Using independent contractors offers employers significant tax and nontax advantages. Since employers are required to pay certain benefits and taxes on behalf of their employees, the financial benefits of having a large independent contractor work force can be significant.

For example, by classifying workers as independent contractors, employers may be able to avoid responsibility under:

• the Federal Insurance Contribution Act (FICA) or Social Security tax
• the Federal Unemployment Tax Act (FUTA)
• the Consolidated Omnibus Budget Reconciliation Act (COBRA)
• workers' compensation
• retirement plans

All payroll taxes and benefits are maintained by the individual contractor, who does not participate in your company-offered fringe benefit plans.

Also, your own exemption from many federal, state, and local laws is based on how many employees you have in your work force. Independent contractors are not counted as employees. Thus, if you contract with independent contractors instead of hiring regular full-time employees, you may not be covered by some of these laws. These laws include:

• the Americans with Disabilities Act
• the Family and Medical Leave Act
• the Title VII of the Civil Rights Act of 1964
• the Age Discrimination in Employment Act

Disadvantages of independent contractors. The main disadvantage to using independents is that you must keep on top of exactly what qualifies someone as an independent contractor. If you misclassify someone as an independent contractor who isn't, the penalties can be extremely costly.

Not only that, but there are two different sets of "tests" for independent contractors — one under the Fair Labor Standards Act (FLSA) and a 20-point test administered by the IRS. While the tests differ, they both focus on how much control the employer has over the employee's work.

Another disadvantage is that independent contractors, by definition, are permitted to work for a number of different companies at a time. You won't have as much control over the worker's time, efforts, and loyalty as you would with a permanent employee. Furthermore, most contracts permit the independent contractor to substitute another individual for himself on any job, so you may not even be sure who's ultimately going to do the work for you. Finally, independent contractors make a commitment to work for you for the length of the contract, and that's it. If you like their work and want to continue the relationship, you may have to renegotiate the agreement (including their payment rate).