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The federal Internal Revenue Service provides 20 guidelines in its Publication 937 and its Form SS-8 for determining whether a service provider is an employee or an independent contractor, but even the IRS itself says that its interpretation of these guidelines is subjective and depends on the specific circumstances. Furthermore, the IRS does not necessarily require that all 20 criteria be met: that determination is also subjective, though some sources say that satisfying any 10 of the criteria is sufficient. Here are the 20 guidelines, with the language the IRS uses for its determination in quotes, and the status of Wright Consulting Services, Inc. (WCS) described after each:
  1. Instructions: "An employee must comply with instructions about when, where, and how to work. Even if no instructions are given, the control factor is present if the employer has the right to control how the work results are achieved."

    The services provided by WCS are spelled out in its professional services agreements with its clients; the statement of work in such an agreement specifies what services are to be performed. The client does not have control over how these services are performed, the order of individual work items, or the specific days or hours that the consultant works.

  2. Training: "An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from purchasers of their services."

    WCS provides and pays for its consultants' occupational, managerial, and technical training. While work performed for clients may provide WCS consultants with valuable experience, its clients never pay for training.

  3. Integration: "An employee's services are usually integrated into the business operations because the services are important to the success or continuation of the business. This shows that the employee is subject to direction and control."

    While almost any consultant's services are important to the success of a business, WCS does not perform services essential to a client's daily business operations, such as the maintenance and operation of information systems; rather, it performs systems analysis, design, and development and implementation services to enhance the client's tactical or strategic situation. WCS consultants also do not attend client functions expected of employees and unnecessary to the performance of contracted services, such as staff meetings, holiday parties, and so forth.

  4. Service Rendered Personally: "An employee renders services personally. This shows that the employer is interested in the methods as well as the results."

    Naturally, WCS consultants render their services personally, although they may not always be present on the client's premises while the services are performed. WCS does, however, go to great lengths to make clear that it is performing services as a separate business entity rather than as an employee. WCS is incorporated under the laws of the state of Washington (copies of its Articles and Certificate of Corporation are available upon request), is licensed by the State of Oregon and the City of Portland, maintains its own telephone number and mailing address, conducts its own advertising and marketing, has distinct business cards and letterhead, and uses its own bank accounts.

  5. Hiring Assistants: "An employee works for an employer who hires, supervises, and pays workers. An independent contractor can hire, supervise, and pay assistance under a contract that requires him or her to provide materials and abor and to be responsible only for the result."

    Since its contracts specify responsibility for the results of work and do not dictate the manner in which it is to be performed, WCS has the ability to hire non-billable employees for secretarial, clerical, and other office services. It also uses outside services such as printers and accountants on a non-employee basis. This does not necessarily allow WCS to hire subcontractors to perform client services; such arrangements may still be proscribed by the professional services agreement between WCS and a client.

  6. Continuing Relationship: "An employee generally has a continuing relationship with an employer. A continuing relationship may exist even if work is performed at recurring although irregular intervals."

    Although some kind of ongoing relationship may exist between WCS and a client, work is performed subject to a contract with limited time periods and/or scope of work. Extensions to either the timeframe or scope take the form of an amended or new contract. Furthermore, a consulting engagements may not be precursor nor a follow-on to employment of WCS consultants by a client; a WCS consultant is contractually prohibited from performing work under a WCS contract for, and being employed by, the same organization in any 12 month period.

  7. Set Hours of Work: "An employee usually has set hours of work established by an employer. An independent contractor generally can set his or her own work hours."

    WCS consultants' commitment of time to a particular client is dictated by the requirements of the contract, not by the client's desires for someone to be present at specific hours or on specific days. Consultants' work hours and days are determined by WCS as needed to complete project tasks, and not by the client. Furthermore, vacation, holiday, and sick leave benefits are provided by WCS and not by the client.

  8. Full-Time Required: "An employee may be required to work or be available full-time. This indicates control by the employer. An independent contractor can work when and for whom he or she chooses."

    WCS consultants' commitment of time to a particular client is dictated by the requirements of the contract, not by the client's desires for someone to be present full-time. WCS consultants may divide their time among multiple clients as well as administrative, training, and marketing tasks not related to a particular client, and only those hours related to work performed pursuant to a specific agreement are billed.

  9. Work Done on Premises: "An employee usually works on the premises of an employer, or works on a route or at a location designated by an employer."

