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Best Billing Options for a Contract Position?
ffatTony asks: "I've finished college and found a great job, but
now I'm surrounded by a number of contracting options without any real
explanation of why one is better than the other. I hoped the more
experienced among you could provide some insight. The three options
presented to me are (1)Corp to Corp (100% payrate), (2)Independent
Contractor (86% payrate), and (3) W2 Employee (62% payrate and a
moderate weekly expense stipend). I understand that for the first two,
I will need to pay self-employment tax. And in the first case I'll
need to start a corporation (<$100, I'm assured), get an
insurance policy, and workman's compensation. I'd like to hear about
your experiences and any hidden fees that may be associated with each
option. What do you all suggest? (Yes I'm going to talk with an
accountant as well). Also can anyone suggest an online source that
explains exactly what is tax deductible."
Here come the myriad "IANAL but..." and "ignore the /. crowd, contact your lawyer" responses.
"Population 1,656"
i'm going to be in that position soon!
As a corporation, your income will be taxed at both the corporate and individual levels. IRS regulations my prohibit you from paying all of it back out as pay. As a W-2 employee, you will receive worker's compensation, social secutiy, and probably benefits.
Publications 15 and 501 are somewhat useful. You can browse all publications at http://www.irs.ustreas.gov/forms_pubs/pubs.html
If you are outside the U.S., try the department of revenue for your home country: most have at least some information online, and are very happy to explain the details (to encourage filing).
I myself am still in college and am almost at the completion of the first slow year. I'm running a subchapter S corporation so that the company's profits will be taxed personally to me. Granted though being a full time student has limited the profits, IE I'm looking at probably no tax for this years operations. Due to the fact I am the only employee I don't yet have unemployment insurance or file wage reporting because I don't pay myself wages or a salary. I'm not familiar with your state but a good place to start for any state is sba.gov, they should give you the basics of starting your own company.
Considering you, and many others who have responded, have found employment, I am unemployed and am desperately seeking work.
Who is this employer? I must discover who is actually hiring during this time of the year.
"There ought to be limits to freedom"
If you are not interested in starting your own company and filing paperwork every quarter with the IRS, then the W-2 will be the most painless.
If you can itemize tax deductions such as miles on your vehicle, office supplies, etc. then option 2 might get you a little more $$$.
Option 1, I won't go there. You really should consult a tax lawyer or an accountant.
You'll pay income and self empolyment taxes on quite a bit less income, since you'll be paying for just about everything through your corp account. Your accountant (get one when you create the corp) will be able to work more freely. For one person, the LLC corp works pretty well.
And in the first case I'll need to start a corporation (under $100, I'm assured).
Assured by who? If you can figure out how to start a corporation in your home state for less than $100, you need to tell me how. Most states charge more than that just for the corp license. Check out any of the incorporation web sites, and take a close look at the fees just for the state alone - before the lawyers get involved. Here in Texas, it's something like $260 if I remember right.
For what it's worth, whoever is assuring you that shouldn't be trusted for anything else they tell you, either.
What's your damage, Heather?
Having done this (option 1) I can assure you that the greatest hidden fee is the incredible amount of time spent trying to figure out what the hidden fees are and who needs to get paid for what license/program. What a nightmare, for me at least. Who knew that the evil HR department ever *actually* did anything? To save yourself countless hours of frustration, go with option #2. Unless you plan on going this route for at least a few years, avoid all the extra soul sucking paperwork of option 1, it's a negligable amount of extra money and a significant amount of extra work and time. Luckily I have a friend who works for the bbb who gave me all the info I needed and spent almost as much time getting me started as I did. If you go the route of option #1, make sure you've got some competent friends or relatives who know the ins and outs of your state's business laws.
.sig wanted: Must be concise, funny, and display my cleverness.
One of my friends worked as IT support person at a local university. I think he was hired as an independant contractor. Within a year he was gone and the other personnel(ones hired directly) stayed. It was MUCH easier to terminate his contract than to fire an employee, due to having to pay severance for a regular employee.
This is the reason I didn't take a job in a different IT department there, they wanted to hire me as an independant... easy to let go if the position became unneccesary...
It'll cost less than $100 to start the corp, but then you'll have to keep up on filing annual reports (you can pay an attorney about $400/yr to do this for you). A decent accountant will cost another $1500/yr to do your quarterly and annual corporate taxes. It is better than going with a proprietorship, however, because you can set your payroll and other things which will save you $$$ in taxes. Either way, dental insurance is usually out if you're self employed. My wife had $5k in dental expenses one year...ouch. Uncle Sam will be your new best friend.
You usually have more freedom as to when you can take time off. You're not limited by onerous HR policies. You can write off lots of good computer stuff (which really only saves you your tax rate on the items).
I've found that companies are just as likely to get rid of an employee as they are a good contractor, so that really isn't an issue.
Good Luck!
pb
(4) Say that you're a management consulting firm (310% payrate)
Corp to Corp - You are responsible for everything. All the money goes to you. Can give you better leverage in contract dispute.
Indie Contractor -- Most of the money goes to you. Depening on whether or not you work through a contract managment company, you may or may not have to handle insurance and taxes by yourself (note: this can be a big time suck).
W2 Employee - Not all the cash, but big brother takes care of a great deal of annoying crap (health insurance, taxes, office supplies, travel expenses, you name it and you can probably weasle a way to get your employer to pay for it).
Best of luck.
-- RLJ
Concentrate on your work, skills, and Fragging. Leave the IRS stuff to HR.
-- @rjamestaylor on Ello
Because they treat me like dog shit, and while most of my colleagues think (and probably rightly so) that I get paid too much, from time to time they pile me with WAYY too much stuff that it would take someone working 24/7 three months to finish, but no they want it in A MONTH. And they refuse to pay me more and also refuse to hire anyone else because there is a block on spending.. They also say shit like (it's not the first time, either) "Well we wish we could pay you more but we just don't have enough left.. maybe we can give you some comp days or something." Well great.. fuck them I'm leaving. I don't need them, but apparently they don't realize this. Dude you can have my job. Giving away your life for a paycheck is not worth it. Fuck this company. (hint: I work for a multi-billion dollar media conglomerate)
Me too.
;-)
And no, I don't have an @aol.com email address
I suffer from attention surplus disorder.
I started a software-development corporation and operated it for several years. Actually opening a corporation isn't terribly difficult, but keeping up with the recurring (monthly, quarterly) federal and state paperwork requirements takes a lot of time. It also requires significant accounting expertise.
It really doesn't make sense for an individual, unless you like the idea of learning accounting in all of your free time.
I have been contracting for about 9 years now, and have pretty much tried all the various flavours in quite a few contries. What I have found is this. With a corporation, you can pay yourself a lower salary, thus minimising personal tax, but the company still has to pay tax. Often this is more than the personal version. Also you have a problem of accounting for that company that can cost. I have my own company, but don't really work through it. Maybe when I get married, and two people can draw a salary from it, it will be worth it but not now.
My suggestion is this. Go with the Simplist one first. In Oz I am a PAYG employee with a contract agency. they do all the tax deductions, super, payroll tax, blah blah, and I just get money put in my account on a weekly basis... No Worries.
what about other things like job security.
Personally, I'd rather go with the employment option - in the end, you will probably get better compensation without all of the legal hassles of a corporation.
The society for a thought-free internet welcomes you.
You want advice on contract billing options?
I require a non-refundable advance of $1,000, my billing rate is $150 per hour. As soon as you fax the binding contract agreement, I'll get to work on your problem . . .
Display some adaptability.
Corporation to corporation. The sooner you start treating yourself like a company, the better... I would imagine this option will open up opportunities in the future that may not be available to you as an individual contractor and certainly not as an employee.
