Taking Care of (Other People's) Business

How to Make Sure You’re a Consultant, Not an Employee

How to Make Sure You’re a Consultant, Not an Employee

Thursday, July 20, 2017/Categories: Business Tips

When you begin working for a new client, you have a lot of details to figure out, like the project scope and payment terms. But one detail many consultants overlook is their status as independent contractors.

Working as an independent contractor means you get to be your own boss. And while that's a lot of responsibility, it has plenty of advantages, including…

  • More control over the type of work you take on.
  • The freedom to work when and where you want.
  • The opportunity to earn more money.

Unfortunately, some clients want to treat you like an employee, which can impede your independence and ability to take on more clients. This is why it's important to establish your status as an independent consultant any time you take on a new project.

Employee or Consultant: How the IRS Decides

You may think it's obvious that you're a consultant, especially if you work with multiple clients. But the IRS may see it differently if a client acts like your employer. While an invite to the company picnic might not do it, simple things like requiring reports or supervising your work may cross the line.

The IRS recently pared down their 20 question test for determining employee status. The new common law rules ask employers to evaluate workers on three criteria:

  • Does the business dictate how and when a worker performs the job?
  • Does the business control many of the financial aspects of the jobs or make a significant investment in tools or equipment for the worker?
  • Does the worker receive benefits typically associated with employees, such as vacation pay, insurance, or a pension plan?

Basically, the more control a company exerts over a worker, the more likely the worker is an employee. The IRS admits this is a bit of a gray area, stating on its website that there is no set formula for determining employee status.

That may be particularly troubling if you're ever on the other side of this equation, too. Let's say you subcontract out a portion of a project, but that contractor claims you treated them like an employee. You may be on the hook for their back taxes and other benefits. Get the details in "This Common Mistake Can Cost Small Businesses Thousands" on Insureon's main site.

How to Establish Your Consultant Credentials

Determining your employment status may be complicated, but you can establish yourself as an independent contractor. There a couple of different ways you can do this, including…

  • Make sure your contract is crystal clear. It should state that you're working as an independent contractor, not an employee. Download our free sample contract to use as a guide.
  • Establish boundaries. These help you demonstrate that you're in charge of how your work is done. Legal website Nolo.com has a helpful checklist of habits employers may want to avoid when working with independent contractors. Use it to identify behaviors that can compromise your availability.
  • Consultant Insurance. Another way to establish that you're an independent contractor is by purchasing consultant insurance. Getting your own General Liability Insurance and Professional Liability Insurance shows that you're not relying on your client's coverage.

Consultant insurance helps in a lot of ways. Read "Why Clients Want Proof of Insurance for Management Consultants" for more information.

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