Can Therapists Be 1099 Contractors in New Jersey? The ABC Test for Group Practices

Possibly. But in most cases, in the event of an audit, the government is going to say no.

If your therapists see your practice’s clients in your office, you’re going to have a very hard time defending them as contractors under New Jersey law. But if a therapist runs a genuinely independent practice and works from their own home, there may be a legitimate path to a 1099.

If you own a mental health practice in New Jersey, you may have heard conflicting advice about the age-old employee vs. contractor issue for therapists, counselors, social workers, and psychologists. Some people say therapists can never be contractors in New Jersey. Others say they can, as long as they choose their own hours, work remotely, or have their own LLC.

Neither answer is reliable on its own because New Jersey looks at the actual relationship holistically.

Another extremely important caveat: The state starts from the assumption that anyone you pay should be a W-2 employee, and it’s up to you to prove otherwise. This can be thought of similarly to "guilty until proven innocent."

To do that, the practice has to show that the arrangement passes all three parts of what’s called the ABC test: how much control the practice has, the nature or location of the work, and whether the therapist has an independently established business of their own. Fail any one part, and the therapist is an employee under the New Jersey laws that use the test.

This article is the New Jersey layer. The federal rules (the IRS test, federal back taxes, and the IRS settlement programs) are a separate question, and our complete guide to 1099 vs. W-2 for therapists covers them. You need both, because a therapist can pass one test and fail the other.

The short version:

• New Jersey presumes anyone you pay is an employee. The practice has to prove all three parts of the ABC test, not one or two.
• Part B is where most group practices get stuck. Therapy is the service you sell, so the only realistic route through B is for the therapist to work outside all of your places of business. Their own home counts as outside.
• Working from home isn’t enough by itself. The practice still has to show it doesn’t control the work (A) and that the therapist runs an established practice of their own (C).
• An LLC, a contractor agreement, or a 1099 doesn’t settle anything. Neither does a clean federal answer.

Let’s start with an easy example: a contractor vs. an employee

Let’s say you need an electrician to fix the lights in your office.

• The electrician quotes a price, decides how to do the repair, brings the necessary equipment, and carries their own insurance.
• They have a website, business cards, and a Google Business profile.
• They serve lots of other customers. When your lights are fixed, they move on to the next job. If you never call again, their business continues.
• And possibly the most important point here: the electrician works in a totally different industry than your private practice. You provide mental health services, they provide electrical services.

This is a textbook case of a business paying an independent contractor.

Now picture a therapist (let’s call her Jen) who works at a group practice.

• The practice sets the fees charged to the client.
• The practice sets Jen’s compensation.
• The practice supplies the office (or the telehealth platform), handles intake and billing, and sets its own operating procedures.
• Jen has no meaningful client base or business apart from the group.
• Jen and the practice are in the same industry: mental health.

This is a textbook employer-employee relationship.

Keep in mind, this is an illustration, not a legal checklist. Independent contractors don’t have to own a truck, maintain a website, or have hundreds of customers. A therapist’s business probably needs far less equipment than an electrician’s. The useful question is whether the therapist, like the electrician, is running a business that exists independently of your practice.

Here’s the question I’d hold onto for the rest of this article: if your practice stopped sending Jen clients tomorrow, what business would she have left? If the honest answer is “none,” New Jersey is almost certainly going to treat her as your employee.

What changed with New Jersey’s ABC test in 2026?

New Jersey didn’t invent the ABC test in 2026. The state has used it under its Unemployment Compensation Law for decades. What’s new is that on May 5, 2026, the New Jersey Department of Labor and Workforce Development (NJDOL) adopted detailed regulations (N.J.A.C. 12:11) explaining how it applies the test. The rules took effect June 1, 2026, and became operative October 1, 2026. They apply under the state laws that use the ABC test, including the Unemployment Compensation Law, the Temporary Disability Benefits Law, the Wage and Hour Law, the Wage Payment Law, and the Earned Sick Leave Law.

