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There is an important legal distinction between an employee and an independent contractor. The IRS has strict definitions for independent contractors and for good reason. Independent contractors are typically exempt from standard labor and employment legislation. Improper classification can result in under-reporting of wages, unemployment taxes, benefits, etc., all of which can bring about devestating financial and legal consequenses.

If you choose to operate as an independent contractor, you must be certain that you understand the requirements for such an election and that you comply with them. Failure to do so may result in a disallowance of your status by the IRS and lead to financial penalties and possible legal action.

However, if you plan carefully and maintain complete documentation, you should have no problems.

Unfortunately, there is no short concise definition of an independent contractor that can be applied across a broad range of employment situations. However, the most basic premise of determination relates to the degree to which an employer is able to exercise control over the worker. Other factors include the nature of the service provided, and the independence of the worker.

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A first step would to be evaluate your situation relative to the following very basic criteria.

1. An independent contractor must be continuously and permanently free from control or direction over the performance of duties and services, both under his contract of service and in fact; AND

2. The services of an independent contractor must fall outside the usual course of business for which the services are performed OR the services must be performed outside of all the places of business of the enterprise for which services are being performed; AND

3. An independent contractor is someone who is operating in an independently established trade, occupation, profession or business.

The following guidelines have been provided by the IRS to assist in properly classifying workers as independent contractors. The common denominator is the extent to which the employer is able to exercise direction and control over the activities of the worker. As the language below suggests, there is a significant amount of subjectivity in determining final status - and of course the IRS has the final say.

1. INSTRUCTIONS

If the employing unit gives detailed instructions, particularly regarding how the task is to be accomplished, the worker is more likely to be an
employee. If the employing unit only gives instructions as to the final outcome, the worker is more likely to be an independent contractor.

2. TRAINING

If the worker requires additional training from the employing unit, he/she is more likely to be an employee. If the worker requires no additional
training, he/she is more likely to be an independent contractor.

3. INTEGRATION

The more the services performed by the worker are closely related to the "core" business of the employing unit, the more likely the worker is an
employee. The more the services performed by the worker are incidental to "core" business practices, the more likely the worker is an independent
contractor.

4. SERVICES RENDERED PERSONALLY

If the services must be rendered by the worker personally, he/she is more likely to be an employee. If the worker need not perform the services personally, he/she is more likely to be an independent contractor.

5. SET HOURS OF WORK

If the worker has set hours of work, he/she is more likely to be an employee. If the worker is able to set his or her own hours, he/she is more likely to be an independent contractor.

6. CONTINUING RELATIONSHIP

The longer the business relationship continues, the more likely the worker is an employee. The shorter the business relationship continues, the
more likely the worker is an independent contractor.

7. CONTRACTING, SUPERVISING, AND PAYING ASSISTANTS

If the employing unit is responsible for contracting, supervising, and paying assistants, the worker is more likely to be an employee. If the worker is responsible for contracting, supervising, and paying assistants, he/she is more likely to be an independent contractor.

8. FULL-TIME WORK REQUIRED

If the worker is required to work full-time, he/she is more likely to be an employee. If the worker is able to set his or her own hours, he/she is more
likely to be an independent contractor.

9. SEQUENCE OF WORK

If the employing unit establishes the sequence of work to be performed, the worker is more likely to be an employee. If the worker determines the sequence, he/she is more likely to be an independent contractor.

10. PLACE OF WORK

If the work must be performed at the place of business, the worker is more likely to be an employee. If the work may be performed elsewhere, the worker is more likely to be an independent contractor.

11. REPORTS

If the worker has to make frequent reports on the progress of his or her services, he/she is more likely to be an employee. If the worker does not
have to make frequent reports, he/she is more likely to be an independent contractor.

12. METHOD OF PAYMENT

If the worker is paid from company payroll, he/she is more likely to be an employee. If the worker bills the employing unit, he/she is more likely to be an independent contractor.

13. RISK OF LOSS

If the worker has little risk of loss, he/she is more likely to be an employee. If the worker has a greater risk of loss, he/she is more likely to an
independent contractor.

14. FURNISHING TOOLS AND MATERIALS

If the employing unit furnishes tools and materials, the worker is more likely to be an employee. If the worker furnishes his or her own tools and materials, he/she is more likely to be an independent contractor.

15. INVESTMENT

If there is little or no personal investment in the tools, materials, and resources used in providing the service, the worker is more likely to be an
employee. If the worker has a substantial personal investment, he/she is more likely to be an independent contractor.

16. PAYMENT OF BUSINESS EXPENSES

If the employing unit directly pays for a business expense of the worker, the worker is more likely to be an employee. If the worker pays for business
expenses then bills the employing unit, he/she is more likely to be an independent contractor.

17. WORKING FOR MORE THAN ONE FIRM AT A TIME

If the worker provides services for only the employing unit, he/she is more likely to be an employee. If the worker serves more than one firm at a time, he/she is more likely to be an independent contractor.

18. AVAILABILITY OF SERVICES TO THE GENERAL PUBLIC

If the workerís services are available only to the employing unit, he/she is more likely to be an employee. If the worker provides services to the
general public, he/she is more likely to be an independent contractor.

19. RIGHT TO DISCHARGE

If the employer has the right to terminate the worker at any time, he/she is more likely to be an employee. If the employer does not have the right to terminate the contract without reasonable notice, the worker is more likely to be an independent contractor.

20. RIGHT TO QUIT

If the worker has the right to quit without notice, he/she is more likely to be an employee. If the worker does not have the right to quit without
reasonable notice, he/she is more likely to be an independent contractor.

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