Consultants: Independent Contractors
If you have already established a consulting business, you may want to continue working as a contractor rather than an employee. Design Strategy Corporation sometimes works with consultants as independent contractors. However, the 1986 Tax Reform Act tightened the requirements for independent contractors in the technical services industry, and our industry has been the subject of many audits since then. To ensure compliance with federal tax laws, we require documentation of your business history and an independent contractor (IC) agreement.
Documentation
To show that you have an ongoing consulting business, you must provide us with the following documentation:
- Evidence that your company has been incorporated for at least four months. (Design Strategy Corporation will verify that your corporation is in good standing with the Secretary of State in the state of incorporation.)
- A copy of your most recent quarterly federal tax form showing that you are paying both the employer and employee share of payroll taxes.
- Proof that policies are in force for Workers' Compensation insurance and general commercial liability insurance.
- Samples of your company business card and letterhead.
- Evidence of a business bank account in your company name.
- A business telephone number that is not the same as your home telephone number.
IC Agreement
If you are selected by a client to work as an independent contractor through Design Strategy Corporation, you will be asked to sign an agreement with Design Strategy Corporation. This agreement makes it clear that we have a business-to-business relationship rather than an employer-to-employee relationship.
Some of the important points of the agreement are:
- The IC is required to complete the client project, and Design Strategy Corporation can terminate the IC's services only if the client no longer requires those services.
- If the IC learns about a client through Design Strategy Corporation and then works for that client directly, he or she must pay a broker fee to Design Strategy Corporation.
- The IC must maintain general liability insurance coverage and, if required, Workers' Compensation insurance.
- The IC's payment is contingent on the client paying Design Strategy Corporation; in other words, the IC assumes the risk of client nonpayment.
- Payments to the IC are net 30 days.
IRS Requirements
IRS audits of independent technical contractors often focus on the language of contracting agreements and on the types of documentation that Design Strategy Corporation requires you to provide. However, they may also consider other factors, including:
- Whether you work for more than one customer at a time.
- Whether you maintain business books and records and send invoices to your customers.
- Whether your tax returns itemize expenses such as office expenses.
- Whether you market your services-for example, by means of brochures or advertising.