October 1 was not a declaration that every 1099 therapist suddenly became an employee. It’s a reason to look at your existing arrangements carefully, now that the state has spelled out how it reads the test.

The New Jersey ABC test in three questions

The “or” within B gives two possible routes through that part. But A, B, and C all have to be established. A therapist who passes B because they work from home can still fail A or C. (N.J.A.C. 12:11-1.2 to 1.5)

Can your group practice use 1099 therapists? Four common scenarios

These examples simplify real relationships. They show where the questions tend to come up. They don’t decide anyone’s legal status.

There’s no magic number of other clients a therapist needs. There’s also no exception that makes a clinician a contractor because they’d prefer it. NJDOL says the hiring business is responsible for proper classification even when the worker agrees to the 1099 arrangement.

A: How much control does the practice have?

Think about the electrician again. You can describe the problem and agree on when the office will be open. You don’t set the electrician’s working hours, train them in electrical work, or dictate each step of the repair.

For a therapist, New Jersey may look at whether the practice sets required hours, requires availability at certain times, controls how services are delivered, sets compensation, provides training, restricts work for others, or keeps the right to direct the work. The written contract matters, but so does what actually happens after it’s signed. NJDOL says these considerations are not a scorecard where a certain number of favorable facts wins. The whole relationship gets evaluated. (N.J.A.C. 12:11-1.3)

That makes a few common statements less convincing than they sound:

• “The therapist chooses their hours.” A useful fact, but the practice may still direct plenty of other parts of the relationship.
• “We pay a percentage of collections.” The question is still who sets that percentage, who sets the client’s fee, and what other control the practice has. The rule specifically lists whether the practice sets the worker’s rate of pay as a factor.
• “We never tell clinicians how to do therapy.” Clinical autonomy matters, but a practice can exercise a lot of control through schedules, required availability, training, and limits on outside work without ever touching a session.

A New Jersey health care case shows how much this prong can do on its own. In a 2023 decision, the state’s Labor Commissioner looked at an imaging group that paid radiologists a flat rate per read and reported them on 1099s. The radiologists logged into the group’s system, had to read scans within 24 hours, and only occasionally worked on site, while the group billed patients and insurers and carried the risk of not getting paid. The Commissioner found they were employees based on A alone. Swap “radiologists reading scans” for “therapists doing telehealth sessions” and you can see why working remotely doesn’t settle anything.

Health care also comes with real compliance obligations, and the final rule recognizes that. Steps taken solely to comply with federal, state, or local laws or regulations don’t, standing alone, count as evidence of control under A. (N.J.A.C. 12:11-1.3(f)) That helps with legally required documentation, privacy, and licensing practices. It doesn’t mean every rule a group chooses to impose is legally required. On EHRs specifically: the proposed rule treated a business’s required software as evidence of control, and NJDOL dropped that from the final version. So requiring your EHR isn’t automatically decisive, but the broader operating relationship still matters.

B: Is the therapist doing the practice’s work, and where?

The electrician makes this one easy to see. A therapy practice provides mental health services, and fixing the lights is outside the usual course of that business. A therapist seeing the group’s clients is different: therapy is the thing the group sells.

That makes the usual-business route through B close to impossible for most group practices. But there’s a second route: the therapist performs the services outside all of the practice’s places of business. (N.J.A.C. 12:11-1.4)

This is where remote work matters. The final rule says a person’s own home, where they work remotely from a location the hiring business doesn’t operate, isn’t one of the hiring business’s places of business. (N.J.A.C. 12:11-1.4(e)) So a therapist who does all of their sessions by telehealth from their own home may have a path through the location side of B, even though they provide the same service as the group. A and C still have to be established separately.

If the therapist sees clients in your office, the location route is basically gone. If they work partly from home and partly in your office, the home sessions don’t erase the office sessions: B asks whether the work happens outside all of your places of business. A hybrid arrangement needs its own review.

Be careful with other off-site arrangements, too. New Jersey’s definition of a place of business is broader than a leased office. It includes places where the business has a physical plant or conducts an integral part of its business. (N.J.A.C. 12:11-1.4(c) through (e)) Don’t assume any location away from your office automatically counts. The protection for remote work from the therapist’s own home is the clearest one.

