Author's Note: This article was originally published in the July edition of the Davidson Group newsletter.
The layoffs that have plagued our economy for the past few years have given rise to a wave of new business consultants, many of whom might be more accurately described as private contractors doing the work that was done by employees in more stable economic times.
Some of them are actually working for their old employers, just in a different status. Others consult with various companies while searching for a full-time job. Others still have found that they prefer self-employment, even if many aspects of their work lives are no different than being an employee. In some industries, individuals have also found that they can actually make a lot more money as an independent contractor than they did as an employee, albeit without benefits.
"Consulting in the practical sense can be anything," it says on theIRS website . "It is a common buzzword in the business world. Many people call themselves a consultant, when in reality they may be a broker, a salesperson, a retailer or engaged in a business which is a hybrid. One of the issues facing the industry is an influx of new entrants, many of them managers and executives who have been downsized. They open up shop independently or in collaboration with others. For many displaced workers, consulting is something that they say they are doing in the interim while searching for a job."
But if this describes you, or if you use independent consultants in your business, you need to be aware of some pitfalls and make sure what you're doing meets IRS guidelines. The IRS uses three characteristics in evaluating the relationship between businesses and workers. These are:
- Behavioral Control--does the business have a right to direct or control how the work is done through instructions, training or other means?
- Financial Control--does the business have a right to direct or control the financial and business aspects of the worker's job?
- Type of Relationship--how do the workers and the business owner perceive their relationship?
More specific information on how these factors are evaluated is available
here . Working as a consultant or independent contractor can be a good option for people with the right personality, especially in a tough economy. And for employers, consultants can often provide them with the talent they need to grow without all the risks of bringing on full-time employees, as long as they follow the guidelines and make sure they're not calling employees independent contractors.
