Contracting out work to independent contractors is another staffing option to consider, due to the many tax and non-tax benefits involved. However, the distinction between employee and independent contractor can be hazy, and misclassification can have serious consequences.
Advantages of Using Independent Contractors
Classifying a worker as an independent contractor has distinct advantages for a company. Because many labor and employment laws are triggered only when a business reaches a certain size, keeping the number of actual employees on the payroll low may avoid liability. In addition, there are many up-front financial savings:
Disadvantages of Using Independent Contractors
The most important disadvantage of using independent contractors is the danger of misclassification. Due to the inherent tax consequences, the IRS polices this classification diligently, and misclassification can result in an audit of the entire workforce. To further complicate matters, there are two different "tests" for independent contractors, one under the Fair Labor Standards Act [FLSA] and a 20-point IRS test. Meeting the criteria necessary to fulfill the independent contractor definition can be disadvantageous: