Outsourcing Vs. Temporary Help

There are two main ways to get short-term help for your business. Outsourcing generally means hiring an independent consultant to perform certain services, while hiring temporary help refers to acquiring a short-term employee through a personnel service.

Independent consultants' rates may be lower than agencies would charge you for the same assistance. But going through an agency saves you the time and expense of locating temporary help. When you hire through an agency, you pay the agency directly for all services and avoid other expenses and tax worries.

"Hiring temporary help through an agency frees me from doing bookkeeping, payroll and employee taxes," says Jeff Auerbach, president of Gaithersburg, Maryland-based Replicon Inc., a biotechnology company involved in DNA diagnostics, who hired a scientific researcher through Kelly Services. "Writing a single check simplifies things and frees me to concentrate on the business."

Hiring consultants, on the other hand, can be a more complicated matter. "When you hire outside consultants, you must have them fill out a W-9, which will tell you if they're corporations or unincorporated businesses," says Dave Stevens, a CPA in Santa Fe Springs, California. "If they're unincorporated, you must issue them a 1099 at the end of the year if you've paid them more than $600 for that year."

It's also important the person you hire as an independent consultant is not actually acting as an employee, which would make you liable for taxes.

"There are certain criteria outside consultants must meet in order to be considered independent contractors by the government," says Stevens. "If you're audited and challenged and you lose, and people you paid as independent contractors are actually deemed employees, you may have to pay all employment-related taxes you should have withheld and submitted to federal and state taxing agencies, plus the employer's share of any other taxes due. This amount could run as high as 40 percent of what you paid them, plus penalties and interest."

The IRS has a 19-question checklist called "Employer's Supplemental Tax Guide" to help you determine whether a person is an independent contractor or an employee. The checklist can be downloaded from the IRS' Web site (http://www.irs.ustreas.gov).

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This article was originally published in the January 1998 print edition of Entrepreneur with the headline: Swamped?.

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