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January 25, 1999
Web posted at: 6:30 p.m. EST (2330 GMT)

by Leslie Goff

(IDG) -- The way a contracting job is structured -- the hours you're expected to put in, where you perform the work, your expenses and perks -- have little to do with the deliverables. Instead, they have everything to do with how the client views you and how the client thinks the Internal Revenue Service views you.

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Employers are being especially careful about how they hire temporary workers in light of section 1706 of the IRStax code and recent lawsuits. Recent cases include the U.S. Department of Justice suit against Time Warner Inc. charging that company with failing to withhold taxes and accord corporate benefits to workers who the Justice Department alleges were in reality full-time employees. And a group of Microsoft Corp. temps recently sued the software maker for failing to consider them full-time employees.

As a result, many larger companies are strictly following the guidelines set forth in the so-called "Twenty Questions," or 20 Common Laws that distinguish employees and contractors.

Independent consultants generally have three options: They can work as subcontractors, contractors or as incorporated service providers. Subcontractors and contractors are in a more nebulous position when it comes to how they are paid: Many companies, especially brokerage firms, agencies and larger consulting firms, will insist on paying contractors on a W2 basis and withholding taxes. But contractors who are concerned about maintaining their independence should assume responsibility for all expenses and taxes and ask clients to report their income using form 1099.

Computerworld spoke with four independent consultants -- two sole proprietors and two incorporated individuals -- about the creative ways they have found to maintain their classification as self-employed contractors.

Don Anthony

Principal, Anthony & Associates, Charlotte, N.C.

Specialty: Oracle Corp. applications, Unix, TCP/IP, systems integration

Business Model: Sole proprietorship. Usually works for two to three clients per week, with a guarantee of 20 to 30 hours each. Declines commitments of six months or more. Insists on being paid as a 1099.

Logic: "I haven't really approached it from the legal standpoint; this is just my preference. I look at it as building my business. If I take on a 40-hour-a-week project for one client, then I lose my ability to be flexible and work for other clients that I've established. As you build your client base, you have to be available to support them later, when they're in maintenance mode."

Limitations: "Large corporations are often concerned about working with 1099s because of the 1706 regulations, but it's usually the accounting department, not the IT department. I had a client once that was concerned about it. It took them two years, but they finally came around because they needed my skills enough that they had to bend to my terms."

Cynthia Cole

Principal, Computer Concepts and Methods, Wynnewood, Pa.

Specialty: Database design and development

Business Model: Sole proprietorship with her husband. Prefers to work on a 1099 basis but would work on a W2 basis if it were necessary to get an interesting project. Will work on a project full-time but not for longer than six to eight months. Cole and her husband sometimes share projects, with one person serving as project lead.

Logic: "Spouses can be sole proprietors without a lot of complications. We didn't incorporate because it keeps the paperwork simple."

Limitations: "Being independent doesn't limit us at all. The only limiting factor is not to take on such a large project that we can't work for other clients. But finding technical variety has not been an issue."

Pat Craig

Principal, Complexity Management Inc., Somerville, Mass.

Specialty: Software quality assurance, project management

Business Model: Incorporated. Has five people on a payroll as W2 employees and also uses seven 1099 subcontractors. Maintains numerous simultaneous clients.

Logic: "In the late 1980s, when the 1706 regulations came down, if you wanted to ensure that you remained independent, you incorporated. I'm not sure that's as necessary today, but being a 1099 is definitely falling out of favor. Also, your personal assets are protected from liability lawsuits when you are incorporated."

Limitations: "None. But I definitely would have lost some work over the last couple of years if I were a sole proprietorship."

Marc Perkowitz

President, MTP Systems Consulting Ltd., Arlington Heights, Ill.

Specialty: Oracle database design and administration

Business Model: Incorporated. Performs fixed-bid work, which helps establish independence because employees are paid a salary or hourly wage only. Insists that clients don't send him 1099 forms because they're not required for incorporated businesses, and he avoids submitting unnecessary paperwork to the IRS.

Logic: "Incorporating was recommended by my accountant, for both legal and financial reasons. You have additional deductions for travel and office expenses. It's easier to get around the home office restrictions, and you can set up better retirement plans for yourself.

Limitations: "It helps [clients] feel more comfortable from a liability point of view and also in terms of the IRS. Incorporating can help indicate your independence, but based on my reading, it isn't foolproof."