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Consultants: Are You an Independent Contractor or Employee by IRS Standards?

Consulting is a broad field containing many titles and job roles. Someone working as a management consultant will have a different relationship with clients than, say, a healthcare consultant. Some people choose to strike out on their own as a sole proprietor; others join an established firm. Suffice it to say, there’s no “right” way to consult—but workers must be aware of legal and financial consequences.

For example, operating without consulting business insurance can land you or your firm in hot water if a client sues. The Insurance Information Institute lists management consultants, IT consultants, and financial advisors among the professionals who need liability coverage. Why? Because the outcome depends heavily on the advice and services you provide. If they cause a client to lose money, you’ll be on the hook for those damages. Without insurance, these legal cases can get quite complicated and expensive.

It’s a good rule of thumb to protect your own financial interests whether you’re an independent contractor or employee. But even this classification can get murky within the consulting field. Is an organization bringing you on as an independent contractor or an employee? And why does it matter? Here are a few key differences to note:

The IRS uses 20 factors to determine whether a worker is an employee or not according to common law rules. Much of it boils down to how much control the employer has. If you find yourself following a set list of instructions during set hours, you’re probably an employee. Likewise, if your employer provides the training, this could be a sign. If you’re serving a single client on a full-time basis, that’s “waving the red cape in front of the IRS’s horns.”

Conversely, if you cover all your own expenses (like getting to and from worksites) then you’re probably an independent contractor. The same goes for purchasing all your own equipment. If you juggle multiple clients at once, this makes you appear more like an independent contractor.

Your status will also depend on the nature of the contract you and your client signs. Signing on as an independent contractor only to function like an employee can appear deceitful to the government.

Above all, make sure you’re operating as a consultant from a place of clarity and legality. Clarify your role with clients before signing onto any short- or long-term projects. Then protect yourself against lawsuits with consulting business insurance. Find an affordable policy today through CoverHound!

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