Search:

Articles

< Back to Articles

Know the Rules Before You Hire an Independent Contractor Pt. 2

THE INDEPENDENT CONTRACTOR (IC)
Part 2 of Series of 3

Independent contractors, or IC's, are people who contract to perform services for others, but do not have the legal status of employees. Businesses can save time, money and administrative headaches by hiring IC's. IC's may use a variety of names - freelancers, consultants, self-employed, entrepreneurs or business owners - it makes no difference in the eyes of the law (Part I of series).

"What are the benefits?"
Businesses can usually save money by hiring IC's rather than employees. In addition to salaries or other compensation, employers usually must pay employee expenses such as:

• Federal payroll taxes of 7.65% which includes income and social security taxes. There is also a FUTA tax of 0.08%.
• State unemployment insurance premiums
• Workers' compensation insurance premiums
• Employee benefits (health insurance, vacation, sick leave, retirement, life or disability insurance
• Office space and equipment

These expenses add at least 20% to 30% to payroll costs (e.g. $10/hr + $2-$3/hr for expenses). You incur none of these expenses when you hire an IC. Even though IC's are often paid more per hour than employees doing the same work, they still cost less.

Most important for many firms, IC's provide a level of flexibility that can't be obtained with employees. You can pay an IC to accomplish a specific task, allowing your business to utilize the IC's specialized expertise for a short period. An experienced IC can be productive immediately, eliminating training time and expense. You drastically diminish if not totally eliminate severance costs and exposure to discrimination or wrongful termination lawsuits that sometimes accompany firing or laying off an employee.

"What are the risks?"
Despite the advantages, many businesses are reluctant of using IC's because they have heard about or experienced the consequences of misclassifying Independent Contractors who are, legally, employees. And the consequences can be economically devastating. A business must pay the IRS all back taxes owed, with interest, plus a penalty of 12% to 35% of the tax bill.

Audits by state agencies are even more common than IRS audits. State audits most frequently occur when workers classified as IC's apply for unemployment compensation after their services are terminated. An investigation by your state unemployment compensation agency will ensure, and you will be subject to fines and penalties if it is determined that the workers should have been classified as employees.

Another disadvantage-IC's can sue you for negligence if they are injured on the job, something employees covered by workers' compensation normally cannot do.

(The above information extracted from NOLO, September 2002) In the next issue of The Hire Option - " Should companies have freelancers and consultants sign written independent contractor agreements?" "What about intellectual property ownership?"