So, yes lawyers and accountants will be a must but again, the earlier you start managing your affairs correctly, the more money you should have to show for it in the next 10 years.
The guy was right that posted earlier about Sub Chapter S versus a Chapter C corporation... only one level of taxation. Not too mention that you can be a contractor yourself to your own corporation and manage to write off much more than just your equipment for use.
I don't know where you live but here in South Carolina it's approximately $200 to get all the paperwork and such with the state and such set up to form a corporation plus the bottom line fee from an attorney is typically in the $600 range for a corporate setup as simple as what you suggest. It's worth the investment.
Whatever you do, don't go the W2 route.
Good luck and let us know how it goes.
Why are they offering a different rate for corp-to-corp than 1099? That doesn't make a whole lot of sense. There is no difference in the cost to them.
Are they not allowed to contract directly with you if you are 1099? A third party getting a cut in that case seems like the only reason for a rate difference.
Michelle
The long and short of it is which makes you more comfortable. I you always perform honorably then you should have no problem with Sole Prop. method and you make the most this way.
There is an article on consulting/contracting business issues in the Dec 2001 ;login: - the USENIX and SAGE magazine. I don't think the December issue is online yet.
IANAL, etc.
The first option is probably not your best because you'll have to incorporate and this is not easy, although it's not particularly expensive in most cases. You do not have to do worker's comp and so on because you'll be the only employee (unless you're thinking of subcontracting - things get more interesting). You do have to have insurance and whatever your state laws require. The only problem is that many companies require a minimum yearly gross sales figure to consider you a 'company' - check with them first.
The second option is the best if you want to go independent. I used to live in that world. It's pretty stressful, but you do get to control your destiny to a certain extent. OTOH, you get no automatic Social Security, 401(k), medical benefits and so on. You'll have to do those yourself (and your taxes get complicated in a hurry, so look for a good crook^H^H^H^H^Haccountant =)
The third option varies widely among different companies. The 'W2' is the standard tax form you get in the mail every year if you're an employee. You have it easier there, but not all companies offer the same benefits (obviously check around). IOW, this is the "FTE", full-time employment position as I understand it.
Of course, the more difficult it is to pull off the consulting 'mode', the more money you rake in. Comparatively speaking, I was making tons more money when I was an independent consultant. Now I'm also a consultant but also a 'W2'. I'm considered sorta-hourly but I get full benefits, paid vacation and so forth.
I would probably just ask someone from HR in the company you're dealing with and make them explain what the exact differences are.
- TaxACT
- TaxCut
- TaxSlayer
- TurboTax
I've only used TurboTax and TaxCut myself, and the Deluxe versions of either should have everything that you need. The simple fact is that not getting a W-2 complicates your tax situation tremendously, so you'll need tax preparation software eventually. The Deluxe versions of both TurboTax and TaxCut have "expert assistance" to guide you through a series of questions that will explain exactly what you can and cannot deduct.Nothing for 6-digit uids?
you're going to need to fill out a 1040z.. one thing i can advise you if you're going to consult/freelance/contract (they're all pretty much the same) :-) is that anything you purchase... gas, work related material, even taking out someone to dinner... save the receipt... you can get A LOT of write offs on your taxes... and don't be ashamed... just don't purchase a plane flight to the Bahamas and consider it a business trip... but you know what i mean... i've been doing that for 2 years already and it works out great... remember... your accountant is your friend ;-)
Also, check out the Independent Computer Consultants Association... it's a site set up for guys like us for information on consulting and so forth
best of luck
Welcome to the game of life. The game-clock is running and we are keeping score. If you don't already know the rules of the game, then you really don't want to try to learn them while the game is in progress.
Seriously, until you have a clue about taxes, insurance, liability, and a zillion other things, start off as an employee. Employees don't get rich, but they (generally) don't get sued when their code isn't what the customer didn't tell you they wanted and employees don't get hounded by the Internal Revenue Service for "forgetting" to pay their taxes.
Once you figure out the rules or get a better personal support team than slashdot, then you can think about the subtleties of a Sub-S Corporation.
There only piece of insight you need is to know that
I looked into incorporating here in Minnesota. Just the filing fee was three hundred(IIRC), plus I'd have to had a lawyer to get all the papers straight... few thousand there. And no, you can't skip the lawyer this time :)
One company i worked with just had a branch non-profit incorporated... i think it totalled some $2600 when they were done...
First, you can get a great detail of information at http://www.realrates.com . Nolo press http://www.nolo.com also has some good advice (and books) on the subject.
In my experience, 1099 (Independent Contractor) is the best option, and the 14% cut they're taking is reasonable. I've heard as low as 10% for 1099, but 14% is decent.
From first-hand experience (in California), avoid setting up a corporation unless you can realize some ancillary benefits such as purchasing health benefits or equipment with pre-tax dollars. The downside of a corp is that maintaining your corp is a royal PITA--assume you will spend 4-8 hours monthly just making certain you stay compliant with stupid little rules. Or you can pay an accountant/lawyer to do that for you ($200-500/month).
W2 sucks for several reasons: you can't deduct anything from taxes, you're depending on your body shop to collect for you (and you have little legal recourse if they don't), your only retirement savings options are whatever the body shop offers (at best a 401K with crappy mutual funds), and a 38% cut is way too high.
1099 allows a minimum of hassle, decent deductions, and up to $13500/year into a SEP-IRA. If you really want it, you can still purchase liability insurance as a 1099 contractor, though I've often heard of liability insurance (whether for a 1099 or small Corp) as "sue-me bait". Basically, if you don't have over $100,000 in assets or policies, you're not worth sueing.
Hope this helps
Remain calm! All is well!
Option #1 might be a bit more complicated, but believe me, in the long run, you'll benefit from it. But read to the bottom of this. :)
The main thing is the fact that according to US Tax law, the things you can deduct as "Employee Business Expenses" are very limited. As a corporation, you are able to deduct anything that is "reasonable and necessary" (subject to some exclusions), both of those things are relatively easy to prove.
Example: You go to a hacker conference (at your own expense). You won't be able to deduct these expenses if you are just an employee.
There of course are some downsides: As employee you are covered by labor law, and generally you have a lot more rights (fair termination, timely pay, etc). Corporation doesn't have any more rights than specified in the contract, and you have to collect payments yourself, and sometimes clients are very slow in paying. Generally, the bigger the client is, the slower they pay. Big Wall Street companies sometimes take 90+ days to pay up. On other hand, they won't go bankrupt...At any case, it does good if you specify in contract terms like "2% discount if payment is within 2 weeks", sometimes that gets accounts payable moving quicker.
You will have to buy your own health insurance, and individual health insurance is quite expensive (50% more expensive than group quote at times), so do include that in your total costs for #1.
Some clients insist on liability insurance policies for your company before they can do business with you. These can run from 500 to 1500$/year, depending on what client requires.
Also, yes, its a lot more paperwork, and you MUST have an accountant to do your taxes, payroll, etc. Without it, you are a sitting duck for IRS.
There are alternative solutions, trying to combine best benefits of #1 without all the hassles: There are "fair" consulting companies that take care of all paperwork, your client's credit risk, health insurance, payroll taxes etc, while still allowing you flexibility to buy certain things tax-free and enjoy other benefits of being incorporated.
"Fair" here refers to the fact that such company charges for its services a small percentage (2-10%) of your total income, while in general, consulting companies rip you off (sometimes taking 66% of your client's fee!).
The way it works is this: Assuming you already have a client and an agreed rate, you come to such a company, and after a few sanity checks, you become an employee of this consulting company, and consulting company signs the contract with your client at an agreed rate.
Then, whenever you need to spend money on something is tax-deductible, you pay for it with company's credit card. This money will be deducted directly from your next payroll check "above the line" (i.e. before the taxes are computed).
