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August 31, 1998

Independence Without All The Hassles

Umbrella firms can handle paperwork

By Norbert Turek

Contracted Benefits

Services that umbrella companies provide for independent contractors

Act as an employer of record for tax purposes

Execute contracts and, in some cases, help determine going rates

Bill and collect money due

Pay and file taxes

Manage retirement plan

Provide health-care options

Pay general liability and worker's compensation expenses

Track expenses

Reimburse qualified business expenses with pretax dollars Data: InformationWeek

igher pay, flexible hours, the chance to be your own boss--becoming a contractor has a number of advantages. But many IT workers opt to remain in salaried positions because they don't want to spend their off hours sending out invoices, collecting payments, balancing the books, and shopping for health benefits and a retirement plan.

There's a way to go it alone without having to deal with all the paperwork, or worry about the Internal Revenue Service's ongoing crackdown on con- tract workers: Hire an umbrella company. For a fee-usually 3% to 5% of an independent contractor's hourly billing rate-an umbrella company hires the contractor as an employee, creating a separate division with a personal manager for each worker.

When the employee gets an assignment, the umbrella company executes a contract with the client company, bills the client, and collects payments. Income and expenses are managed separately from the rest of the company. The umbrella company pays the worker's salary and bonuses out of the worker's income, files state and federal taxes, and even manages health and retirement plans.

What umbrella companies don't do is find work for you. That doesn't bother Robert Marinaro, an independent contractor who has worked for Contractor's Resources, an umbrella company that manages about 250 people, for two years. He likes the fact that he can choose the jobs he wants to take on while maintaining stable benefits.

Marinaro gets most of his work from contract employers, who take a fee from the client employer. The contract employer signs a contract with Contractor's Resources and pays the company directly. Marinaro has to pay for the services Contractor's Resources provides, but says it's well worth the cost. "Contractor's Resources pays my taxes, takes care of my 401(k), collects my bills, and sends me a check," says Marinaro. "I just do the work I love. It's a no-brainer."

Contractor's Resources was founded by Mike O'Connor in 1986 as Software Resources and is the oldest umbrella company in the country. O'Connor says he came up with the idea of an umbrella company as a legal means for people to work as contractors after the 1986 Tax Reform Act tightened the rules on companies' hiring independent contractors. He left Contractor's Resources last year and started a separate umbrella company called Independent Professional Services. A few other umbrella companies have been set up around the country, including Churchill Benefit Corp. in Delray Beach, Fla., and P.A.C.E. in Walnut Creek, Calif.

IPS is registered in eight states, and Contractor's Resources wants to go national. "We're registered in more than 20 states, including California," says Alex Libkind, business development manager at Contractor's Resources. "And we'll register in any other state where even one contractor can show enough billings going out." Churchill, registered in 15 states, also wants to expand.

Not everyone thinks umbrella companies provide a useful service. Janet Ruhl, an author who tracks contractor rates, says anyone who is going to be independent for more than a year or two should go it alone. "People who've already learned to find their own clients will ultimately tire of having 4% to 5% taken out of their checks for these back-office expenses," she says.

Kip Haggerty, an independent contractor in Los Angeles, is content to do his own administration and isn't concerned about the tight IRS restrictions on contractors because he makes sure he works within the rules. "When people ask me why I bring my own computer to their office," he says, "I say, 'It's not just a good idea-it's the law.'"

If you're thinking about becoming an independent contractor, you need to know the rules regarding the hiring of contractors. In some cases, an umbrella company will make it easier to do some contracting work.

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