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More businesses using freelancers, experts say

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  • Expert: Firms are becoming more "project-based" so they use more freelancers
  • Freelancers save firms the cost of benefits, taxes, equipment, work space
  • Freelancing offers options for laid-off full-time workers, says expert
  • Freelancer offers tips on avoiding pitfalls, including tax implications of going solo
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By Steve Almasy
CNN
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ATLANTA, Georgia (CNN) -- Anne McKillips is certain of one thing in this uncertain economy: She is never going to work for someone else again.

Anne McKillips says it's important to understand the tax implications of owning your own business.

In 2005, 7.4 percent of workers were classified as independent contractors.

Unlike employees at risk of being laid off and tossed back into the field of those searching for work, she decided years ago to go into business for herself.

McKillips realized that she could do the same kind of work on employee benefits that she'd been doing for her employer, without the hassles.

"I felt I could deliver a better product or service to my clients because I didn't have the constraints of the company I was working for," she said. "And I didn't have to put up with some of the corporate stuff."

So McKillips started her own company. But by 2006, it had grown so big that she decided to sell it and become a consultant -- what the government calls an independent contractor -- on employment and work flow issues.

She joined an increasing number of Americans going it on their own.

The percentage of people who are working as independent contractors has grown, according to the Bureau of Labor Statistics.

In the latest numbers available, from February 2005, 7.4 percent of workers -- or 10.3 million -- were classified as independent contractors -- more than a full percentage point higher than in 2001.

More companies are using freelancers because their businesses are becoming more project-based, one expert said.

"As business models change, you get a lot of organizational upset and that adds to the economic uncertainty," said Joe Pastore, professor emeritus of management science at Pace University. A business "really can't see out much more than a year perhaps. And you're operating from business cycle to business cycle."

There are also big economic incentives to hire freelancers, he said. Businesses cut the costs of benefits and payroll taxes and often don't have to buy new equipment or find work space for a freelancer.

And Pastore said because of the bureaucracy of many companies, it's much easier to get a freelancer approved for a project with a specific short-term time period than it is to get a new full-time position approved.

"It's really about flexibility," said Jon Down, associate professor of management at the University of Portland. "Companies can scale back if they don't meet projections [by cutting the number of freelancers they use]. In times like these, companies are all about minimizing their expenses."

Down said that as employment numbers shrink, so will the use of independent contractors -- especially in such a broad and deep recession -- but that freelancers are likely to be the first to find work when the recovery begins.

He said the length and depth of the recession will be seared into the memories of businesses and it will depend on the industry as to who will be hiring independent contractors.

Pastore said it might be worth it for people who have been laid off from full-time jobs to look for some freelance opportunities. He said a job search typically takes about one month of looking for every $10,000 of salary you make -- and it might take even longer in today's economy.

McKillips offered some tips for workers who want to try the independent route for the first time. The most important thing, she said, is to fully understand the tax implications of owning your own business.

For instance, you have to pay your own Social Security tax.

"You can't say to the IRS, I didn't know I was supposed to pay this," she said.

You also have to set aside money for retirement and disability insurance.

You should start by putting 30 percent of the money you make into an account, one that you keep separate from your personal savings, McKillips said. She also recommended getting a good accountant -- one who's very familiar with small businesses -- and an attorney.

It's also important to keep track of your expenses, even something as small as picking up a few supplies while you are at the grocery store.

Also decide whether you want to add employees in the future as the business builds.

McKillips, whose business had employees in 22 states before she sold it, had a friendly warning for new entrepreneurs.

"Be careful -- you might grow bigger than you wanted to," she said with a chuckle.

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