Please note, the following is based on our understanding of California and Federal Law, but it is not legal or financial advice. Consult your advisors before making any decisions.

TechProse works with a wide variety of highly skilled consultants on our projects. Part of the service we provide to our clients is a clearly defined contractual relationship with TechProse and our resources. This way, the client gets the deliverables they need without the added risk of later being held responsible for employee benefits in the event the consultant is reclassified. To accomplish this, TechProse works with consultants who are either:

1. W2 temporary employees of TechProse for the duration of the engagement, with normal benefits and features; or
2. Independent contractors who have formally organized a business, as either a C or an S corporation, and meet standards to demonstrate the viability of the business entity.

Note: Based on recent comments and activities by the EDD and IRS, we no longer accept any other business relationships with our consultants, aside from the types listed above. This means we cannot proceed if you are set up as a sole proprietor, partnership, or LLC until you change to one of the types of consultants listed above. The risk of coming to the attention of compliance organizations and not passing an audit is too high with these other types of company structures. LLCs, once considered "safe," are targets as well, especially single person LLCs that are considered "disregarded entities" for tax purposes.

When you read the rest of this page, remember that when we refer to Independent Contractors, we mean "not on a TechProse W2, AND the consultant is structured as either a C or an S corporation."

Many hourly employees hear that if they work as an independent contractor, they can gain various business advantages. They may be able to deduct expenses, fund retirement and impact the amount of taxes they pay. This may or may not be the case, depending on individual situations. Independent contractors have additional responsibilities; for instance, they must file quarterly tax reports, and pay a 15% self-employment tax on estimated earnings.

If you choose to conduct business as an independent contractor based on your evaluation of the ideal way to structure your consulting practice, make sure you are familiar with the rules around that business format. There are very strict IRS and California regulations to define what criteria an individual must meet to work as an independent contractor, as compared to being an employee.

Especially in California, the Employment Development Department (EDD) screens returns of independent contractors. If the EDD believes that you do not meet the test for filing as an independent contractor, you, your consulting agency, and the client you worked for could be assessed employment tax, interest, and penalties. These can be significant dollar amounts and could make it difficult to continue to operate.

So, to avoid this, if you want to work as an independent consultant, you should be able to meet the IRS definition of an independent consultant; some of the typical criteria are below.

By IRS definition, you are an employee, and not an independent consultant, if the person for whom you work has the right to direct and control the way you work. This means they control both the result and the details of when, where, how, and in what sequence you work. It is the IRS' view that the employer need not actually exercise control. It is sufficient that it has the right to do so. Financial responsibility for error is also key. Typically, independent contractors provide fixed-price bids for a specific job, and do not bill hourly.

For example, a roofing contractor is an independent contractor. He (or she) is an expert at roofing. They come, they look at your roof, and they give you a written estimate. They are responsible to complete the work as per their written estimate. They may specify timing, but they are unlikely to tell you how they are going to spread the tar or nail the shingles and you don't get to direct their work. At the end of the relationship, you pay the amount you agreed to, and the risk is theirs as to whether they bid correctly or not.

Because there are many grey areas regarding what results in a reclassification from independent consultant to employee, the IRS has adopted 20 criteria to determine if you are an employee or an independent contractor. These are summarized as 20 questions, which follow. This is only a guide; remember, the IRS and EDD can (and do) interpret the law as they see fit. We suggest you seek appropriate advice if you have questions and concerns. For California law, questions 1, 2, 4, 5, 7, 9 and 16 seem to be most critical. We have included the answer a true independent contractor would give in parenthesis after each question:

1. Are you required to comply with instructions about when, where, and how the work is to be done? (No.)
2. Does your client provide you with training to enable you to perform a job in a particular method or manner? (No.)
3. Are the services you provide integrated into your client's business operation? (No.)
4. Must the services be rendered by you personally? (No.)
5. Do you have the capability to hire, supervise, or pay assistants to help you in performing the services under contract? (Yes.)
6. Is the relationship between you and the person or company you perform services for a continuing relationship? (No.)
7. Who sets the hours of work? (You do.)
8. Are you required to devote your full time to the person or company for which you perform services? (No.)
9. Do you perform the work at the place of business of the potential employer? (No.)
10. Who directs the order or sequence in which you work? (You do.)
11. Are you required to provide regular written or oral reports to your client? (No.)
12. What is the method of payment - hourly, commission or by the job? (Fixed price, not-to-exceed, and/or milestone payments are standard for independent contractors.)
13. Does the client reimburse your business and/or traveling expenses? (No.)
14. Who furnishes tools and materials used in providing services? (You do. This includes workstation, Internet, etc.)
15. Do you have a significant investment in facilities used to perform services? (Yes. Key here is "significant." Lots of employees have a home computer.)
16. Can you realize both a profit and a loss from your work? (Yes-very important-you must assume risk based on client satisfaction with your work.)
17. Can you work for a number of firms at the same time? (Yes.)
18. Do you make your services available to the general public? (Yes. You should have business cards, stationery, invoices, and a business listing in the phone book, for example.)
19. Are you subject to dismissal for reasons other than nonperformance of contract specifications? (No.)
20. Can you terminate your relationship without incurring a liability for failure to complete a job? (No. If you work on a project or milestone, basis, you must deliver to receive payment for your efforts.)

In summary, true independent contractors usually have years of experience, multiple clients for whom they work, a home office, and a contract between themselves and the client that enforces the appropriate expectations of the 20 questions.