I do that for bunch of my friends for free, and I'll certainly consider doing it for others (with minimal fee, to cover my costs), so just let me know if someone is interested in this arrangement. Alternatively, search the web, there are a few companies whose business is explicitly what I described.
Sart your own S corp. I don't know who told you $100, but it depends on your state. In Texas it is about $350. Check on your state website, the Texas Secretary of State has a Word template on the website that you fill out and send in with a check and viola! Unless you are going to do something complicated it is easiest to incorporate in your own state.
To be an S corp you'll need to get an Employer ID Number from the IRS (Fill out a form) then file for S corp status (another form).
Advantages of an S corp:
1. not double taxed, the net income is passed on to the shareholders as ordinary income, the corp pays no income tax, but as an indiviudal you will pay tax on this income (not medicare or SS)
2. No self employment tax you are not self employed, you work for the corporation. You will have to pay yourself a "resonable" salary, and take witholding, but this is the only money you pay SS and medicare, etc. on, not company's profit.
3. you can do stuff like buy computers (any legitamate business expenses) and that reduces the amount of taxes you pay on item 1.
example:
Your company bills you out at $100/hr. Your salary is a reasonable $35/hr. You pay income tax, medicare, ss, etc. and your company pays and extra 7% on these $35/hr. The company makes $60/hr this money can be spent on all of your expenses, and whatever is left at the end of the year you pay regular income tax on only. The company can also set up a SEP or other retirement plan (basically a company funded IRA) which is passed to you as tax free income and is a deduction for the company.
This is what I did this year after I got laid off, of course YMMV. Antohter advantage of soing it this way is you can have multiple clients, etc. and don't have to do any extra paperwork.
You can probably get by without a lawyer, but I would definately talk to a good CPA, they can steer you in the right direction help fill out forms correctly etc.
www.irs.gov has all the forms you'll need and lots of FAQ's. Just remeber that the IRS regs, like any law, are open to a certain amount of interpretation and the answers in some of those FAQs is really just how the IRS interprets the reg. Again check with your CPA.
Si vis pacem, para bellum
The only thing more annoying than a Libertarian is an (un|mis)informed Libertarian
you can write almost everything off. You would need to incorporate yourself, and get your employer to pay you as a corporation. But think about it...your rent, your car payment, gas money, food, entertainment, computer related expenses (should probably be higher on the list); everything is a tax write off. Plus you have the benefit of building a credit history as your corporation, thus negating any bad personal credit history. Great for former dot-comers who have credit problems after the high-paying job dries up.
Some people think that there's more security in full time, but that's not true anymore. The deal between employer/employee has been completely broken. I have seen a lot of full-time people get laid off - recently, I watched a large company lay off people with more than 20 years experience who were doing significant work merely to get rid of the liability of their pensions. You will not be working there in 10 years, believe me.
Unless you have incorporated recently, you can't go corp-to-corp. Work on learning about what you need to do in your state so yu have that option on your next client.
I would suggest independent contractor. It pays better and you can work on setting up your corporation. Plus, it makes you think of your career for what it really is. You provide a service to an employer in exchange for money. Take the money and take care of yourself, i.e. start a retirement account.
This is horrible advice. Since the companies you are working for will file 1099s for what they pay you, failing to report a significant chunk will very likely trigger an automatic review (between 3 to 5 years after you file), by the system. The burden of proof will then be on you to prove you didn't earn the income.
I found out the hard way though a stupid mistake.
What do you know I wrote a novel
Just go with option 3. There's a reason why they have to pay more for #1 and #2. Since you're just starting out and are not sure whether you'll be a pro consultant for the rest of your life, why go thru the headache of setting up a corp and doing all the paperwork? Plus, I assure you the expenses of establishing and maintaining the corp will exceed $100...don't believe the ads you see.
And while this might seem laughable nowadays, there is still *some* additional security when you are an employee.
Pure genius.
I would sat that any true ibertarian, or even "sometime libertarian" would chock at this suggestion
which reads:
Perhaps it is a media problem; if the government owned a few media outlets, it would be able to put writers and producers with
My theory, your looking to justify breaking the law(right or wrong)
however this is my favorite.
Breaking the law anonymously is not an act of civil disobedience; it is an act of cowardice, and it will bring little sympathy from the public or from the people who are in positions of power.
so why dont you mail the IRS a not telling them that your not paying your taxes, how about taking a stand and not abusing the laws that prevent the government from forcing you to regester wherever you are living.
This post is more to discredit the poster, and to say, Dont fucking take his advice, I would consult a very good tax attorny before think about this.
for even better material on his conflicting veiws see here
That is what I do. I own two companies (51% of a C-corp, 100% of a sub-S). Plus I have a 60+ hr/wk day job. It is SO MUCH FUN to work literally 16+ hours a day, 7 days a week. Of course, the corps pulled in over $250k in gross receipts this year and I landed a $15k bonus for busting my ass at my day job. I ain't all bad.
Workaholics...UNITE!
Bill Gates aside, history has shown that the brain is useless for making the big bucks. Therefore, go with Option #4, which is to sing/act/play ball. The total salary of the pathetic Detroit Lions for 4 seasons will exceed what all of the IT geeks in your graduating class will make in a lifetime.
If you are on an H1-B visa or otherwise not a permanent resident of the USA, you can get away without reporting most of your income. Why? Because by the time the IRS figures out what hit them, you'll be back home. And they don't extradite for silly "crimes" like tax evasion.
That may be so. Ignoring ethical concerns and judgments regarding the authority of the U.S. government to levy taxes (or whatever else you might want to rant about), consider the future. If your tax liability is considerable you might as well forget about traveling to the U.S. ever again. You will likely either (a) be unable to enter the U.S. or (b) be arrested upon/after entry. I know second-hand whereof I speak.
Here's a fourth option:
... get more clients/customers because you're a regular agency rather than "just this guy, you know".
Get some other IT folks like yourself and form a corporation together (i.e. split the cost). Then you all become W2 employees of your own corporation, can get better deals on benefits packages, can maybe split the cost on something resembling an office, and here's the big benefit
Believe it or not, many corporate clients would rather hire an agency and spend twice the cost for the same end result simply because an agency implies stability and competency more than a single individual can. At least this is my personal observation.
Plus, if a potential contract comes along that you're not necessarily qualified for, it's really easy to have your co-worker/partner take the position, or even share it. Based on your corporate structure, you all end up benefiting through profit sharing, and you end up with a contract that otherwise would have been lost.
Check this out. Lots of valuable info, advice, and info about benefits and legal resources.
http://www.icca.org
I have likewise been considering this option. My biggest concern is not what to do but how to do it. For now it is just me, however I would like to have a team of people 20-25 at the most.
I am considering starting an LLC, rather than a sole proprietorship, s corp or what not. Any info the rest of you have in this matter would be very beneficial to me.
:-( --- argh. Despair, I owe again.
Get the money first, then get the contract, then start coding.
Long story short:
I foolishly built a complete website for this asshole. I never got paid. I threatened to sue. They removed the code. Then in a month, after paying some schmuck twice what I was asking, they put the same site back up, instead of cold fusion it was VB_ASP. Same code. Same variable names. same error codes. Same fucking bugs. Wish I had put in a "in case you screw me" back door.
If any of you black hat hackers want a website to attack (on your own merit, for your own benefits)
I can hook you up with a well deserving target.
I am a "sometime libertarian." There are some things the government does right and some things it does wrong. I'd be a lot more willing to support a government that serves the needs of the people. That is not happening right now.
I don't know about you, but "breaking the law anonymously" != "cheating the IRS, which has your SSN and copies of 1099s." Big difference.
What's your problem with me? I'd really like to know.
