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 for you 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 for IRS tax purposes. The twenty common law factors of a perfect independent contractor relationship are - http://www.wwwebtax.com/general/independent_contractor.htm:

• No Instructions. Independent contractors are not required to follow, nor are they furnished with, instructions to accomplish a job.
• No Training. Independent contractors typically do not receive training by the hiring firm. They use their own methods to accomplish the work.
• Others can be hired. Independent contractors are hired to provide a result and usually have the right to hire others to do the actual work.
• Independent contractor's work not essential. A company's success or continuation should not depend on the service of outside independent contractors.
• No time clock. Independent contractors set their own work hours.
• No permanent relationship. Usually independent contractors don't have a continuing relationship with a hiring company. The relationship can be frequent, but it must be at irregular intervals, on call, or whenever work is available.
• Independent contractors control their own workers. Independent contractors shouldn't hire, supervise, or pay assistants at the direction of the hiring company. If assistants are hired, it should be at the independent contractor's sole discretion.
• Other jobs. Independent contractors should have enough time available to pursue other gainful work.
• Location. Independent contractors control where they work. If they work on the premises of the hiring company, it is not under that company's direction or supervision.
• Order of work. Independent contractors determine the order and sequence in which they will perform their work.
• No interim reports. Independent contractors are hired for the final result only. They should not be asked for progress or interim reports.
• No hourly pay. Independent contractors are paid by the job, not by time. Payment by the job can include periodic payments based on a percentage of job completed. Payment can be based on the number of hours needed to do the job times a fixed hourly rate. Payment method should be determined before the job commences.
• Multiple Firms. Independent contractors often work for more than one firm at a time.
• Business expenses. Independent contractors are generally responsible for their own business expenses.
• Own tools. Independent contractors usually furnish their own tools. Some hiring firms have leased equipment to their independent contractors so that they could show the independent contractor had their own tools and an investment in their business. This strategy won't work if the lease is for a nominal amount or can be voided by the hiring firm at will. The lease must be equivalent to what an independent business person could have obtained in the open market.
• Significant investment. Independent contractors should be able to perform their services without the hiring company's facilities (equipment, office furniture, machinery, etc.). The independent contractor's investment in his trade must be real, essential, and adequate.
• Services available to the public. Independent contractors make their services available to the general public by one or more of the following: having an office and assistants; having business signs; having a business license; listing their services in a business directory; or advertising their services.
• Profit or Loss possibilities. Independent contractors should be able to make a profit or a loss. Employees can't suffer a loss. Five circumstances show that a profit or loss is possible: the independent contractor hires, directs, and pays assistants; the independent contractor has his own office, equipment, materials, or facilities; the independent contractor has continuing and recurring liabilities; the independent contractor has agreed to perform specific jobs for prices agreed upon in advance; and the independent contractor's services affect his own business reputation.
• Can't be fired. Independent contractors can't be fired so long as they produce a result which meets the contract specifications.
• No compensation if the job isn't done. Independent contractors are responsible for the satisfactory completion of a job or they may be legally obligated to compensate the hiring firm for failure to complete.

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:

• have consistently treated the worker and similar workers as independent contractors;
• have filed all the required forms; and
• have had some reasonable basis for treating the worker as an independent contractor because there were similar rulings or court cases, or because it was an industry-wide practice or because prior tax auditors had never questioned the practices.