I am an independent contractor and I have signed a non-compete clause. However, I have been told that the Internal Revenue Service specifically requires that independent contractors have more than one client, or they are not “independent” contractors, instead they are employees. If they have to have more than one client, then you cannot be expected not to compete. The corollary is that if an “employer” is requiring an independent contractor to sign a non-compete agreement, then they owe the IRS withholding taxes “independent contractor” payments they have made. Is this correct?
I have been told that the Internal Revenue Service specifically requires that independent contractors have more than one client, or they are not "independent" contractors, they are employees.
IRS publication 15 - http://www.irs.gov/pub/irs-pdf/p15.pdf is the main document that addresses employee status = page 8. A general rule is that anyone who performs services is your employee if you can control what will be done and how it will be done.
The IRS has developed a list of factors which are used on a case by case basis to determine whether a worker is an independent contractor or an employee tax purposes. The twenty common law factors of a perfect independent contractor relationship are - http://www.wwwebtax.com/general/independent_contractor.htm:
These factors should be used in determination. The laws - the employee vs. independent contractor issues - are extremely complex and to evaluate your situation - you might need a help of a local tax attorney . It is also possible to use a federal "safe harbor" rule which can exempt certain workers from the common law factors listed above. To be exempt from these factors, you should establish that you: