Classifying Independent Contractors vs. Employees

If you have an SBIR award or a government contract, misclassifying employees and consultants has a dire impact on your tax situation, as well as how you recover costs under your federal award. An individual who performs services for you is either a consultant or employee.

If classified as a consultant, you may only recover G & A or F & A indirect costs on amounts spent on direct consultants. If classified as an employee, you may recover fringe, overhead, G & A and/or F &A indirect costs on amounts spent on direct labor (depending on your indirect rate structure). Consultants are not direct labor and should be treated as such. In addition, misclassifying consultants and employees can have a dangerous impact with the IRS.

Classifying an employee as a consultant leads to a non-compliance risk where the IRS can recover backup withholding, FICA, and unemployment taxes in addition to penalties and interest. While there is no concrete model for classification, you can visit for additional information. If it looks like an employee, chances are it is.
For additional information, please visit us at

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