Bill
Speaking as a consultant whose works all over the globe, the best option is to ---
Set up a corporation in places that don't tax you to death - Hong Kong, Singapore, and Virgin Island come to mind.
Whatever you do, you do it under the corporation name - that is, you pay yourself (from the corporation sense) just enough to not pay too much personal income tax to Uncle Sam, and the remainder profit you can store in your "corporation".
With another layer of "corporate fat" to insulate you from the greedy fingers of the IRS, you can do much wonder.
Muchas Gracias, Señor Edward Snowden !
"If you are on an H1-B visa or otherwise not a permanent resident of the USA, you can get away without reporting most of your income."
This show an incredible ignorance of what an H1-B is. You MUST be a W2 employee to be H1-B by definition, in which case you will get automatic deduction. Sure, you can fail to file tax returns if that's what you mean, but that's not likely to save you a whole lot of money, if any).
The rest of your post sound like really poor advice, but I guess everyone is entitled to his/her opinion...
I'm an independent contractor. It's easy only need your own health insurance and do quartery filings. Been doing if for years and works great.
- It is cheap and easy to start a corporation - you fill out Articles of Organization and file them at the Secretary of State's Office with the associated filing fee
- You must then file annual reports, create by-laws, file corporate tax reports, keep separate books, keep separate bank accounts (which are more expensive to maintain that personal bank accounts), pay dividends (or elect not to), hold annual shareholders, officers and directors meetings (yes - you meet with yourself if you are the only shareholder/officer/director, etc.
- You are subject to double taxation - the corporation pays what it collects as fees, then you have to pay personal income tax on what you take as a salary
- Depending on state, the corporation has to pay a yearly excise tax for its existence
The main reason people begin corporations is to have a shield against liability. The main reason businesses ask their "contractors" to start them is so they can avoid paying taxes. This in most cases is illegal. The mere fact that they are giving you this option implies to me that they think that you can be deemed an employee and thus subject to tax.If you do not maintain a corporation properly, its existence can be disregarded (called "piercing" the corporate veil) and YOU can be PERSONALLY liable for any debts of the corporation -- INCLUDING TAXES. Trust me, you do NOT want the IRS and/or your state's tax authorities chasing you for back taxes, interest, and penalties -- all of which can be many times more than the actual tax owed.
IMHLO (L=legal), you should not agree to anything other than being paid as an employee with full withholding without first talking with an attorney who represents YOU -- definitely NOT your prospective employer's attorney (because of a conflict of interest).
Laws affecting technology will always be bad until enough techies become lawyers.
I've been contracting for over eight years now and my advise is W2, that's the only way you can be assured of getting paid.
I killed da wabbit -Elmer Fudd
As a full time emploiee I work my 40 hours and I'm gone. I don't have much paper work. While I can be fired fairly easially, I'm always at the bottom of the list below contractors, and they normally pick and choose from full time employees to transfer first.
Full time is best for someone with a family. The benifits are better and cheaper. Also I'm only required to work 40 hours, and I get paid when I'm sick (I have sick leave, and then disability for long term sickness should I need it). A contractor needs to save money.
I have a friend who did independant contracting as a carpenter. He made as much in 6 months as he did previously in a full year, and he spent most of his days watching the outdoor channel on satalite. However he went back to a full time job. Going two months without a paycheck is really hard. (Carpenters get paid when the job is done and the loan closes, which means for a large project no money comeing in for two months while you still have the normal bills. A large part of going back was benifits. His job provides him with a nice truck, and the one he was driving wasn't holding up. A new one is expensive (and he needs a 3/4 ton truck for his tools). There are many other benifits, but the big on his you can budget how to spend a paycheck that never changes in your head. When your paycheck changes from job to job and doesn't come in for months at a time it is hard to budget even if you make more money.
YMMV, but don't fall for the trap that full time labor is 62% of the wages vs a contractor. There are more benifits, you are less easially fired (and if laid off you get better severance), you are done at the end of the day. If you have a family this is extreemly important. If you are alone and young you can take a chance by not having benifits, but I wouldn't recomend it. (I personally have not seen a doctor this year, and only did once in the last 4, but I have it anyway).
What I like is when the day is done I'm done. I don't have to do paper work at home. I do my hobbies at home, the contractors I know work more hours than me for their pay. Sure they earn it, but per hour I don't think they make more. When the company hires a contractor to help, they may have more expirence then me, but i'm still in charge of the code. I need to understand it. I need to approve the design, after all they trust me to maintain it after your contract is up. that means I have more power.
YMMV is always important. What you want is up to you. Don't be afraid to go back and forth. i've worked with several people who started as a contractor, moved to full time, and then when the project was cancled moved back to contracting.
With the limited information you have provided here is my two cents, having formed and been a part of various corporations, partnerships, and soleprietorships over the years, I would keep it simple.
If its just you, then why bother with incorporating, unless your work involves some sort of great liablility risk, since you didnt specify the line of work you are getting into its really hard to say. You can get insurance for anything, and just having a corporation does NOT exempt an individual from being held personally accountable(Our legal beagles call this piercing the corporate vail, or some such).
From your description it sounds like a sole proprietor situation so why bother with all the extra paperwork and filings associated with forming a corporation. Unless there is a real need for liability protection.
However if you plan to have employees then yes incorporating would maybe wise to limit liability, but a greater reason would be if at some point you would like to take the venture public. There is nothing preventing you from just keeping it a simple sole proprietorship and as things progress incorporate at some level at a later date.
Regarding taxes, by not going the corporation route you will not expose yourself to double taxation, which takes the form of the taxes you pay for your salary and later if the company makes a profit, you will have to share some of those with the taxman. As an individual the tax preparation burden is very simple, and yes, you still can write off everything under the sun as long as its vaguely work related.
Hope you find this usefull, and best of luck.
Yeah, the first poster is right and so are the people he's talking about. Contact an Accountant for the option that suits you best; but that doesn't render the rest of what you hear irrelevant.
/. and download lots of porn without fear of reprisal. I made the move three years ago and never looked back. It's been great for me. Now is a great time to be a contractor too. IT departments that have laid off all sorts of people are turning to contractors in increasing numbers for the necessary services on which they have come to depend, but that they are no longer equipped to handle internally. Depending on your skill set, you can probably ride this wave for another couple years, maybe more. If you've wanted to try it, you should. Good luck!
The biggest gotcha in self-employment is the lack of employer paid benefits. Before making any decision to opt out of W2 style employment, shop appropriate health plans for yourself and make sure you set aside, first thing, 6-8 months of self pay health insurance premiums, especially if you've got family that depends on you. Most of the other benefits you can live nicely without; but consider what you really want. Many life insurance companies will, if asked, offer special self-employment premiums on incentive style life policies. This is nice because you can essentially use this technique to combine enforced retirement savings and life insurance security, again, thinking of your immediate family.
Once you've factored in health insurance, look at the cash that's left from each scenario and start doing some math. Figure your first year's expenses as a contractor, an S-Corp and a W2 employee, look at the 2001 tax tables, which have been published on the IRS site in their preliminary form and see what you net from each. If money is your only criteria, that's the shortest path to an answer.
I've been through all of the above scenarios and settled on an S-Corp, a few reasons and caveats to follow:
In three years as an S-Corp, I have never had to pay corporate income tax. The breadth of your possible deductions is much greater. And most everything you would suspect, is in fact allowed. I captalize and then depreciate my equipment then deduct software, education and training, an office phone and fax, cell phone, mileage, travel, sub-contractors and whatever else comes up. Everything else flows directly through to me as personal income on which I pay taxes at the income tax rate. There is nothing forced, unnatural or illegal about it. This is what the S-Corp was designed to do. I was audited in my first and third years and thanks to paying an accountant to do the preparation, the IRS left me alone without any questions, penalties or fines.