    WCS consultants may perform some of the work for a particular project at the WCS offices, and some at the client's site, as appropriate to the requirements of each engagement and to the employee's work schedule. Tasks not specific to a client engagement, including adminstrative, training, and marketing activities, are performed at the offices of WCS, and not at a client's location.

  10. Order or Sequence Set: "An employee may be required to perform services in the order or sequence set by an employer. This shows that the employee is subject to direction and control."

    As noted under item #1 above, the services provided by WCS are spelled out in its professional services agreements with its clients; the statement of work in such an agreement specifies what services are to be performed. The client does not directly specify how these services are performed, or the order or sequence of individual work items.

  11. Reports: "An employee may be required to submit reports to an employer. This shows that the employer maintains a degree of control."

    Although the statement of work for a WCS engagement may include the submission of reports as evidence of completion of defined milestones within a project, these take the form of specific project deliverables such as analysis or design documents rather than status reports. WCS generally does not submit formal periodic status reports on the progress of a project.

  12. Payments: "An employee is paid by the hour, week, or month. An independent contractor is usually paid by the job or a straight commission."

    Clients do not provide WCS' consultants with a regular, defined paycheck. Rather, WCS invoices clients at regular intervals (usually monthly) according to the terms of the contracts it has established with the clients (usually effort and expenses actually incurred during the period), and clients are obligated to pay these invoices within a defined period of time (usually 30 days). Consultants, as employees of WCS, receive employee benefits and salary paychecks from WCS rather than from the client. In addition to project work, these paychecks cover nonbillable work, training, vacation, holidays, and sick leave, which are never billed to a client. In addition to paychecks made to consultants, WCS shareholders receive dividend checks from WCS based upon its profits.

  13. Expenses: "An employee's business and travel expenses are generally paid for by an employer. This shows that the employee is subject to regulation and control."

    Like most consulting firms, WCS does bill its clients for travel and other major expenses incurred directly in the conduct of a contracted engagement. It does not invoice for minor expenses such as copying and mailing, or for its consultants' travel for purposes other than work on a specific contracted project.

  14. Tools and Materials: "An employee is generally furnished significant tools, materials, and other equipment by an employer."

    In many cases, direct access to a client's facilities and equipment is required for the conduct of a specific project. However, a client's facilities and equipment are used only where necessary. WCS provides its consultants with their own office space, computing equipment, and telephone services as needed to perform services for a client where possible, to perform services for other clients, and to perform administrative and marketing tasks for WCS. Office supplies are always provided by WCS rather than by the client, even when used at the client's site.

  15. Investment: "An independent contractor has a signficant investment in the facilities he or she uses in performing services for someone else."

    As discussed immediately above, WCS furnishes consultants with their own equipment and other facilities for performing consulting services, and WCS has a significant investment in these.

  16. Profit or Loss: "An independent contractor can make a profit or suffer a loss."

    Because of its significant investments in equipment and facilities used by its employees, in employee training, and in its marketing efforts, WCS is exposed to the potential to suffer a loss as well as make a profit. Because its professional services agreements usually set a limit to the effort and expenses that can be invoiced, WCS can also potentially suffer a loss due to project overruns.

  17. Works for More than One Person or Firm: "An independent contractor is generally free to provide his or her services to two or more persons or firms at the same time."

    Over a period of time or even at the same time, WCS performs services for more than one client.

  18. Offer Services to General Public: "An independent contractor makes his or her services available to the general public."

    WCS advertises its services, participates in professional organizations as a business, and has business cards and letterhead representing its existence as a distinct business entity.

  19. Right to Fire: "An employee can be fired by an employer. An independent contractor cannot be fired so long as he or she produces a result that meets the specifications of the contract."

    WCS' professional services agreements spell out the services to be performed. As long as WCS meets its contractual obligations, such an agreement cannot immediately be cancelled without cause. In some circumstances, however, an organization's management may make decisions or encounter other circumstances unrelated to its contract with WCS that render such services unnecessary. Therefore, contracts between WCS and its clients include a clause allowing cancellation of such an agreement, even without cause, given 30 days' notice.

  20. Right to Quit: "An employee can quit his or her job at any time without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion or is legally obligated to make good for failure to complete."

    As mentioned above, WCS is obligated to perform the services described under the agreements it makes with its clients. Similarly, to allow for unusual, unforeseen situations, contracts between WCS and its clients allow the cancellation of such an agreement given 30 days' notice, under which circumstances all work completed will be turned over to the client.

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