What this looks like in a real audit. A New Jersey client of ours was audited over exactly this issue. During the audit, the auditor told her, as she relayed it to me: “Don’t bother fighting this. When we see that the worker is in the same field as the business, we automatically assume the worker is an employee.”

That’s one auditor’s comment, not official policy, and it skips half of the rule. B can also be met when the work happens outside all of your places of business, which is the opening for clinicians who work from their own homes. But it tells you where an audit starts. If your clinicians see clients in your office, the auditor’s shortcut and the rule land in the same place, and there’s no B argument to make. If they work from home, you may have a real argument, but don’t count on the auditor to raise it for you. Be ready to make it yourself: tell the auditor you disagree at the exit interview, and file an appeal within 30 days of the state’s follow-up letter.

C: Does the therapist have a business that could continue without yours?

This is the Jen question again, and it’s the one I find most useful:

If your practice stopped sending this therapist clients tomorrow, what independent business would remain?

The electrician would still have a business. For a therapist, the equivalent might be an established private practice with its own clients, its own marketing, its own systems, and meaningful income from work outside your group. The two businesses don’t need to look alike. What matters is whether the therapist’s practice truly exists apart from this relationship and is stable enough to keep going if it ends.

The final rule lists relevant facts such as how long the separate business has existed, whether it’s viable, how many customers it has and how much work comes from each, the therapist’s investment, whether they set their own rates, and whether they market their services. No particular number of clients, and no website, is a stand-alone legal requirement. NJDOL looks at the totality of the facts, not a tally. (N.J.A.C. 12:11-1.5)

That’s why “our agreement says the therapist can work elsewhere” doesn’t answer C. Permission is relevant context, but the question is what independent practice the therapist actually has. And a second job, by itself, isn’t a separate business.

A note on outside clients. The proposed version of the rule had language emphasizing whether a worker actually did paid work for others during the period in question. NJDOL deleted that provision from the final rule. Real outside clients are still a listed factor, and often the most convincing evidence, but the final rule doesn’t require every therapist to show paid work for others during a specific audit period to pass C.

Can pre-licensed clinicians be 1099 contractors in New Jersey?

Associates are the clearest case. In New Jersey, a licensed associate counselor (LAC) can practice only under the direct supervision of a qualified supervisor, and an independent counseling practice has to be owned and operated by a fully licensed clinician. (N.J.A.C. 13:34-10.3) Other associate-level licenses come with their own supervision requirements, so check your board’s rules for each one. Our guide to starting a private practice in New Jersey covers the LAC ownership and supervision rules in more detail.

Here’s the interesting part. Because licensing rules require the supervision, the supervision itself may not count as control under A, thanks to the compliance carve-out above. But C is where it falls apart. It’s very hard to show an independently established practice when the license itself doesn’t let the clinician run one. If you have associates on 1099s, they’re the first ones to fix.

Why the paperwork can’t decide it for you

Some practices ask every 1099 therapist to form an LLC, carry their own insurance, sign a contractor agreement, and fill out a W-9. Those documents serve legitimate purposes, but none of them settles the classification question. This is what attorneys call “substance over form.”

The final rule says an LLC or other business registration, a professional license, or an insurance policy is not enough on its own to establish an independent business. If the group requires or encourages the therapist to form an entity, NJDOL says that can suggest a business in name only. And neither the “independent contractor” label in an agreement nor a Form 1099 can turn an employee into a contractor. (N.J.A.C. 12:11-1.5 and 1.6)

Our electrician probably has insurance and a registered business, too. Those facts help describe a real business in combination with everything else about the relationship. A therapist gets the same full-picture analysis, not a pass for producing the same documents.

A real New Jersey case: therapists with their own LLCs

One New Jersey decision shows this better than any summary. In OT, Inc. v. New Jersey Department of Labor and Workforce Development (2017), a company placed physical and occupational therapists in New Jersey schools, and the therapists worked through their own LLCs. The company’s trouble started the way these cases often do: two temporary disability claims led the state to audit it.