Make sure, if you go this route, that you file an S Declaration with the IRS before January 7th of the tax year (i.e. 1/7/2001 for 2001 taxes). The IRS will not let you slide on this, most of your corporate expenses will be disqualified and you'll have to file a schedule C with your personal income tax return. Very intrusive, privacy invading rectal exam of a tax form, not pretty. Do not forget.
As an S-Corp, your liability in business matters is limited to the assets of the corporation which is a big plus if you ever get sued for any kind of breach of contract. If you are a regular 1099 contractor, your personal assets will be fair game for the plaintiff.
Most businesses that will want to contract with you will be more inclined to do so if you are incorporated. This clearly relieves them of the problem of paying unemployment taxes on you, providing benefits, etc. Your contracts will also be much easier to write because you can skip all that crap about "So and so is not entitled to and is not an employee of blah blah blah" It's like a whole page of language. And they don't have to 1099 you at the end of the year, or do any special sort of reporting on you.
On a personal note, being self-employed increases your responibility to the job. You can't hang that hat on anyone else, anymore. You can, however, turn down jobs you aren't interested in, choose your own tools, piss away a couple hours a day on
Last thing - do do do, get an accountant. It's cheaper than you think and priceless all at the same time.
Oops
But even if a corporation has a profit (pursuant to Code Section 61) it still does not have to pay a tax on that profit, because there is no provision in the IR Code making corporations "liable" for or requiring them "to pay" a tax on their profit. So when Mr. Bell suggests that individuals have to pay income taxes on the receipt of foreign income, he not only overlooks the fact that the receipt of foreign income is no different than the receipt of any other form of "income," such as wages, dividends, interest etc. etc. etc He also overlooks the fact that there is no provision in the Code making anyone "liable" for, or requiring them "to pay" a tax on "income." However, that's not the end of it. If it is Mr. Bell's claim that Americans have to pay income taxes (and file returns) on the receipt of foreign income, then he is also saying that such Americans are required to give the government information that can be used against them. Since all information on a return can be used against those who file, how can there be a requirement that one has to file a return and be a witness against oneself, even in connection with the reporting of foreign income?
However, since the income tax is also based on self-assessment (with the IRS having no authority to assess against taxpayers any amount that taxpayers do not first "assess" against himself) Mr. Bell also believes that Americans are required by law to assess income taxes against themselves - which, of course, is also not true. How many misconceptions concerning income taxes is Mr. Bell permitted to have? But there's a whole lot more.
Mr. Bell also apparently believes that the Code taxes government workers differently than those employed in the private sector. But how can that be? How can the "income" of government employees be taxed differently than the "income" of private employees. This would obviously violate the "Equal Protection" clause of the Constitution. Besides, since "income" for income tax purposes means a corporate profit, government employees obviously have no taxable "income" on the same basis that private employees have no taxable "income." In addition, nowhere in the IR Code are government employees made "liable" for income taxes or required "to pay" such a "tax." (The distinction in Code Section 6331 is because the government already has the "accrued wages" of federal employees, so their accrued wages can not be made subject to "levy." So for this particular asset the government had to create a special "notice of levy." This is what probably threw Mr. Bell off.)
Mr. Bell then refers to "Subtitle C income tax" and the alleged "deducting (of) Subtitle C 'income' tax" from employees. Of course, there is no such thing as a subtitle C income tax. The income tax is imposed in Section 1 of Subtitle A. Since another tax is "imposed" in Section 3402 (in the guise of the withholding of income taxes) how can what is "imposed" in Subtitle C be an income tax? And since withholding taxes are collected before returns are filed, how can the withholding tax be an income tax, since income taxes have to be assessed before they can be due? (See Treasury Reg. 601.102) Apparently there is no end to Mr. Bell's confusion. The so-called withholding tax imposed in Subtitle C has nothing to do with income taxes or the 16th Amendment. It is a direct tax on wages imposed in blatant violation of the apportionment provisions of the Constitution as is fully covered on my web site in my discussion of the Brown case, which I took to the Supreme Court. It is easy to see how the federal government gets away with this ruse, since even Mr. Bell is taken in by it.
Please note that Mr. Bell was able to pack all of this misinformation in only one short paragraph. One shudders to think how much more misinformation is contained throughout his massive web site. So let's turn to the next two paragraphs in which he says: Apparently Mr. Bell cannot draw simple conclusions from information he has already gathered. Here Mr. Bell correctly states that "income" as used in the 16th Amendment (and hence as contained in the statutes) means a corporate profit. This being the case, how can anything an individual receives from any source be taxable as a corporate profit? And since even government employees are not corporations, how can anything they receive be taxable as a corporate profit? Further on Mr. Bell attempts to set up criteria for "taxable persons". But since Mr. Bell has already correctly concluded that "income' for tax purposes means a corporate "profit" how can there be "taxable persons" having taxable corporate "profit"? In essence what Mr. Bell does is to make simple things complicated. That's why he needs such a big web site.
Next Mr. Bell states income "is an accounting term, not a legal term." Here, he has it totally "bass-ackwards"! "Income" as used in the IR Code is a specially crafted "legal" term. Before the passage of the 16th Amendment people used the term "income" as synonymous with "earnings" or receipts as is generally defined in any dictionary. But because of the apportionment restrictions placed on the government's taxing power by the Constitution, the Supreme Court was forced to give that term (as it appears in the 16th Amendment) a different meaning then what the public at large assumes "income" to mean. (And federal judges take full advantage of the public's unfamiliarity with this distinction when they falsely charge juries as to the legal meaning of "income" as it appears in the IR Code.) So the legal (i.e. constitutional) meaning of "income " as it appears in the IR Code is different than its dictionary definition. So for Mr. Bell to believe that for tax purposes the term "income" is an "accounting term" and "not a legal term" is to again reveal a fundamental gap in his understanding of our income tax "laws."
Next Mr. Bell states that "Certain businesses are privileged entities, whose profits are taxed." What businesses are privileged entities? And where in the IR Code are these "privileged entities" identified? (Of course, cutting trough all of Mr. Bells gobbledygook, he continually overlooks the fact that the entire income tax is still based on "self-assessment" and "voluntary compliance": which means that all one can only owe in income taxes is what one claims one owes on a 1040.) The income tax as "imposed" in the Code seeks to impose the tax on all "income" (relying on the public not knowing the difference between the legal meaning of "income" and its dictionary definition) regardless of who earned it and under what circumstances it was earned. Section 1 of the Code states "There is hereby imposed on the taxable income of (1) every married individual
Next, Mr. Bell further reveals the extent of his misunderstanding of the income tax when he states "The tax has always been considered a privilege tax, on the order of a license, hence an indirect or excise tax," and that " it is the only tax in our history that is measured by income, rather than by some other standard."
First, the tax has not "always" been considered an "indirect tax" as Mr. Bell states. An income tax was correctly held to be a direct tax by the Supreme Court in the 1895 Pollock decision. Consequently the Court held the Income Tax Act of 1894 unconstitutional for want of apportionment. The income tax is obviously a direct tax because the tax is paid directly to the government as opposed to the payment of indirect taxes, which get paid indirectly to government as people purchase the various products on which such taxes are imposed. (There are other distinctions, which I need not get into here) What is confusing Mr. Bell is that the Supreme Court in the Brushaber decision ruled that the effect of the 16th Amendment was to allow the government to put an excise tax on corporate profit, a power it always had. What Mr. Bell hasn't been able to figure out (along with Otto Skinner) is that the income tax was never imposed as the excise tax that the Supreme Court held it to be. No, the income tax (despite the Brushaber decision) is imposed as a direct tax but since it is not apportioned, its payment can not be made mandatory - even in connection with corporate profits.
If the income tax were imposed as the excise tax that Mr. Bell believes it to be, it would have to be imposed in the manner described by Mr. Luckey on page 5 of his somewhat infamous "CRS Report for Congress" in which he states. "An excise tax is a tax levied on the manufacture, sale, or consumption of a commodity or any of various taxes on privileges often assessed in the form of a license or fee.." Where is there any language in the Code claiming that an income tax is imposed on this basis? In addition, if the tax were imposed as an excise tax it would say so. For example, Section 3111(a), which (fraudulently) imposes the employer's portion of the Social Security tax, states: "There is hereby imposed on every employer an excise tax, with respect to having individuals in his employ" I would ask Mr. Bell to put on his web site a similar provision in the Code that identifies the income tax as the excise tax he believes it to be. However on page 204 of "The Great Income Tax Hoax" I reproduce a document from 'Internal Revenue manual, MT 9900-26" which states in relevant part, as follows:
342
Excise and income Taxes Distinguished
342.1
Base So, while Mr. Bell believes the income tax is, in reality, an excise tax imposed on some privilege (and merely "measured by income" generated by that "privilege"), the government claims it is not. Who is right?
In addition, if the income tax were imposed in the form of an excise tax, the tax would have to be imposed and collected on the basis of geographic uniformity - however it is not. Just to cite one example. The decision in Ott v. USA, 141 F.3r 1306 shows that the income tax is collected one way in the 5th and 8th Circuits, another way in the Fed., 3rd, 4th and 7th Circuits, and still another way 6th, 9th and 10th Circuits. So the income tax is not imposed and collected either on the basis of apportionment or geographic uniformity, and, as such, its imposition and collection does not fall into any of the three taxing clauses contained in the U.S. Constitution - and for that reason alone the payment of income taxes can not be imposed on a mandatory basis on any U.S. citizen (or corporation) regardless of where they live or what are the "sources" of their income.
The bottom line is, if Thurston Bell can pack so much misinformation in just three short paragraphs on his web site, one can just imagine how much more misinformation is contained in the rest of it. Mr. Bell recently stated that he has never read any of my books. It is hard to understand how any serious student of the income tax could have avoided reading any of my books which have sold over 500,000 copies since 1976 and influenced hundreds of thousands of Americans, if not millions, to avoid paying income taxes. However based upon the amount of misinformation (as revealed above), he is obviously laboring under- the fact that he hasn't read any of my books may help explain the extensive gaps in his understanding of the Federal income tax. So much, therefore, for Mr. Bell and his alleged expertise.
Obviously not relevant to the original poster .. but in Canada try www.ca4it.com.. I don't work for them, I'm a client..
The idea is to leave as much income to your corporation as possible - it's taxed at roughly 18%. They then try to fix things so that your personal income is under 30,500 (lowest tax bracket roughly 22% as opposed to about 46% at the top around an income of $60,000).
Incorporating and having a sly accountant allows you to pay roughly 20% of your income out to the government instead of the roughly 50%+ you could pay as a normal person.
Note as the director of a corporation you are paying toward Canada pension but not to unemployment insurance. As the man said, get disability insurance - you're not covered unless you buy it yourself.
The folks I mentioned ca4it.com do a decent job - I'd say they're a good place to start out - they have everything set up in a nice routine, they remind you what has to be done and when, etc. But they don't make a really big effort, so you might want to look for someone a little more aggressive & ambitious later on.
pork barrel missile defense systems
What if you're a contracter programming part of a missile defense system? I personally think they should just eliminate the income tax and only have a sales tax.
No quantifiable deliverables, telecommuting, and direct deposit. - Dogbert (paraphrased)
+++ UGUCAUCGUAUUUCU
The differences between the three, in my opinion are largely determined by the level of responsibility associated with each and your personal goals. Creating a corp or sole proprietorship (Independent Contractor) is something you should do if you intend to run a functional company (having some actual purpose, possibly hiring people, to create a working "machine" that performs a service or sells a product in exchange for money; money that you are personally responsible for tax-wise). To go with a W-2 option is to join an already established "machine" that will deduct money from your base salary on behalf of Uncle Sam. Not a bad option if the salary is good and the machine looks well-oiled to you.
As far as actual costs, I think your estimate on corp-to-corp ($100) is ambitiously low. Expect to invest about 500-600 if you have an accountant or lawyer do all the filings and advise you. (If you want to do ALL of the footwork and paperwork yourself, then it would probably actually cost around 100 bucks.) I personally found it easier to deal with an accountant, because learning about all that filing stuff would make my head explode. The accountant is one of your most valuable resources in a corporation.
When you factor in insurance and everything, figure ~$1000/yr to keep the corp ticking.
The sole proprietorship option is good if you want to get going in a pinch. The thing to remember if you go this route is to SAVE MONEY FOR TAXES!! When you have cold hard untaxed dollars coming in, it's very hard to resist the urge to pimp out. Tax deposits should be made early/made often.
So, I don't think there is Best Choice on an absolute scale. It depends on which option best fits in with your future plans. And I hope some of the ramblings here help put things into perspective.
I've worked in all three capacities, and I've found that the best choice is almost entirely based on your own personal disposition. I like to work - to me it's fun and I don't have to be pushed. If I'm pushed, I get pissed off and do poor work. No one can push me as hard as I push myself, and no one will ever appreciate the extra effort, they will simply grow to expect it and then act like you're slacking off if you get into a slump and need to go back to normal human being hours to recharge. If you want to be in business for yourself, you had better like all aspects of business. You had better be prepared to ALWAYS turn the other cheek and to view your relationship with people in your industry as lifetime relationships, with lifetime memories. Your long term success will depend on how well you can maintain your own integrity, even when facing totally unscrupulous business practices from others. The mechanics of which business path you take are simply that: mechanics. You can learn them if you want to, but you'd better learn the appropriate mechanics no matter what path you choose. Don't make your decision on a business form based on the mechanics of the form. Your own personality must be your guide.
An old, time worn traveller
Difficult question to answer, from a purely European perspective, yes the money is more, however your often worked / tasked more, and have to spend more time running a company. From experience this is'nt very interesting, it's far better to join what we call an Umbrella company here if you want to "contract" so that a bunch of contractors are part of 1 organisation and the accounts, legal advice, payroll is all dealt in 1 go and you just withdraw salary.
Overall I think a permanent company is better, everyone gets the job itch some more than others. My advice is to work it out and work with your employer.
Several people have mentioned increased pressure, this is true, your generally so busy working then when you get home you have to run a business as well, this eats into your social time too!
One area that everyone ignores when talking about this is loneliness. Contractors can sometimes be seen as outsiders in some companies, depends upon where you work, being ostracised by who are effectively your colleagues can be rather frustrating, its not you, but what you represent they dislike, the guy on more money, with the flashy laptop. It can be ok for a while but does become very tiring after some time, you have to sort yourself out, why are you contracting, for the money, to make friends or for the experience?
One last issue I want to highlight when you study this, is accountants. They are thieving bast**ds, costly, obfuscate what should be simple taxation policy in Klingon, and what surprised me most of all, is that they do make mistakes more often, however won't admit to it. I can't say how best to deal with them, but it's all part of the experience of running a company, prepare to carry some battles.
Ok now really the last thing, get what we call Professional Indemnity Insurance, this should protect you when someone brings up the
"we really don't want to involve the lawyers"
talk which seems to be a scare management strategy that crops up a lot, be prepared, you never know what is around the corner.
One other thing, market economics. Bad market, hard to get work, no contract, no clients, no income, have a large cash pile reserved, DO NOT SPEND IT ALL, save and plan for trips and bumps, and this will lessen the fall.
Good adventures!
The best choice (IMHO) is to form a Limited Liability Company, or LLC. A sole-owner LLC is taxed like a sole-proprietorship, but it is treated legally like a corporation.
