Declaration if independents - independent contractors

Nation's Business, Oct, 1991 by Janine S. Pouliot

Frank Vitiello was desperate. He had only three weeks to finish a project for his Stamford, Conn.-based custom computer systems development business, Info-Mation, but he lacked adequate staffing to do it.

The current recession precluded hiring another employee, so he turned, instead, to the services of an outside contractor for computer programming.

The arrangement seemed perfect: He could compensate the independent only as long as necessary, and he didn't have to pay the Social Security, disability, and unemployment taxes required for regular workers.

But things didn't turn out the way he planned. "We were in such a hurry, we accepted the first resume that looked good," says Vitiello. "One week into the project the independent asked for an advance. Then things started to fall apart real fast."

The outside contractor began bringing her child to work, and staff members found themselves babysitting. Eventually it was agreed she could work at home, but her computer was broken. Vitiello lent her money to buy the necessary part and sent over an employee to install it.

By the due date, however, the project remained unfinished. Vitiello decided to let the contractor go--and was out two advances, the cost of the computer part, and three weeks of fees. "I had to work 14 hours a day to catch up," says Vitiello, "but this fiasco still hurt us. The project came in late, and we caught flak from the client."

Despite the dangers inherent in the outside-contractor relationship, for many entrepreneurs this association means the difference between new business and flat growth.

When suddenly faced with an unanticipated job, most managers would rather hire an independent than pass up the additional assignment. The trick is knowing how to make it work.

Sally Albert, director of human resources for Windham Hill Productions, Inc., a record company in Palo Alto, Calif., was delighted with her outside contractor. "We temporarily needed to replace our controller on maternity leave, so we went through an interim search firm, The Corporate Staff, in San Mateo," Albert says. She found an accountant with the experience necessary to step right into the job. "We only needed him for September through December, which worked out perfectly since his private tax practice began heating up in January," she says.

In addition, because the independent's time was not taken up with daily meetings and long-range planning, he was free to concentrate on the projects at hand. "We discovered we could use him part-time and still keep all bases covered," Albert says.

The freedom to decide when and how often to use the independent is particularly valuable to employers whose activities cover a wide spectrum. Rather than settle on an in-house jack-of-all-trades/master-of-none to handle a variety of functions, you can pick and choose the person who best satisfies a distinct need and then contract out that specific work.

What's more, the savings multiply when you use independents. You eliminate not only permanent salary expense but also vacation and sick pay. You also economize on internal paperwork. Gone are personnel and medical record keeping, performance reviews, and on-the-job training, since most contractors hit the ground running.

And because the outside contractor is not considered an employee, the business is not obliged to collect his or her federal, state, or city income tax, or file the appropriate tax returns. Savings for the business can mount up, particularly considering the drain at quarterly tax time.

If it all sounds so good, why bother to hire permanent employees at all? Shouldn't every worker be an outside contractor? Not necessarily. Often the negatives can substantially outweigh the benefits.

The flip side of the flexibility to hire and fire on demand is the lack of control. Fear of job loss keeps many workers on the straight and narrow.

Another problem with relying on outsiders is that they're not always available when you want them. If, instead of hiring the staff required to handle peak work loads, you depend on contractors, you may find yourself short-handed at critical periods. Findings a substitute isn't always easy when your operation takes time to learn or is highly specialized.

A business's greatest exposure, however, is in the area of payroll taxes. The IRS estimates that it loses $1.6 billion a year in revenue because it believes many employees are mislabeled as independent contractors. It has begun, therefore, to scrutinize just who really qualifies for this classification.

Firms that inappropriately name employees as independents face severe consequences. Back-due Social Security and unemployment taxes will be levied against employers found in violation. And if the company fails to make good on the balance due, the individual responsible for classifying the worker as an independent can be held personally liable for the full amount.

Even the contractor can come after you. If the IRS decides that the independent is an employee after all, he or she is empowered to claim the benefits an employee normally would have received.