The incorporation method isn’t the loophole. Paying someone through a corporation (regardless of its pass through status) and then treating them as an employee is the the attempted loophole. In the US and many other countries it doesn’t work.

> "Paying someone through a corporation (regardless of its pass through status) and then treating them as an employee is the attempted loophole"

But isn't that exactly how consultancies work though? The client enters into a contractual agreement with the consultancy, asking for specific consultants to help the client get certain tasks done. The consultants are "treated as employees" in the sense that they often have to physically work with the client, on the client's projects, during the client's schedules, having lunch in the client's canteen, working with the client's team, reporting to the client directly, using the client's tools and processes, creating IP for the client, etc.

There is a 20 part tes(it’s actually now a 3 part test with 4-6 sub parts each but it’s substantially still the same). The fact that the consultant has to physically come into work at a specified time and uses the clients tools is evidence for them being employees.

That their company receives income from multiple clients, and the engagement is for limited duration is evidence for them being contractors.

The IRS and local governments make the final determination.

https://www.everee.com/blog/irs-independent-contractor-test/

Thanks.

If there's a subjective test involved, where some things are left to interpretation and circumstantial evidence, my take here is that it would be wisest to work with a lawyer/accountant on setting up the correct structure for each engagement.

It's also good to remember that this is the IRS, and that other jurisdictions may have entirely different practices here.