Thus you get the benefit of filing Schedule C with all those tasty deductions, and if go bankrupt or get sued you have the LLC to hide behind ('Limited Liability').
Filing an LLC is cheap, typically $100, and most states recognize them.
Starting your own corp can be time conuming and confusing the first time but once you have done it once, it's pretty easy and it's a great experience. I do e-commerce web sites and many of my clients don't have a clue about what they need to do to set up a real business. The fact that I can at least point them in the right direction makes my services even more valuable to them.
As far as the accounting goes, in the real world, every bit of accounting experience you can get is helpful. Let's face it, if you just graduated with a CS or engineering degree, basic accounting at least is easy. Sure you will need the help of a professional but you should be able to handle the majority of it yourself and at least understand what you accountant is trying to tell you when it comes to the harder stuff.
Being able to write off all that new computer stuff you're going to buy now that you're getting a paycheck is a real advantage.
For great information on this and other topics for contractors (contracts, finding work, etc) you owe it to yourself to check out Real Rates - The Computer Consultants Message Board
It may vary by state, but in some I believe that if you are the sole employee of the corporation, you are exempt from workman's comp insurance.
Give me my freedom, and I'll take care of my own security, thank you.
They suck. As someone who pays them, they seem huge. I mean, it adds thousands onto your tax bill. While being a contractor may work out better in the long run, having to pay that big chunk of extra taxes really hurts. Not to mention that you have to come up with money quarterly or pay a penalty.
I personally think they should just eliminate the income tax and only have a sales tax.
Yes, but who gives a fuck what you personally think? You're just a person. People don't run the government.
Do not start a C Corp! You will be taxed as a personal service corporation. That is taxed at a flat rate of 35%! Then you still have to pay taxes when you withdraw your profits, as dividends or compensation.
ROFL!!!!
I don't know whats funnier... the post or the followups.
Having been in all three positions over the past several years, I'll give my 2 cents.. (I'm in Texas)
Corp - Corp: Most likely for the seasoned veteran who can take advantage of the situation.
Pros:
freedom to negotiate your own rates.
freedom to seek out and negotiate your own projects - and pass on those you aren't interested in.
freedom to sub out chunks of a project - meaning you need to know other guys like you or other contracting types who can help you - this allows you to take on projects that would be too much for you alone.
A biggie - you can write off a lot of stuff as business expenses - Computers, travel, meals, etc.
Another biggie - limited liability - if you flame out the client's server due to your screw up, you have a bit of a shield to keep them from suing you and taking your house or your retirement account (they were dealing with the Corp - not you personally).
Cons:
You have to manage your corporate finances, this means that roughly 40% of what you bill goes to Uncle Sam - even if you decide to spend it before it's time to pay up - You never want to get in debt to the IRS.
There is a lot of paperwork - don't even try to handle it yourself - get a CPA and let them take care of it for you (probably $1500.00 per year).
You have to self-insure - It's expensive - but not bad if you are single.
Independent Contractor: This is a bit of a fuzzy definition but let's assume it means they write a check directly to you the individual.
Pros:
Most of the ones from above but the tax implications in the US can in some cases make this more expensive that Corp - Corp.
Cons:
Expenses are tougher to deal with because all the money is flowing through your personal bank account - instead of both yours and the corporation.
Liability - You will not have the corporate shield to hide behind in the event you are sued - although a large company will sue you personally along with your company anyway.
W2: The least work (and money) of the three.
Pros:
No paperwork or expenses on your part.
Probable insurance coverage by your company.
You can file for unemployment if they fire you without cause.
Cons:
You don't have any of the freedoms of the other two - if you just got out of college that may not matter.
One final thought - If a company is not broke, there is often more money available for contractors than there is for actual employees. This comes from how they account for the money - payroll cannot be hidden on the financials but contractor dollars can usually come from anyplace the company has funds to spend - so for instance they could take $50,000.00 that was earmarked for software purchases and spend it on contractors, but there is not an additional $50,000.00 for payroll - get it?
I'd say that in the current market go for the most secure job which would be the W2 employee. TONS of my friends (we're 2+ years out of college) were contractors and now they can't find work. 50% of them are now waiters/waitresses. the rest are living off mommy and daddy.
corporate stuff sucks ass sometimes but at the end of the month when you get the paycheck, you're pretty happy to have a job.
the up sides are that corp. work for me means 20 hours of work a week and 20 hours of writing my own code on company time. So by the time the market turns up again i'll have tons of stuff to dive for with a nice saftey cushion in my savings account.
-me
Keep in mind that few people will say that they should be doing something other than what they're doing. People who are their own boss often say "I really like being my own boss," which has no bearing on the amount of experience they have with another boss. People who have a little more security, as your third option would seem to provide, will tell you that they really enjoy the job security they have.
In my humble opinion, these testimonials aren't very useful. You'll just have to sit down and figure out what would be the best for you. Of course, you could follow the words of Whitman:
You shall listen to all sides and filter them from your self
Good luck.
My Karma was at 49, then they switched to words. All that work for nothing!
Go to www.ceweekly.com
and click on the "Intro to Contracting" link.
I can share quite a bit about this, since I have started and run two subchapter S corporations for exactly this purpose.
I started my first one in Texas in 1993, operated it until 1996 and sold it to one of my employees. Then, I moved to Michigan and started another on in 1997.
When I started the one in Texas, I didn't know what the hell I was doing so I paid a lawyer to do all the filing for my corp, fed tax id, state forms, etc. Net cost $900.
In Michigan, I generally knew what to do, but found it easier to pay an Internet company to do it for me, www.bizfilings.com. Net cost $319.
If you do decide to incorporate, go with an S-corp, it will save you a lot in tax dollars, but also do lots of research on your state laws. Texas has no state income tax, Michigan does. I have to file 25 or more reports each year:
It can be overwhelming if you are not prepared. I do all my own returns except for the annual returns which are complicated enough to bring in my accoutant. I also buy general liability and workers comp insurance which runs about $700 a year. The only reason it's so low is I'm only insuring myself. In Texas, I had 6 employees, but now I'm a lone gun. A lot less stressful that way since I only have to keep myself employed.
Now, I don't want to poo-poo the idea, because for me, the benefits far outweigh the extra gruntwork. I have a lot of flexibility in my hours and the kind of work I choose to do. I answer only to my customers and if they piss me off, I can move on more easily. I would rather deal with the hassles of my own biz than the hassles of corporate life. But that's me. I also didn't have the guts or experience to even try something like this until I had about 8 years of experience in the industry. (I started life as a mainframe COBOL programmer for EDS back in the day).
So, it's not easy, but if you can pull it off, the rewards are oh so schweeet. Good Luck!
Top Echelon Contracting Your one stop shop. They are an "Employer of Record" for hundreds of contractors all across the united states with clients ranging from Chrysler, Oracle, Verizon, and even smaller businesses.
If you do what you always did, you get what you always got.
That doesn't make any sense to me. As a W2 employee, your employer pays half of the FICA (Social Security) and Medicare taxes, whereas as a sole proprietor you pay both sides yourself. The difference is >7% (in favor of being a W2 employee) for that alone. On the other hand, you may not have as many options as far as deductibility of equipment and whatnot...
"Biped! Good cranial development. Evidently considerable human ancestry."
I can't understand why you'd ask for financial advice on this forum. Frankly, you'd be better advised to seek a professional consultant for matters of this nature. Ask yourself what the average income, knowledge, experience and professionalism of the average sloshdatter is, and then consider whether you really want them advising you on your finantial future.
How about: "S-Corp. Ion"
An LLC gives you the benefits and protection (you're not personally liable for damages, your LLC is) of a corporation but you don't have to hire yourself nor pay payroll taxes, the income can pass right through to you as personal income, no double taxation. This is like an S-Corp.
