Consultants with their own corporations are automatically independent contractors.
Welcome back to the blog series on the 13 Myths of Independent Contractors. We created this series to help you navigate some of the potential legal minefields caused by the complex legal environment surrounding independent contractors. The content from this series comes from the whitepaper: Independent Contractor Myths versus Reality.
Myth: Consultants with their own corporations are automatically independent contractors.
Courts have ruled that an individual who forms a corporation technically becomes an employee of that company. Unfortunately, that does not mean all consultants with corporations are not independent contractors. It’s possible for an individual to form a corporation and still perform work in a manner that makes them an employee of their client. The direction and control between the individual and the client company actually determine the status of the relationship.
However, this is another common, and dangerous, assumption. Many client companies mistakenly believe that any consultant who has incorporated their consulting business is exempt from the usual common law factors. This is because consultants with their own corporations are automatically considered as independent contractors to the client company.
Despite the fact that a worker provides “proof” such as their own Employer Identification Number (EIN), or paperwork demonstrating they perform services as a Limited Liability Corporation (LLC), sole proprietorship, or other type of business entity, does not by itself make them an independent contractor.
The worker is an employee if their work falls within a law’s definition of employment, regardless of how the relationship is characterized on paper. Under the FLSA, FMLA, and MSPA, how the worker or the employer characterizes the relationship is irrelevant to determining whether they are an employee; what matters is whether the reality of the situation indicates the worker is economically dependent on the employer (an employee) or in business for themselves (an independent contractor). For federal tax purposes, how the worker and the employer characterize the relationship is only one fact considered among many in determining whether the employer has the right to control how the worker performs their work.
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