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Avoiding Trouble with the IRS

Whether you are considered an independent contractor or an employee is a critical difference in your tax liability, ability to utilize business deductions, legal standing, and so on. Here are the 20 so called “factors” which the IRS applies in the United States.

  1. Instructions. Employers should not tell the consultant how to do the job (e.g., how to consult).
  2. Training. The employer would not invest in training an independent contractor.
  3. Services. The independent contractor has the right to sub-contract and use his or her own employees without approval of the client.
  4. Non-integrated. Consultants should not be running an essential part of the client’s business. (Beware, “temporary” sales directors.)
  5. Assistance. Contractors control and pay their own staff.
  6. Length of service. Multiple contracts are all right, but otherwise long-term and perpetual work indicates employee status.
  7. Hours. Consultants determine the time necessary to complete an assignment.
  8. Volume. The client cannot insist that the consultant take on more work and thereby forego work for another client.
  9. Location. The client cannot choose where to work, unless the work can only be performed at one site.
  10. Sequence. Consultants determine the order in which they do the work.
  11. Reporting. Consultants should not be required to produce interim reports.
  12. Fees. Independent contractors are paid for results, not hours worked. (Does anyone still want to argue with me about the merits of value pricing overly hourly billing?!)
  13. Expenses. Consultants pay their own expenses and are reimbursed, and don’t have expenses directly billed to the client.
  14. Tools. Consultants do not have to use client equipment.
  15. Investment. Consultants have investments in their own business, such as equipment, home office, web sites, etc.
  16. Profits. Consultants can reap profits and incur losses, independent of any single client.
  17. Multiplicity. Consultants can work for more than one client simultaneously.
  18. Access. The general public can access and hire a consultant.
  19. Termination. Consultants cannot be fired at will as can employees.
  20. Liability. Consultants are liable for failure to complete a job and for poor quality of results of a job.

If several of these factors apply to your relationships, you may be vulnerable to IRS audit. Above all, if over 80% of your revenue is from a single source, you’re likely to be considered an employee of that source.