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I'm considering only using Consultants with 1099 status for my staffing agency at this stage as a startup. Pros and Cons?

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Lisa McCormack
Title: VP, Client Services
Company:
(VP, Client Services, ) |

Hello,

If I understand your question correctly, you are a start-up company and you are considering using 1099 consultants to fill positions for your company. The biggest risk of using 1099 contractors for any role in your company is that they may not meet the IRS guidelines for independent contractor status. The IRS formerly used what has become known as the "Twenty Factor" test. It has recently attempted to simplify and refine the test, consolidating the twenty factors into eleven main tests, and organizing them into three main groups: behavioral control, financial control, and the type of relationship of the parties http://www.irs.gov/pub/irs-pdf/p15a.pdf. It is important to ensure your consultants meet this criteria or you could be audited and responsible for payroll taxes, penalties, etc.

Once you have determined that a consultant meets the 1099 compliance criteria then there are many pros to using 1099 contractors for your business as you would not offer the benefits an employee would receive and performance is based on what has been defined in their contract. Since staffing can be cyclical, your can bring on contractors as needed to address your hiring ramps. Make sure you have a good independent contractor agreement, which your legal counsel can provide.

Keith Taylor
Title: CFO
Company: Lyris, Inc.
(CFO, Lyris, Inc.) |

Dear Anon: Lisa gave you the factual and correct perspective -- If you do bring on many/most positions as 1099 contractors, be careful to ensure they truly qualify. (FYI -- I helped establish www.icontract.com back in 2000 -- its extremely difficult to truly qualify general workers as 1099 contractors.)

As a Finance person I regularly challenge companies to really 'validate/test' the theory that "a 1099 contractor is cheaper". Proper insurance coverage for such contractors can be more expensive; Contractors usually require a higher 'hourly' rate -- they need financial coverage between engagements; Contractors usually want or need hourly not salaried equivalent, or conversely, they limit their time commitment; You get what you pay for -- employees recognize and reward the financial commitment - Contractors recognize the lack thereof... In a nutshell, there are many other 'hidden' costs or risks of hiring contractors vs employees.

As an alternative / compromise, consider hiring key workers, with some sweat equity tradeoff, or deferred compensation component, and then hire non-critical positions as 1099ers.

Dan Ryan
Title: CFO
Company: Privately held
(CFO, Privately held) |

Ask yourself: are they going to be more loyal to you than you are to them? If turnover does not matter to you then this will not be a big deal. But what about the truly excellent people you find as contractors? Would you not want them to come on full time and give you sustained excellence in your company? Also, I find committed employees give 50, 60 or more hours per week on a pretty regular basis. The "savings" using only contractors can go away if you really need those extra hourse, b/c a contractor will make you pay for every minute whereas dedicated salaried employees give you more b/c they are dedicated and committed.

On the flip side, from a management perspective, it is nice to be able to quickly and easily sever someone without having to go through the whole layoff/firing rigamarole, which is depressing and messy for all invovled. Perhaps your strategy could be a mix of the two approaches? Say, start everyone as a contractor, and only after 6 months, if you are loving them, you can bring the best on full time.

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