NEWSDAY

An independent contractor is not an employee
By Jamie Herzlich
June 1, 2009

During the course of doing business, projects often arise that don't warrant a full-time worker but still need to get done.

It's at these times that many businesses turn to independent contractors for help.

In fact, the use of independent contractors has risen as the economic downturn has deepened, according to SurePayroll Inc., an online small-business payroll service based in Glenview, Ill., that tracks the usage of independent contractors through a monthly index.

"When the outlook is uncertain, businesses turn to contractors because they provide a relief valve until they can figure out where the market's going," explains SurePayroll president Michael Alter.

As of the end of April, the index hit 3.94 percent, the highest level it has reached since its inception in 2004. Broken down, this means that, for every 25 workers earning money at a small business, approximately one is paid as an independent contractor.

Independent contractors can be used on a per-project basis and are less costly than salaried employees because the business owner isn't responsible for their payroll taxes or benefits, Alter notes.

"It's about eight to 10 percent more in taxes for a permanent employee versus an independent contractor, not including benefits," he says.

While the savings can be significant, businesses must be careful when using independent contractors to ensure they aren't misclassifying employees as independent contractors, which can result in serious tax penalties and liabilities, notes Peter Schneider, a partner in the labor and employment practice of Meltzer, Lippe, Goldstein & Breitstone Llp in Mineola.

"You can't just dub a person an independent contractor and make it so," Schneider says. "A person has to qualify under various federal and state statutes in order to be considered an independent contractor." (Click here for New York Labor Department information, and here for U.S. Chamber of Commerce advice.)

Much of who is an independent contractor rests with right of control.

The Internal Revenue Service "really focused on control and supervision," says Lawrence Lioz, a tax partner at Margolin, Winer & Evens Llp in Garden City.

Specifically, a business shouldn't exercise control over how independent contractors do their jobs or directly supervise their services, Lioz explains. Independent contractors should also be free to work for other companies and set their own hours, he adds.

"The key thing for any company to consider is what the person they're planning to bring on board will be doing," says Joan E. Lisante, a Washington attorney who has written on the subject of independent contractors for business publications.

If they're going to be working on an extended project or one that requires direct supervision, you may want to consider other options, such as hiring a temporary employee, notes Barbara Gebhardt of Opus Staffing in Melville. You should also consider whether they need to be working on-site.

"In most cases, they work in their own space," says Adam Schwam of Sandwire, a Garden City-based information technology firm that uses independent contractors.

He's found it helpful to have project agreements with his independent contractors.

In fact, it's also wise to have an independent contractor's agreement, which helps spell out the relationship.

"It's always a good idea to have something in writing," explains Stephen Fishman, a San Francisco-based attorney and author of "Working With Independent Contractors" (Nolo; $34.99).