Show Opportunities for Profit and Loss

Because they run their own businesses, independent contractors have the opportunity to earn profits or suffer losses. If you run absolutely no risk of loss, you're probably not really an independent contractor. The best way to meet this test is to have recurring business expenses, such as office rent, equipment, and possibly even salaries for assistants. This demonstrates that you could face a loss if you don't find enough work.

You can also show an opportunity for profit or loss by charging your clients a set price for a specific project, rather than billing by the hour or day. If the project price exceeds your expenses, you'll make money; if you charge too little, you'll come out in the red.

Look Like an Independent Business

Take steps to make yourself look like an independent businessperson. Here are a few things you can do to cultivate this image:

• Use a fictitious business name instead of your own name.
• Maintain a separate bank account for your business.
• Obtain all necessary licenses and permits for your profession.
• Carry business insurance.
• Don't accept employment benefits -- such as health insurance, paid vacations, or pension benefits -- from your clients; instead, charge your clients enough to purchase these items yourself.

Make Your Services Widely Available

Independent contractors usually offer their services to the general public, not just to one person or company. Government auditors will be impressed if you market your services to the public. Here are some ways to do this:

• Obtain a business card and letterhead.
• Hang out a sign advertising your services.
• Maintain listings in business and telephone directories.
• Attend trade shows and similar events.
• Join professional organizations.
• Advertise in newspapers, trade journals, and magazines.
• Mail brochures or other promotional materials to prospective clients.
• Phone potential clients to drum up business.