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Get More Bang for Your Labor Buck

Independent Contractors Can Save You Time and Money
By Phillip M. Perry

For Laura MacDonald, running a successful real estate agency always meant maintaining a full-time staff. And why not? Her two office workers responded efficiently to a flood of housing inquiries from buyers and sellers.

Then the recession hit the real estate industry with the force of a freight train hitting a wall. Her profits threatened, MacDonald knew she had to do something to preserve the viability of her 17-year-old St. Louis-based firm.

The Solution?
MacDonald replaced her costly staff with the services of an independent contractor who performs vital business duties from a remote office. The result has been the savings of many thousands of dollars and the salvation of a firm that MacDonald fears would otherwise have fallen into the red.

If that story sounds familiar, it’s no surprise. Micro-business owners everywhere are relying more than ever on freelance workers.

MacDonald hired virtual assistant Jeannine Clontz, who works from Arnold, Mo. Clontz is the incoming president of the International Virtual Assistants Association (IVAA), an organization that connects business owners with self-employed service providers around the country.

“There has been a long-term shift over the past six or seven years toward the use of independent contractors,” reports Clontz.

Why the boom? Clontz cites two reasons.

“The advent of globalization and the related competitive pressure on profit margins seem to have been the initial motivators,” she says. “And today’s employers are responding to the recessionary economy by asking how they can reduce their taxes and expenses.”

Could independent contractors be a good match for your micro-business? The information in this article will help you decide.

Cost Savings
Independent contractors offer cost savings derived from their scheduling flexibility.

Rather than hire employees and then maintain sales or workloads to keep them busy, micro-business owners can employ contractors on an hourly or project basis as work flow requires.

“Saving money is the driving motivation for the increasing use of independent contractors,” says Nancy E. Joerg, senior attorney at Wessels Sherman Joerg Liszka Laverty Seneczko P.C. in St. Charles, Ill. This labor and employment law firm counsels and defends employers around the country on independent contractor matters.

With independent contractors, employers don’t have to shell out insurance premiums for health care, unemployment or workers’ compensation. Neither must the employer pay Social Security taxes or fund overtime, time off, vacations and retirement plans.

“The savings are huge,” says Joerg. “In some cases using independent contractors can save employers a third or more of payroll costs.”

Specialized Help
Independent contractors are trained and ready to do exactly the job that you need done. They come in two broad categories.

The first consists of individuals who provide a basic level of administrative, creative and technical services. Examples would be secretarial and bookkeeping tasks, telephone answering, and Web site design and maintenance. Most of the time these contractors work in their own offices. Occasionally they visit a client’s workplace to complete their projects.

The second category of independent contractors consists of self-employed people who perform managerial or high-level technical work. They fill senior positions such as chief financial officer (CFO), human resource manager, marketing director, project manager, communications network designer, and training and coaching leader.

The ability to rent the skills of these experienced professionals can be invaluable to a micro-business that might not otherwise be able to afford such expertise, says Gene Zaino, president and CEO of MBO Partners, one agency that matches senior-level contractors with client businesses.

“When you are small, you need to find experts that will let you share a little of their time,” he says.

Rates for all of these services vary widely by experience and region. To give one example, a business using the services of a remote virtual assistant for administrative work might pay from $25 to $35 an hour, according to IVAA. It’s not unusual for hourly rates to top $150 or $200 for experienced people performing high-level technical or managerial duties.

As these figures indicate, hourly rates for independent contractors usually run higher than you would pay a full-time employee. But business owners save money because they only pay for the hours they use the independent contractors and don’t pay for employee perks or benefits.

The savings are especially attractive at senior-level positions. A full-time CFO might cost a business $150,000 to $200,000 annually. But, many of the freelance CFOs registered at the agency B2B CFO charge their smaller business clients only a few hundred dollars a month, says agency president Jerry L. Mills.

Whatever the services performed, independent contractors can possess unexpected skills that enhance a business.

For example, MacDonald discovered that her virtual assistant was knowledgeable in the intricate technological details of setting up an integrated voice mail, e-mail and online social networking system. The contractor also created and maintains a blog page linked to MacDonald’s Web site as well as lists homes for sale on Facebook, Craigslist and other appropriate Web sites. None of that could be handled by MacDonald’s former full-time staff.

