Tread Carefully Around Freelancers

Q: My business is growing, but I'm hesitant to hire a full-time employee and pay taxes, benefits, workers comp and unemployment insurance. Do you think I should go with freelancers instead?

A: Especially in today's recession, hiring freelancers (also known as independent contractors) can be a great way to save money while recruiting the people you need to help your company grow.

And now that so many executives, salespeople and IT professionals are out of work, top talent is more affordable than ever--with no strings attached. The downside to hiring freelancers, of course, is that you're not their only client. Unless you're able to provide a steady stream of work for them, they may not be available the next time you need them. In fact, once the economy recovers, your most talented freelancers may leave you for full-time jobs with benefits.

If you give your freelancers too much work, however, you may have the government to contend with. According to the IRS website, an individual is considered an independent contractor if the company he or she works for controls or directs only the results of the work, not the means or methods of accomplishing them. This generally means that independent contractors must work for multiple clients, use their own tools and work from their own location. If the freelancer you hire drops her other clients and starts working out of your office full time, you may be breaking the law.

"Before you hire someone to work for you, you should talk with your accountant about the nature of the work they are going to perform, the frequency they will perform this work and the way in which the work is going to be performed," says Allison Brack. A tax partner at New York's Citrin Cooperman & Co., she works with closely held businesses. "Exerting too much control over the service provider could put you at risk for being responsible for unpaid payroll taxes."