Outsourcing Firm's Latest Offering: Health Insurance

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And in 2008 the New York City-based Freelancers Union formed its own insurance subsidiary, Freelancers Insurance Co., that offers plans in New York State ranging from about $200 to $500 a month.

While contract workers may want the option of services like oDesk Payroll to purchase health-care benefits, it also appeals to companies that want protection against claims by the IRS or state regulators that they are misclassifying workers. Employers that improperly classify workers as contractors face steep penalties and back taxes, and the IRS and several state governments have announced plans to scrutinize companies using independent contractors more aggressively. "To the companies doing the hiring, it does help with this compliance problem," says Steve King, a partner at Emergent Research, a Lafayette (Calif.) small business research and consulting firm.

Switching to services like oDesk Payroll has tax implications for freelancers as well. While workers who switch will no longer be subject to the self-employment tax, they will also lose many of the deductions they claim as contract employees. ODesk CEO Swart says that even with the oDesk fee doubling, most will still make about the same amount. "Generally contractors will break even or save money by the end of the year," he says.

For some, adding access to more affordable health insurance to the chance to work flexible hours from home creates an irresistible deal. Michelle Baker works 40 hours a week through oDesk doing data entry for a San Francisco tech startup. A 44-year-old from Santa Rosa, Calif., who also writes about wine on the side, Baker has been uninsured for three years, paying what medical costs she has out-of-pocket. When she shopped for individual coverage three years ago, she was looking at paying more than $300 a month for catastrophic coverage. Now she's buying a similar plan through oDesk for $186. "That's been the key outside benefit that I've really needed," she says.

Tozzi covers small business for BusinessWeek.com.

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