Contractor or Employee?
Independent contractors are not employees. And business owners must take careful steps to be sure that they maintain the lines of distinction between the two.

“Businesses are often shocked to learn that some of their independent contractors are considered employees in the eyes of the IRS and state departments of unemployment insurance,” says attorney Joerg.

Back taxes and heavy financial penalties can result if the IRS or another government agency audits a business and reclassifies independent contractors as employees. Joerg points to these examples:

• The IRS may assess financial penalties and demand payment of all of the withholdings that the employer should have made, even if the employee has already paid those taxes.
• The wage and hour division of the U.S. Department of Labor may determine an employer failed to pay overtime for reclassified individuals who worked more than 40 hours a week. That means still more retroactive wages and fines.
• State departments of unemployment can audit for back unemployment insurance contributions. And Illinois, for example, assesses 24-percent annual interest on unpaid amounts.
• Workers’ compensation carriers can demand back premiums. “We have seen one carrier demand hundreds of thousands of dollars from one employer who uses a lot of independent contractors,” says Joerg.
• Reclassified employees may seek to recover lost wages and benefits.

Protect Yourself
Misclassifying employees as independent contractors can prove extremely costly. And the risk of running into a problem is high because the IRS and other agencies have not provided a clear-cut definition of what constitutes an independent contractor.

You can take steps to protect yourself.

One way is to consult with an attorney experienced in independent contractor law. That attorney can help you reduce your risk by taking several actions on your behalf.

An attorney can prepare contracts that specify an independent contractor’s status. While contracts can provide an excellent defense against charges of misclassification, they must be written correctly to conform to federal and state law as well as to industry-specific practices.

“It’s dangerous to use a canned contract,” says Joerg. “You can think you have covered all your bases, but that may not be so.”

An attorney can also instruct you on correct management procedures that maintain the independent contractor status of individuals and can ensure that your independent contractor relationships conform to the requirements of your state law.

“Each state has its own independent contractor test for purposes of unemployment insurance, and yet another test for workers’ compensation,” says Joerg. “And in both areas there may be special tests for certain industries.”

You can also turn to the IRS for help. Go to www.irs.gov and enter “independent contractor” in the search box. The results will return tax tips, forms and other information.

Don’t forget that the certified public accountants at NASE TaxTalk can answer your questions about classifying, hiring and paying independent contractors. And they’ll answer all of your questions at no additional cost. Just visit www.NASE.org and click the link for the Tax Resource Center.

Finding Freelancers
So where do you find independent contractors—whether to perform administrative tasks or take over the high-level work of a CFO?

One of the best ways is to get referrals from other businesses, asking which contractors they’ve found most valuable. You can also go to organizations and agencies that connect self-employed individuals with clients.

Once you have some prospects, spend time and effort finding the right one. The retirements of baby boomers and the severe recession have resulted in rapid growth in the number of people who have left the workplace and are now offering their services as independent contractors.

Be aware that some contractors may bring more enthusiasm than professionalism to their work. Many are just beginners, having recently left a corporate job for the freelance world. For example Clontz points to virtual assistants, saying that many are just now getting their feet wet in an industry which is barely more than a decade old.

“The virtual assistant industry is still in its infancy,” says Clontz. “Many practitioners may have great skills but just don’t know how to run a business” in terms of serving clients in a professional manner.

Before hiring any independent contractor, perform due diligence. Ask for references and check them. Speak with the individuals on the phone to assess communication skills and personalities. Peruse their Web sites: Do they reflect professionalism? Membership in a professional association is also a favorable sign, as is any certification such organizations offer.

Once you’ve picked out an independent contractor, go into test mode. Start by hiring the freelancer for a small, specific project that isn’t mission critical for your micro-business. Give the contractor a deadline and a budget. Then see if the results come in on time, on the money and up to your expectations.

Change Is Good
If the recession has proven anything, it’s that micro-business owners need to be flexible in their attitudes toward business operations.

Tough times call for timely changes—and that can mean a fundamental remodeling of the bricks-and-mortar office with its full-time staff.

“When we grow through trying times, we have to be adaptable and become aware of how our business is changing,” says entrepreneur MacDonald, reflecting on her own experience with independent contractors. “We need to open our eyes to new possibilities.”

Award-winning New York City author Phillip M. Perry applauds the work ethic of his fellow independent contractors.