"I'm making the guru break! I've already incorporated my new business and I'm in negotiations to work for my soon-to-be-former employer on an independent basis. They want my work, but they'd rather keep me on as a fulltime employee. They've told me that IRS regulations do not permit former employees from contracting back to the employer for six months following separation. Apparently, this separation period is necessary to prove that the contractor is really a contractor, not an employee. Is this true? Even if I've established my own corporation?"Read legal eagle Steve Fishman's answer: http://www.guru.com/channel/legal/askexpert/Q10282.jhtml
Dear Steve,
I'm making the guru break! I've already incorporated my new business and I'm in negotiations to work for my soon-to-be-former employer on an independent basis. They want my work, but they'd rather keep me on as a fulltime employee. They've told me that IRS regulations do not permit former employees from contracting back to the employer for six months following separation. Apparently, this separation period is necessary to prove that the contractor is really a contractor, not an employee.Is this true? Even if I've established my own corporation?
-- Beamer
Dear Beamer,
No, there is no IRS regulation that says an ex-employee must wait six months before working as an independent contractor for his or her former employer. However, it is true that the IRS and other government agencies are highly suspicious of companies that hire ex-employees as independent contractors and then have them perform the exact same services they performed as employees. This does not mean that you can't work as an independent contractor for your former employer. However, it does mean that both you and your former employer need to be very careful to establish that you are a true independent contractor, not an employee in contractor's clothing.The fact that you've incorporated your business is extremely helpful, since it helps you look like an independent business person to the IRS. It also means your client need not file 1099s with the IRS, since they're hiring a corporation instead of a sole proprietor. 1099s are an audit red flag for the IRS, so avoiding the need for them is a great benefit of incorporating. Just make sure that all your clients hire your corporation, not you personally. Also make sure you keep up with the proper paperwork for your corporation.
Other things you can do that will help cement your independent contractor status include having multiple clients, working in your own office rather than at your clients' offices, having business expenses such as office rent and insurance, making your services available to the general public (for instance, by advertising), and using written independent contractor agreements.
Most important of all is how your clients treat you. Your former employer cannot control you on the job or supervise you as it did when you were an employee. Its control must be limited to accepting or rejecting the final results you achieve. How to achieve those results is up to you. This means, for example, that you should establish your own work schedule. Check my Guide, By the Book, for more information on this. Better yet, show it to your prospective client.