet objective criteria (a written statement of work, an independent business entity with its own overhead, control over their own methods and rate, and the freedom to take other work), and a clear way for a client to get an advance determination. California exempts some workers by statute and uses a different test for others [2]. New Jersey can too.

How a client’s lawyer might read your engagement

Here are the questions a client’s lawyer is likely to ask. Each one maps to a factor, one of the considerations the rule lists under Prongs A and C. Where I think a factor is a poor measure of independence, I say so, but the question will get asked either way.

1. Does one client supply most of your income? The rule weighs it [5]. For software work I think it’s a poor proxy, for the reasons above. It’s one factor, not a verdict.
2. Does the client set your hours, require standups or on-call availability, or limit who else you can work for? This is the real control question. A contract clause barring other work says far more about dependence than the fact that you happen to have one client right now.
3. Do you use your own equipment and set your own rate?
4. Is the work defined by deliverables and statements of work, or by hours and availability?
5. Does the engagement have a defined scope and end date, or is it open-ended?
6. Do you run the practice like a business (invoicing, your own entity, your own overhead)? Advertising is a listed factor, but it’s a weak one for referral-based consulting.
7. Do you work from your own space, not the client’s office?
8. Do client security and onboarding requirements go beyond what law requires? The safe harbor covers legal compliance [5], and I don’t know that it covers contractual security controls. Ask an attorney.

What happens next

The Department says it isn’t sure it has the legal authority to delay further [2]. Senate President Scutari asked for a delay to July 1, 2027, and Gov. Sherrill said she’s willing to work on carve-outs for specific groups [3]. If you’re a consultant who wants to stay independent, tell your legislators now. The Legislature is where this will be decided.

Meanwhile, talk to an employment attorney and a CPA, especially if one client supplies most of your income. And keep records: contracts, invoices, proof of other clients, proof of your own tools and marketing.

The good news for companies that hire consultants

I object to how this law fits software consulting, but I don’t think companies should stop hiring independent experts. The ABC test asks for evidence of real independence, and a well-run consulting engagement tends to produce it: a defined scope and end date, deliverables instead of hours, a specialist who chooses their own methods and tools, runs a real business with its own entity and overhead, and is free to take other work.

Building an engagement this way isn’t a workaround. It’s what real independence looks like in practice, and it happens to be how well-run software projects operate too: clear scope, clear deliverables, a clear finish line. It’s simply a better way to buy software. You pay for outcomes. You get depth in exactly the skills the project needs, from someone who has built similar systems for other organizations. You skip the hiring cycle and the ramp-up, and when the project ends, you don’t carry the headcount. No arrangement is guaranteed under a fact-sensitive test, so have your counsel review how the engagement is set up. But the risk is manageable, and it’s a poor reason to go without expertise you’d otherwise want.

If you’re planning a software project in New Jersey and want to talk through how an engagement could be structured, I’d be glad to talk.

This is general information and opinion, not legal or tax advice.

References

1. New Jersey Department of Labor and Workforce Development. Independent Contractors and Misclassification, My Work Rights, revised September 11, 2026.
2. Nikita Biryukov. NJ labor chief criticizes ‘river of misinformation’ about independent contractor rule, New Jersey Monitor, September 21, 2026.
3. Nikita Biryukov. Controversial NJ independent contractor test regulations take effect, New Jersey Monitor, October 1, 2026.
4. Bill Spadea. NJ’s 1099 crackdown could wreck the gig economy, New Jersey 101.5, September 24, 2026.
5. Kathleen O’Malley, Michael R. Futterman, Patrice E. LeTourneau, and Danielle M. Dwyer. New Jersey Employers Should Prepare Now for Oct. 1 Independent Contractor Rule, Insurance Journal (Duane Morris LLP), September 30, 2026.
6. Rutu Patel. New Jersey Adopts Comprehensive ABC Test for Independent Contractors, Rubin, Fortunato & Harbison P.C., August 24, 2026.
7. New Jersey Department of Labor and Workforce Development. Adopted New Rules: N.J.A.C. 12:11, ABC Test; Independent Contractors, New Jersey Register, 58 N.J.R. 1587(a), May 2026.
8. Internal Revenue Service. SEP plan fix-it guide: Contributions to participants’ SEP-IRAs were miscalculated because the wrong definition of compensation was used, IRS.gov.
9. Internal Revenue Service. Worker Classification 101: employee or independent contractor, IRS Newsroom.
10. People 2.0. Worker Misclassification: Why the IRS Cares & You Should Too, People 2.0 Blog.
11. Ernst & Young LLP. Employers have questions on how to proceed after new California law further restricts classifying workers as independent contractors, EY Tax News & Insights, October 23, 2019.
12. Fredrikson & Byron, P.A. The Tangled Web of Worker Classification: Different Legal Standards Weave Confusion, Let’s Talk About Tax.
13. Fidelity Investments. What Is a SEP IRA?, Fidelity Learning Center.
14. New Jersey Issues Controversial Final Regulations on ‘ABC Test’ for Independent Contractor Status, The National Law Review.
15. Same ABCs, New Rules: New Jersey Finalizes Updated Regulatory Framework for Worker Classification, The National Law Review.