Have you thought there must be a commonsense, straightforward approach to understanding the difference between an independent business/contractor and someone who is misclassified? Has the search frustrated you?
The answer is easier than most people realize; there are clear ways to view how truly independent businesses operate. These differences define the deciding factors for the proper classification of ICs.
To make my point, let’s just focus on corporations. What are the traits of an independent corporation? (By by the way, these traits also apply to an individual consultant working as an IC).
1. The corporation provides skills not available in your company. The consultants provided by the corporation are most likely not providing the same services performed by the regular employee staff. The work also is not part of the mainstream business but instead may be something of a onetime or special nature.
2. Typically, another business is hired to perform a specific service — a definable end product — not for time worked.
3. You may have learned of this corporation from advertising, or word-of-mouth, or even from a competitor. The business most likely markets itself to attract new clients.
4. Corporations have a business name, possibly a physical establishment (although this is not as significant today as it once was), and an investment in capital (office equipment, tools, supplies). They have invested in things other than an individual’s time and skill.
5. The corporation decides how it will perform the service. It can make business decisions about the job that can affect its profit or loss. If it completes the job more efficiently then it can make a greater profit. If it does not operate as efficiently, it could actually lose money completing a job. An independent business has a true risk of loss.
6. Generally, a successful business does not depend on a single client for financial existence. In the case of a single, independent consultant s/he may work for multiple clients through a series of single engagements over time. As one project ends another begins — with different clients. Doing this demonstrates multiple clients even when there is only a single project at any time.
7. Another heavily weighted factor is the ability to assign or reassign the consultants who work on the project. If the corporation is large enough it may assign different consultants to work on a project, so in effect the client is not hiring an individual to perform work, it is engaging another independent company to provide the service.
This list isn’t complete; however, everyone has heard the adage “if it walks like a duck and quacks like a duck, it’s probably a duck.” This definitely applies to the proper classification of independent contractors. Look around at the business world — at your own company. What are the differences between how employees operate and how other corporations operate? Those differences separate an employee from an independent contractor.
Disclaimer: Given the general nature and context of this article, the material presented should not be relied upon or construed as either tax or legal advice. For specific information on recent developments, the effects of particular factual situations or of a particular law in regards to your business, or before making decisions based upon this presentation, you should obtain the opinion of a qualified expert.