Independent Contractors and Sales Tax Nexus: What You Need to Know

Did you know that as of 2025, it’s estimated that there are nearly 80 million freelance workers in the United States? As the gig economy grows and businesses increasingly turn to independent contractors, sales tax obligations for both parties have become more nuanced than ever.

With state regulations evolving faster than ever, staying ahead of your tax responsibilities can be overwhelming. Let The Sales Tax People help with our breakdown of sales tax nexus and how it relates to independent contractors, as well as any potential risks, best practices, and actions you can be taking now to prepare.

Understanding Sales Tax Nexus

Nexus is what makes the determination of whether or not you’re responsible for collecting and remitting sales tax in a particular state. However, the criteria for what qualifies as a trigger for creating nexus has become more complex and is generally categorized in the following ways:

Physical Nexus

At one point in time, having a physical storefront was the only way to trigger sales tax obligations in a particular state. While that is still one qualifier, modern business operations have expanded qualifying criteria to also include the following:

• If you have an office or warehouse in that state
• If you have employees working in that state
• If you are storing inventory in a fulfillment center in that state

Economic Nexus

Due to a ruling from the U.S. Supreme Court in 2018, individual states can now require out-of-state sellers to collect sales tax based on economic activity alone, including the following:

• Sales volume, such as having $100,000 in sales in that state
• Transaction counts, such as having 200 transactions in that state

Similar to physical nexus, economic nexus qualifiers vary from state to state, so always be aware of where your sales are happening to keep an up-to-date sales tax permit in areas where you are achieving these thresholds.

Affiliate Nexus

As more of a niche classification, affiliate nexus is triggered when out-of-state businesses have a relationship with an in-state entity—or affiliate—that helps to generate sales, which can include the following:

• Partnering with in-state affiliates for advertising or referrals
• Using in-state entities to provide services like delivery or maintenance

While not mutually exclusive, affiliate nexus is different from economic nexus, as the qualifier is based on the relationship between businesses rather than economic activity alone. Affiliate nexus is particularly important when it comes to independent contractors, as state laws may classify them as affiliates, meaning their activities can establish affiliate nexus for out-of-state businesses.

Sales Tax Nexus and Independent Contractors 

Independent contractors—also commonly referred to as freelancers or self-employed individuals—might be creating nexus without even realizing it, so understanding the contributing variables is crucial for both you and them.

Who Are Independent Contractors?

Independent contractors are individuals or entities that provide services to other businesses, generally under contractual terms or as needed. Unlike employees, they do the following:

• Use their own tools and resources
• Often work for multiple clients
• Are responsible for their own taxes

When it comes to hiring independent contractors, different types of business relationships have the potential to create one or more types of nexus in ways you may not have considered. When in doubt, it’s always best to check the requirements for any state you’re hiring an independent contractor in, especially when it comes to any of these job-specific areas:

Sales and Marketing

Having independent sales reps or marketers operating in a state on your behalf can potentially create nexus. This is especially true if they’re actively soliciting sales.

Training and Consulting

If you send trainers or consultants to work with clients in other states, be aware that this could establish nexus in those locations.

Installation, Repair, and Warranty

Contractors performing installation, repair, or warranty services for your products in a state might trigger nexus, even if this work is only performed for a short period of time.

State-Based Independent Contractor Provisions 

As with other nexus triggers, how and when hiring an independent contractor can trigger nexus varies from state to state. While some may consider any presence of a contractor working on your behalf as establishing nexus, others may have completely different qualifiers that can impact how you structure your workforce and operations.

The ABC Test

As of 2025, 33 states use the ABC test, in which the burden of proof falls on an employer to demonstrate that a worker meets all three of the following conditions to be classified as an independent contractor rather than an employee:

1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact.
2. The worker performs work that is outside the usual course of the hiring entity’s business.
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Because all three conditions must be satisfied in order for employers to classify workers as independent contractors, the ABC test has the potential to create the following:

• Physical nexus if workers in a particular state are now classified as employees
• Economic nexus if workers classified as independent contractors contribute to the total revenue or transaction volume that reaches a particular state’s economic threshold
• Affiliate nexus if workers are not considered employees but sales or services associated with them are contributing to business revenue

As of 2025, the following states use the ABC test to make these determinations:

• Alaska
• Arkansas
• California
• Connecticut
• Delaware
• Georgia
• Hawaii
• Illinois
• Indiana
• Kansas
• Louisiana
• Maine
• Maryland
• Massachusetts
• Nebraska
• Nevada
• New Hampshire
• New Jersey
• New Mexico
• Ohio
• Oregon
• Rhode Island
• Tennessee
• Utah
• Vermont
• Washington
• West Virginia

Additional State-Specific Considerations

While this is not an exhaustive list, there are some additional considerations in specific states that can either create nexus or make the determination of whether or not a worker is classified as an independent contractor. Always be aware of the rules specific to every state in which you are doing business.