An administrative law judge sided with the company. The Commissioner of Labor didn’t. He categorically rejected the conclusion that the company had passed the ABC test, and he rejected the idea that the state carries the burden of proof under C. The company escaped the assessment for 2005 through 2007 only because of the specific wording of an earlier settlement agreement with the state. And the Commissioner closed with a warning: hiring therapists who have formed single-member LLCs won’t, by itself, take their work out of the unemployment law.

New Jersey’s ABC test vs. the IRS test

Everything above is New Jersey’s test. The IRS uses a different one (the common-law control test) for federal employment taxes, and the U.S. Department of Labor uses yet another for federal wage law. Passing one doesn’t mean you pass the others.

In practice, New Jersey is usually the harder test for a therapy practice, mostly because of B. Federal law treats where the work happens as one factor among many. New Jersey turns the type of work and its location into a requirement you have to meet on its own. That’s how a clinician can be a defensible contractor for the IRS and still be an employee in New Jersey, like the last row of the table above.

Two practical consequences:

• The federal fixes don’t reach New Jersey. The IRS’s Voluntary Classification Settlement Program (VCSP) and Section 530 relief can limit federal back taxes, and our federal guide explains how VCSP and Section 530 relief work for therapy practices. Neither one touches New Jersey unemployment and disability contributions, state wage claims, or New Jersey’s misclassification penalties.
• Plan both sides at once. If you’re moving clinicians to W-2, a VCSP application should go in at least 120 days before your switch date, and the New Jersey side needs its own review. Handling them separately is how practices end up with a clean federal answer and an open state problem.

What are the penalties for misclassifying therapists in New Jersey?

If NJDOL decides your 1099 therapists were employees, here’s what’s on the table:

• Unpaid state contributions. Unemployment and disability insurance contributions that should have been paid on their wages, plus interest and penalties.
• Misclassification penalties. An administrative penalty of up to $250 per misclassified employee for a first violation, and up to $1,000 per misclassified employee for each later violation. (N.J.S.A. 34:1A-1.18)
• A penalty paid to the clinician. Up to 5% of the worker’s gross earnings over the past twelve months, paid to them. For a clinician you paid $90,000, that’s up to $4,500. (N.J.S.A. 34:1A-1.18)
• Wage law exposure. New Jersey’s wage laws apply to employees, including earned sick leave, and if a clinician doesn’t qualify as exempt, minimum wage and overtime for every hour worked, notes and admin included.
• Workers’ comp. New Jersey requires employers to carry workers’ compensation coverage, so an uncovered clinician is a coverage gap.
• The federal side. Federal employment taxes are a separate bill, covered in our federal guide.

One more thing: if you have any employees at all, New Jersey already requires you to post a notice about its misclassification rules where your employees can see it, and the same law protects employees who raise a misclassification question from retaliation. (N.J.S.A. 34:1A-1.19)

Thinking about moving your clinicians from 1099 to W-2? Whether the classification holds up legally is a question for employment counsel. What the switch does to your payroll costs, your clinicians’ pay, and your practice’s profit is exactly what my team and I help owners work through. Fill out the form at the bottom of this page and you’ll hear back from me personally.

How do New Jersey misclassification audits usually start?

NJDOL says it selects about 1% of New Jersey employers for audits each year. That’s the random part. For group practices, the more common trigger is a person.

NJDOL also audits based on referrals from unemployment claims, temporary disability claims, and wage and hour inquiries. The classic version: a clinician leaves your practice, files for unemployment, and the state has no wages on record for her work with you. That claim becomes a referral, and the referral becomes an audit. In the OT case above, two disability claims started it.

Once an auditor is in, payments to anyone outside payroll get a close look. NJDOL tells employers to have their 1099s and 1096s ready, along with invoices, contracts, agreements, advertisements, business licenses, and business cards for the people they paid. In other words, the auditor is looking for exactly the evidence that answers C. An audit usually covers the prior calendar year, but it can expand if issues turn up, and New Jersey requires you to keep records for the current year plus the four years before it.

