The Difference Between Contractors and Consultants

   |   MBO Partners   |   January 3, 2018

The total number of self-employed people in the U.S. rose to 40.9 million in 2017, and by 2027 we predict that more than half of Americans will be independent or will have worked independently. This independent workforce touches all segments of the economy—from on-demand drivers and freelance writers to marketing professionals and website designers serving major companies.

With so many types of independent workers, what do the terms independent consultant or independent contractor really mean?

Contractor or Consultant?

Independent professionals go by many names: consultant, contractor, freelancer, self-employed, and small business owner may be used to accurately describe a non-employee that performs work for a company for an agreed upon price.

According to our 2016 research, the majority of independents use the term “self-employed.”

While the overall proportions reporting these segments have been consistent since 2013, there is a significant variation by age. Millennials are far more likely to self-describe as freelancers compared to non-Millennials, and they are significantly less likely to say they are self-employed than non-Millennials. On the other hand, Gen Xers are more inclined to say they are business owners (16%) than either Millennials (10%) or Boomers (13%).

The Legal Definition

Legally, independent workers who are not full-time employees under the law fall into the classification of “independent contractors” or “small business owners.”

According to the Internal Revenue Service (IRS): “people such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business or profession in which they offer their services to the general public are generally independent contractors.”

Organizations such as the IRS and the Department of Labor (DOL) have a number of tests to determine if a worker is legally an employee or independent professional, which include the economic realities guidance from the DOL and the IRS common law rules.

However, the general rule is that workers are considered to be independent contractors if the client controls only the result of the work that is done, not what or how it will be done.

According to the IRS, “you are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.” When a client is found acting in opposition to these rules, they are liable for misclassification and other costly lawsuits.

Many independent professionals and their clients engage through a service such as MBO Partners, that has an established methodology and proven best practices for minimizing or eliminating issues with contractor engagement.

Opportunities for Consultants

Independent consultants exist across a variety of industries and areas of expertise. These workers can be graphic designers, IT professionals, writers, procurement specialists, or in another field entirely—consultants are only limited by their ability to have a clearly articulated area of expertise that can be packaged and sold to clients.

Consultants seek to enhance aspects that are already working well for their clients while redefining, eliminating, or changing aspects that hinder the overall operation of the client’s business. This may include making recommendations for merging departments, adding or eliminating positions within the operational structure, or completely reworking a process associated with one or more areas.

Companies that engage an independent consultant are seeking a strategic problem solver—an expert with the ability to diagnose an issue and develop and implement a plan to cure it, not just a body to complete a specific task. Some independents enjoy the intricacies of this level of strategic detail while others prefer to simply work in their area of expertise. The idea is to make a conscious choice about how your services are positioned to your clients.

To learn more about how to become an independent consultant, read our article on “How to Become a Consultant: Transitioning from W-2 Employment to Self-Employment”

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