Navigating Sea of Paperwork

Quarterly taxes, social security payments, invoice preparation and settlement, health care and dental program payments, 401(k) payments. Hey, nobody said being an IT contractor was all fun and games, now did they?

"Its a pain in the butt," said Gary McKay, a contractor used by Electronic Data Systems Corp. to keep the Navy and Marine Corps Intranet technical infrastructure, in Herndon, Va., working.

The paperwork associated with being a free agent is such a pain in the butt, many contractors—and even the companies that employ them—procrastinate in dealing with it. But as layoffs and hiring freezes continue, the ranks of IT contractors are swelling—which means there are that many more potentially tax-noncompliant individuals and corporations out there.

The Internal Revenue Service has been cracking down on noncompliance since the 1990s. Microsoft Corp.s infamous "permatemp" case was settled in December when the company agreed to pay $97 million in the 8-year-old class-action lawsuit brought by permatemps who claimed the company was illegally avoiding paying benefits such as for pensions and health care. And at least one state—New York—has recently ramped up efforts to ferret out people working in that state who are not reporting income properly. An internal memo from one New York company mentions that as of June, there were at least seven pending audits of IT staffing companies by New York, all over the issues of employee classification vis-´a-vis tax reporting.

Whats an IT contractor to do? McKay turned to Yurcor, a provider of online services that handles all the headache-inducing paperwork associated with contractors. The companys services include 1099 compliance testing to determine compliance risk; consolidated invoicing, which means McKay doesnt have to knock on clients doors for payment anymore; health care payments; and even direct deposit. Its almost, McKay said, like getting a regular paycheck. "Its almost like having the security of working for a company," he added. "Its all the back- office stuff that most people dont even think about, but as an independent, you have to think about."

At $374 a month for independent contractors and 14 percent to 16 percent of gross billings for companies that employ them, one of Yurcors most important services is protecting companies from the 10 percent penalty fees on back taxes they could wind up paying if found in noncompliance. Thats particularly appealing to companies that employ so many contractors, they can barely keep track of them, according to Keith Widoylar, vice president of marketing for the Bridgeport, Conn., company. "Some dont know how many contractors theyre using," Widoylar said. "Some dont know how much theyre spending. After all, contractors dont come in through a central gateway, like employees do [when human resources hires and processes them]."

But, for McKay, whos been a contractor with various staffing companies over the past two years, the best part is that Yurcor handles the billing. That lets him concentrate on marketing himself—rather than banging on doors. "You hate calling them and saying, Look, whats the deal?" he said. "[Yurcor does] that for you. You can focus on marketing yourself and getting the job done."