What records should you keep to support 1099 classification?

If you believe a therapist really is a contractor, keep the evidence for each part of the test, organized the way the auditor will look at it. None of it guarantees the answer, but without it you can’t carry the burden of proof.

• For A (control): the signed agreement, plus proof that the day-to-day matches it, such as who sets the therapist’s rate and the client’s fee, how scheduling works, and the absence of required hours, training, or limits on outside work.
• For B (work or location): a record of where sessions actually happen. If the therapist works entirely from their own home, document that, along with the fact that they don’t use your office.
• For C (independent business): evidence that the therapist’s practice exists apart from yours, such as their own website and marketing, other clients or referral sources, their own billing and records systems, their business registration, and how long the practice has been running.

What if the relationship looks more like employment?

First, don’t assume a W-2 therapist needs a fixed, full-time schedule. A practice can employ a therapist part-time, offer flexible days and hours, allow telehealth, and pay a percentage or commission. NJDOL addressed this directly in its responses to comments on the 2026 rule. Being an employee also doesn’t mean the practice dictates clinical judgment.

Second, look at the full cost of each option, not just the split. Moving to W-2 adds employer payroll taxes, New Jersey unemployment and disability contributions, workers’ compensation, earned sick leave, and any benefits you offer. Our federal guide compares a 1099 split with a W-2 split for a clinician bringing in $150,000 a year: a 56% W-2 split costs the practice about what a 60% contractor split does, and leaves the clinician with about the same money before income tax. New Jersey’s own payroll contributions shift that math a little on both sides, so treat 56% as a starting point and model your own numbers.

Third, design the pay plan carefully. Exempt status for licensed professionals generally requires a guaranteed salary, so straight per-session or percentage pay with no base can mean tracking hours. Federal and New Jersey wage rules both apply, so I’d have an employment attorney sign off on the plan before the first paycheck.

If you use 1099 therapists, here’s the order I’d work in:

1. Identify the work and where it happens. Note which sessions happen in your office, at the therapist’s own home, or somewhere else.
2. Document the A, B, and C facts separately for each clinician. Don’t let one favorable fact, like flexible hours or remote work, answer all three questions.
3. Start with pre-licensed associates. They’re the hardest to defend under C.
4. Compare the agreement to what actually happens. Pay terms, training, limits on outside work, intake, scheduling, and control rights should be read as a whole.
5. Bring in employment counsel for the classification and any restructuring. If you’re already in an audit or a dispute, the timing and method of any change matter even more.
6. Model the money before you change anyone’s pay. You need the effect on payroll costs, cash flow, and profit, not just the difference between a 1099 and a W-2.
7. Work the federal side at the same time. Pick the federal approach (including whether VCSP makes sense) alongside the New Jersey review, so one switch date works for both.

When you talk to your clinicians about the change, it usually goes better than owners expect. Their day-to-day doesn’t have to change, the right split keeps their take-home close to where it was, and they pick up real protections, including New Jersey unemployment, temporary disability, and family leave insurance coverage.

Common questions

Are 1099 therapists illegal in New Jersey?

No. A therapist can be an independent contractor if the actual relationship passes all three parts of the ABC test. The job title doesn’t decide it, and neither does the paperwork.

Can an LPC, LCSW, LMFT, or psychologist be a 1099 contractor in New Jersey?

The license doesn’t decide it. A fully licensed clinician can qualify as a contractor, but only if the actual relationship passes all three parts of the ABC test. Associate-level clinicians, such as LACs, face licensing limits that make contractor status very hard to support, as explained above.

Does working entirely from home make a therapist a contractor?

No. Working from their own home can get a therapist through the location side of B. It doesn’t settle the practice’s control under A or the therapist’s independent business under C.

What if the therapist has only one group-practice client?

One client doesn’t decide it by itself. The number of clients and how much work comes from each are relevant under C. The question is whether an established, viable business exists apart from your group.

Does an LLC or contractor agreement protect us?

