Even though I work as an independent contractor, some prospective clients insist that I allow them to classify me as their employee before they will hire me for a short-term project. How can I avoid this without losing the client?
As you've discovered, some companies are reluctant to classify contract workers as independent contractors because they fear trouble with the IRS and other government agencies. To avoid this problem, some companies routinely insist that all contract workers agree to be treated as employees.
If you accept classification as an employee, however, you will lose some of the business tax deductions you could ordinarily take as a self-employed person, such as the home office deduction. And if you're classified as an employee by some businesses and an independent contractor by others, you are more likely to face an IRS audit, with all the headaches and expense that entails.
If you run into a client that is paranoid about classifying you as an independent contractor, explain that you ordinarily do business as an independent contractor and that other clients who have classified you as an independent contractor haven't had any problems. Let the client know the other steps you have taken to make sure that you qualify as an independent contractor, such as working for multiple clients, having your own office, having a fictitious business name and business bank account, marketing your services widely, and possibly getting paid by the project instead of by the hour.