Thinking independently: the pros and cons of using independent contractors to grow a small business.

Some small business owners use full-time employees, while others rely on independent contractors. Willie Middleton II prefers a mixed bag, and rounds out his two-person full-time staff with up to eight to ten independent contractors in any given week.

This employment strategy gives Middleton, CEO of Atlanta-based Southern Mitigation & Restoration Services, the flexibility to ramp-up to handle construction projects, or scale back when business slows. It also reduces employment paperwork and tax obligations and allows Middleton to tap into the knowledge and expertise of other business owners.

Middleton, whose 3-year-old firm renovates older homes for investors, turns to independent contractors to handle the electrical, HVAC, plumbing, roofing, drywall, and flooring for the properties. He checks references thoroughly before putting a new independent contractor on a job site, he says.

Once on board, Middleton says that unlike his frill-time staff, which handles general labor tasks, the independent contractors require little in the way of paperwork. They're responsible for their own taxes, so he simply has to retain a W-9 (which shows the company name, owner, and tax identification number) form on file and generate an annual 1099-MISC tax form (which shows how much was paid out to that company) for each independent contractor.

"Overall," says Middleton, "I've found it to be a much easier way to mobilize a workforce."

1099 BASICS

Independent contractors work for themselves, and are typically business owners who take on projects outsourced by other firms. This means the company that outsources the work isn't liable for payroll taxes or health benefits for those individuals, who typically aren't protected by worker's compensation or most labor laws.

Independent contractors can "work from anywhere" and tend to perform "non-core" work for individual companies. The owner of a hair salon, for example, may use a contractor to create marketing brochures and advertising materials for her business, while a financial planner may hire one to handle 10 hours of filing a week.

Eva Rosenberg, publisher of TaxMama.com in Northridge, California, says independent contractors are an attractive choice for entrepreneurs who want to avoid the complexities of payroll and tax obligations. What companies need to be aware of, says Rosenberg. is that the person to whom you shell out a gross payment (as in, no taxes taken out) on a regular basis may not always be considered an independent contractor in the eyes of the IRS (see sidebar).

Once you've established that the independent contractor is legitimate, Janet Attard, founder of Business KnowHow.com in New York and author of The Home Office and Small Business Answer Book, says be prepared to undergo a trial period. Start by giving out small assignments, then tracking whether they were done on time, completed professionally, and within the parameters you outlined. Only then should you hand over larger projects.

Taxing Matters

Eva Rosenberg, publisher of TaxMama.com, outlines the 20 factors that the IRS considers when deciding that a worker is an independent contractor rather than an employee:

1 Instructions are generally not given by the company to the contractor

2 Training is not essential and is not given by the company.

3 The contractor's personal services are not required and he or she can assign the work to anyone.

4 The work being performed is not essential to the company.

5 They set their own hours.

6 They have no continuing relationship with the company.

7 They control and rare their own assistants.

8 They are free to pursue other work.

9 Where they work is their choice

10 They set their own work priorities.

11 No interim reports are required of them

12 They work for more than one firm.

13 They pay their own business expenses,

14 They use their own tools and equipment.

15 They bear a risk of toss,

16 Their services are available to the general public (or industry).

17 They have made a significant capital investment.

18 Right of discharge is limited by contract.

19 They are not compensated for incomplete work.

20 Timing of payment coincides with completion of the job, rather than