No. Neither one establishes contractor status. NJDOL looks at the working relationship and applies A, B, and C to it.

If my arrangement passes the IRS test, am I fine in New Jersey?

Not necessarily. They’re different tests, and New Jersey’s B prong is a must-pass requirement with no federal equivalent. An established practitioner who sees your clients in your office can be a defensible contractor federally and still be an employee in New Jersey.

I’m hiring my first clinician in New Jersey. What should I plan on?

W-2, in almost every case. A 1099 generally fits only an established practitioner who runs an independent practice of their own and works from their own space. Our federal guide has a full section on hiring your first clinician, including how to structure the pay. If you’re still setting up the practice itself, our guide to starting a private practice in New Jersey covers licensing, entity choice, and the New Jersey S corporation rules.

Does the ABC test apply to my front desk person, my biller, or my marketing agency?

It applies to anyone you pay for services. Your front desk person is almost always an employee: you set the hours and the procedures, and the work is part of running your practice. A marketing agency, IT company, or outside bookkeeping firm usually passes, because the work is outside the usual course of a therapy practice (B), they run their own businesses (C), and you don’t control how they do the work (A). An individual biller who works only for you, in your systems, usually lands on the employee side.

What if my clinician lives and works in New York or Pennsylvania?

State unemployment coverage generally follows where the work is done. A clinician who works entirely from home in another state is usually covered by that state’s rules, which use their own tests. If you have clinicians across state lines, check each state separately.

Can a 1099 therapist sign a non-solicit or noncompete in New Jersey?

They can sign one, but it may work against you. Noncompete and nonsolicitation clauses in a contractor agreement can be treated as evidence of control under A, so the clause meant to protect your client relationships can become evidence that the therapist is your employee. Have an employment attorney look at any restrictive covenant before you rely on it.

Wrapping it up

The electrician example works because most owners instantly recognize a business that serves them as one customer among many. A therapist can run a genuine independent practice, too. But every arrangement gets judged on its own facts: your control, the type of work and where it happens, and the therapist’s own business outside your practice.

And remember, the therapist has to pass all three parts to be a contractor under New Jersey law. Two out of three isn’t enough.

So come back to the question from the top: if your practice stopped sending Jen clients tomorrow, what business would she have left? If the answer is none, she’s almost certainly your employee in New Jersey, whatever her paperwork says.

Helping New Jersey practice owners sort out the contractor vs. employee question is something my team and I do all the time, as part of our accounting services for therapists and group practices. That includes modeling what a switch to W-2 would do to your payroll costs, your clinicians’ take-home pay, and your practice’s profit. When the legal classification itself is in doubt, we’ll bring employment counsel into the conversation too. If you’d like to talk it through with a CPA who specializes in private and group practices, fill out the form below and you’ll hear back from me personally.

This article is general information about New Jersey’s rules as of October 18, 2026, not legal or tax advice for your situation. Classification depends on your specific facts, and federal rules are a separate question.

Sources

• New Jersey Department of Labor and Workforce Development: adopted ABC test rules, N.J.A.C. 12:11 (58 N.J.R. 1587(a)) and announcement of the adopted rules, May 5, 2026
• NJDOL: Independent contractors vs. employees, Frequently asked questions about audits, and Independent contractors and misclassification
• N.J.S.A. 34:1A-1.18 and 1.19, New Jersey’s general misclassification laws
• N.J.A.C. 13:34-10.3, scope of practice for professional and associate counselors
• OT, Inc. v. New Jersey Department of Labor and Workforce Development, Final Administrative Action of the Commissioner, October 5, 2017
• Brach Eichler: Physicians as Independent Contractors v. Employees, on the 2023 radiologist decision
• Baker Donelson: New Jersey Adopts Final Rule for Independent Contractors, and Fox Rothschild: New Jersey Adopts Final Rules on ABC Test for Independent Contractor Classification
• Angelo & Associates: How to Start a Private Practice in New Jersey
• Angelo & Associates: Can Therapists Be 1099 Independent Contractors? A CPA’s Guide for Mental Health Group Practices