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The employer is suppose to withhold taxes from employee wages. If the employer does not pay taxes for employees, the directors and officers become personally liable for the taxes. To get around this, the company may consider using independent contractors instead of employees. The contractor may be paid by any consideration, including stock that is worthless and cannot be sold in an open market.
The IRS and states do not usually like consultant classifications because they like to have employers withhold taxes, which allows them to get paid the taxes quicker, and decreases fraud when the consultants do not pay. It does not matter what an independent contractor agreement states that determines the consultant classification. It is the actions between the parties and how the person who is the consultant is being treated, such as whether he/she is supervising employees, has an office at the company, goes to company functions.
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