Re: Contractor vs Consultant

Subject: Re: Contractor vs Consultant
From: "Steven J. Owens" <puff -at- netcom -dot- com>
To: tonymar -at- hotmail -dot- com
Date: Sun, 26 Sep 1999 21:23:54 -0700 (PDT)

Anthony Markatos writes:

> 1. What is the difference between an independent contractor and an
> independent consultant?

Seven letters? Seriously, I don't think there is any standard
difference, but the general usage of the terms seems to be that a
contractor is hired to fill a slot - sort of a highly skilled, highly
paid temp - while a consultant (or team of consultants) is hired to do
a job. The distinction is in the scope and focus. Then again, I've
heard of plenty of cases where the same descriptions could be applied
to people who call themselves by the opposite titles.

> 2. What is a subcontractor?

Now we're leaving the realm of what they do and mostly talking
about how they're paid.

Strictly speaking, a contractor to whom your general contractor
farms out specific work. A "general contractor" is usually a term
used in building construction more than in the computer field, as the
contractor in charge of figuring out what needs to be done and who to
get to do it. The people they get who are not directly part of their
business are sub-contractors.

> 3. Are all independents 1099rs (i.e., can an independent recieve W2s)?

In the United States, a contractor may be (and in the high tech
fields most often is) a "regular employee" of another company. Mostly
this is to insulate the large corporate customer from any risk of the
IRS showing up with form 1720, the infamous "twenty questions" that
they use to redefine a contractor's status as an employee. This
regular employee gets paid "W2" (that is, the middle-man employer
files a W2 form with the government tax agencies, notifying them eof
how much was paid to the employee, and sends the employee a regular
paycheck). They may be fired as soon as the contract is up, and then
get another contract through a different middleman company (the nicest
term I've heard for the middleman companies is "job shop"), but in the
IRS's eyes, they're still a regular employee.

By definition an independent contractor is not a regular employee
of anybody him/herself (hence "independent") and must file a 1099 form
with US government tax agencies. The independent contractor must also
file quarterly tax estimates and payments four times a year. In
essence, the "independent contractor" works as a separate business
that your business purchases a service from. Because of the tax
issues mentioned above (form 1720) many independent contractors will
prefer to do fixed price contracts, to work on their own schedule, at
their own office, with their own equipment.

> 4. Can an independent work through an agency? If so, how can such an
> individual be labled 'independent'?

Personally, I always consider myself independent :-). However,
most of my contracting work ends up going through a job shop. In
theory the job shop brings some value to the table in terms of career
development, finding, negotiating and landing your next contract, and
maintaining a relationship with the client. In practice I have not
found any of the above to be true. I have even found, negotiated and
landed contracts and brought them to the shop to be the middleman.

Some definite benefits the job shops do bring to the table are
cash flow management (the large corporation may take months to get
around to paying for your time, the job shop fronts the money for your
regular paycheck, meanwhile), handling the tax paperwork for you, and
legal/tax insulation for the client. Also, they save you the grief of
getting through the 'approval' process with the large corporation
(although whether this approval process would exist without the
middlemen is another question).

The necessity of the job shop is mostly an accident of history
based mostly (I believe) in the fact that computers in the early days
were huge, immensely expensive things. But really, the title is a
moot point. You can switch between the two statuses quite easily.
You can even do both at the same time, for different clients,
depending on the details of the situation.

> 5. Can a non-independent contractor work directly for the client (not
> through an agency?

Depends on the client. Many large corporations have huge
bureaucracies with restrictions on who you can hire as a contractor,
"approved vendor lists". Also, contrary to what I said above,
switching status while staying with same client can be quite tricky.
Usually the job shop and the employer have complicated contractual
arrangements, and quite often the job shop will try to get you to sign
a contract agreement that seriously limits your rights to enter into
business relationships. I refuse to sign most such agreements,
particularly the "non-compete" agreements that are far too vague and

However, it is typical and IMHO acceptable for a job shop to
require an agreement from you not to enter into direct job
relationship with the client you're directly working for, while you're
contracting to that client through the job shop. They usually have
some provision that client must pay them a fee to hire you on as a
permanent employee. In any event, I refuse to sign any such agreement
unless it's limited in scope to clients I work with through the job
shop, ends after I stop contracting through that shop, and has no
bearing on any clients I have existing relationships with.

This is all, of course, just my opinion. If you want legal
advice, hire a lawyer.

Janet Ruhl has written a couple of good books on contracting and
consulting - mostly on the nuts 'n bolts issues, which seems quite
unique in the field of books on contracting and consulting :-). I
highly recommend them.

Steven J. Owens
puff -at- netcom -dot- com

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