• In California, businesses that use independent contractors for selling, delivering, installing, assembling, or taking orders for tangible products generally create nexus.
• In Connecticut, businesses that use independent contractors for sales, delivery, taking orders, or maintaining a place of business generally create nexus.
• In Illinois, using a similar name or trademark or receiving sales-based commissions may create affiliate nexus.
• In Iowa, a multifactor test that examines factors such as the degree of control, skill required, and method of payment is used to determine independent contractor status.

How-to Evaluate Independent Contractor Relationships

Because the classification of a worker as an independent contractor or employee can have major implications when it comes to tax liability, it’s important to regularly review these relationships, specifically when it comes to some key factors.

Degree of Control

Because independent contractors traditionally manage their own operations, if you are stipulating how, when, or where the work they are doing for you is done, they might instead need to be classified as employees.

Integration with Business Operations

If an independent contractor’s work is becoming more central to your business operations, this could suggest more of an employee relationship than an independent contractor arrangement.

Exclusivity

In the event an independent contractor is working more exclusively for you than for other similar or competing businesses, this may result in requiring you to classify them as employees.

Proper Documentation

With every new independent contractor relationship, having the right documentation can serve to protect you in the event of an audit or legal dispute. Draft contracts that clearly outline the scope of work, payment terms, and responsibilities, using clauses that specify the independent nature of the relationship and avoiding language that could imply employment.

Scope of Work

Define specific deliverables and project timelines to demonstrate a project-based relationship rather than ongoing employment.

Location of Services Performed

For state-specific nexus purposes, keep detailed records of where independent contractors are performing their work.

Payment Details

Maintain records of invoices submitted by contractors and payments made, ensuring that costs are built into the contract price to reinforce independence.

Proactive Nexus Review

Periodically review where your independent contractors are operating to identify if you are approaching or have reached the thresholds for any potential nexus.

Tracking Systems

Implement systems that can monitor independent contractor activities to maintain clear boundaries between them and employees and demonstrate compliance with state-specific rules.

Professional Guidance

When dealing with complex situations like multistate operations or unclear worker classifications, consulting with a legal or tax professional may be the best option to protect your business.

Common Sales Tax Mistakes to Watch Out For

Taking into consideration everything listed above, here are some of the more common mistakes businesses make when it comes to ensuring their compliance with sales tax obligations when working with independent contractors, and what you can do to avoid them.

Employment Misclassification

Misclassifying workers as independent contractors instead of employees can have significant tax and legal consequences, resulting in noncompliance with state tax laws, triggering audits and penalties. To avoid this, ensure that you understand the IRS and state-specific criteria for classifying workers appropriately.

Assessment Checklist

1. Identify if your business activities have created sales tax nexus in specific states.
2. Confirm that all workers are properly classified for each of those states.
3. Keep detailed records of transactions, exemptions, and contractor activities.

Registration Timing

Failure to register for a sales tax permit after your business has established nexus in a specific state can result in penalties or interest charges. There is generally a window of 30–60 days to do so, but check state requirements and factor in application processing time.

Sales Tax Permit Registration Process

1. Determine where your business has triggered one or more nexus thresholds.
2. Gather the necessary information for each state you are submitting to.
3. Complete the appropriate state-specific sales tax registration form.
4. Monitor your application and promptly respond to any follow-up requests.
5. Receive your permit and begin collecting and remitting sales tax as required.

Gaps in Documentation

If you don’t have clear records of sales tax collected, payments made, and any exemptions claimed, you run a number of risks when it comes to audits, filing amended returns, and not knowing if your business has created new nexus obligations. Routinely check not only your own records but any changes made at a state or federal level.

Ongoing Monitoring Strategies

• Regularly review nexus rules, as laws regarding nexus can change frequently and any new updates may affect your business obligations.
• Periodically review the work of independent contractors to ensure that they are not unintentionally creating new nexus obligations where they operate.
• Promptly notify states of changes such as new business locations or independent contractor engagements that can impact nexus.
• Leverage tools or professional services to track sales tax collection and remittance for clear, accurate records in the event of an audit.

Questions? The Sales Tax People Can Help!

Navigating the complexities of sales tax obligations when it comes to working with independent contractors may seem daunting, but by understanding what can trigger nexus, some of the more common state-specific rules, and how to best evaluate your business relationships, you have the knowledge necessary to confidently steer clear of costly missteps.

If you still have questions, The Sales Tax People are here to help! Our expert team can provide tailored guidance for your unique situation, ensuring that you’re not just compliant but also optimized for success. Contact us today, and let us help turn sales tax complexities into your competitive advantage!