The advantage of an LLC over an S-Corp is that it's less paperwork to manage (don't have to have quarterly board meetings, no need to submit bylaws, etc.).
In California LLCs and Corps pay $800/year for business tax, that sucks.
Check out this link from BizFilings, a site where you can incorporate.
http://www.bizfilings.com/learning/llcfaq.htm
The biggest thing you need to know about consulting is how to deal with your customers. Some are great; others will suck the life right out of you. The great equalizer is your billing rate and practices. Bill in 15-minute increments. (i.e. you call me and ask me what the password is to a system on the week end, and I'll charge you $30 for interrupting my dinner). Make sure you charge enough and don't let them abuse you. Ask up front what they want to do about overtime. If their response isn't, "Dear, God! Don't work any overtime." then you might consider that your billing rate is too low. It means you're selling them labor and not expertise. Labor is almost always low-paying. Expertise is where the cash is. In short, charge them for the value you bring and structure your billing practices so that, if they want to be a butt-head, they pay.
I used to charge less for longer-term jobs. I've started doing the opposite. I find that if I can bounce between doing lots of really short jobs with well-defined goals, I get to satisfy a lot more customers keep building my customer base and no customer has to wait for me to get done with the 8-month project I just started before they can get my attention.
As for the incorporate or not part of this: If you are going to acquire significant assets in the course of your business or do some R&D work, you might consider incorporating. Both of these assets can be depreciated. That's what I did but I haven't been through the first end of the year yet so I can't really speak to the tax issues.
BTW, I am a registered, high-karma user but how would you like it if your best consultant was giving out this advice?
my friend, deductions. Businesses are taxed on their profits. People are taxed on their revenue. Imagine how much you'd pay if you were only taxed on the money you didn't spend...
When in doubt, have a man come through a door with a gun in his hand.
pork barrel missiles? is this some new threat to national security? should i run out and buy a pork proof shelter?
What concerns me is that no one here is considering the true legal and moral implications. Sure, one can make oneself a corporation, but is it really following the spirit of the law. According to the IRS, you are only an Independant Contractor if you
Most contract houses and majorc orporations routinely break these rules, but who's going to stop them. It's up to ud Humans to do what we thing is right. And if you would prefer to be a citizen of the United Corporations of America instead of the USA, then by all means use every legal hook and crook that you can to join the rest of the Scrouge Society (tm).
I worked for one of the top three Global IT consulting firms and after 11 years as a consultant went to a smaller company and finally started my own. The numbers you are throwing out are dependent on so many things, and you are new so the pessimist in me say you are probably going to learn an unfortunate lesson.
[Assuming you live in the United States...]
First, incorporating for $100 is not going to happen. While IANAL or accountant, just filing the paperwork in the US costs that much. Then of course, you have corporate taxes and foreign corporation filings in the event you incorporate in a state like Delaware, but chose to work in say Maryland. These folks get paid even if you do not. Yep, zero income still pays the taxman. Most states have a minimum corporate tax.
Talk to an accountant, have them work the numbers for you and help you decide. Also question the need for incorporation. This used to be done by small businesses to protect the owner's assets. In many states, they have fixed that loophole so if you screw up someone's system, incorporation will not protect you, but the fact you have no money may. This is also the reason many companies will not take on small contracting firms. If the people at the firm completely screw up they have no recourse.
As for your offers, first and foremost payrate is an arbitrary word. Billable rate is what you care about. This is the $$$ per hour, job, project, etc. a corporation will pay for you to be there. If you do not know your billable rate, the numbers are absolutely meaningless (and many would argue are meant to be that way). Consider that a company may be billed $100/hour, would you expect to get $86 under option 2? Unless you know they pay $100 for your services, the company could tell you the payrate is $84/hour (payrate being the amount after expenses and profit are taken).
That out of the way, I want to take you through the three you have listed:
1)Corp to Corp (100% payrate) - I do not understand this one. If you get 100% how are the people who placed you getting paid? My guess is payrate and billable rates are in no way related. Remember all expenses are probably yours. That means when a client asks you to fly to California tomorrow, the $2200 ticket may be yours to pay for. Even your own expenses: both sides of social security, Medicare, health insurance, life insurance, etc.
Understand what you are responsible for. Also remember you will need to cover those months you do not have a contract. $50/hour sounds good while you are making it, but it is $10/hour if you only work four-months in five.
(2)Independent Contractor (86% payrate) This is a pretty good rate. Actually it is a nearly unbelievable rate, because the firm needs at least 16% in most states to break even when you consider taxes, etc. Heck they lose 10% on federal taxes alone, plus they need sales reps, office space, and a profit. Here, they are getting 14%, which makes this a little, difficult to believe I would say. However, it is not impossible. If you have a specialized skill they may pay you this rate just to have the skill or they may use your work as a means to put more people at the site. A lost leader is not out of the question. Like option 1, know what you are expected to pay for.
(3) W2 Employee (62% payrate and a moderate weekly expense stipend). Moderate weekly stipend? What does that mean? The IRS sets the per diems by city each year. If you are not getting expenses covered at 100% then expect per diem. If it is less than that (see the IRS website for per Diem amounts, question it. As for being an employee in general, I would think hard about this one. What does being an employee provide you besides a lower income? I wish it was not true, but job security at any place is pretty much a myth. I have seen places lay off employees while keeping consultants and contractors.
As for what is deductible, get a receipt for everything from your computer to gas in your car. Get one of those books from an office supply place and track the mileage and usage daily, same with expenses. Setup a simple spreadsheet and hang onto every receipt for at least three years. If you are going to have a "home office" make it one. That means it cannot double for something else. People will tell you this is a sure sign for the IRS to audit, but if you are using it as a home office, you have no concerns. If it is your bedroom with a computer desk...
As for how to run it as a business, consider the differences between a contractor and a consultant. A consultant adds value. They bring more to the table than is being asked, they lead and are looked up to while offering constructive input. They know when to be quiet and that in the end, they are paid to do a job even if they do not agree with the approach. In the end, you must get the job done. Any of my clients can get in touch with me 24 hours a day, 7 days a week. Do you need to be this way? No, but I just watched employees and every other consultant get dumped from a client where I still sit. Why? I believe it is because I get the job done without complaint or hassle. Day, night or weekend.
When you do leave, either on your own or because you time is up: Smile, and thank them for the wonderful opportunity. No one said this would be a long-term relationship and this helps ensure you can come back at the next opportunity.
Finally, this is a good question in a bad place (and I wish I had a better place to send you). We all have opinions but remember with free advice you get what you pay for and here there is little to prove I am not a 14-year-old who got my computer three weeks ago. If you are going to do this on your own (and I have found it very rewarding), remember the famous words "Here lies a man smart enough to hire people who knew more than he did". There is no substitute for a good accountant and lawyer. However, I will add that big and good are not the same. Do your research there too.
The level of risk goes up as you add more structure to your business. If you have a $100 corp, you have to have meetings and file the notes. If you spend real money to incorporate with a competent lawyer, you can get a lower-maintenance corp. I spent $2800 (in Silicon Valley), YMMV.
The real hassle of corp-to-corp is billing disputes. Your client will expect you to hire an attorney to help you resolve them, since they have attorneys on retainer who need to feel useful. Unless you know how to play the "get the contractor paid" game within your client companies, you'll probably waste a lot of time getting your invoices paid.
The other two options are a lot easier and less costly up front, but may not give you all the options you can get from having a corporation.
There have been a lot of good comments.
To clear one thing up - there are 2 basic types of corporations, the "S" and "C" class. Both will shield you to some extent from liability - if you are sued for some reason, it likely will be limited to the corporation. You corporation will likely have a few grand in the bank and own some computer equipment, aww shucks. Getting sued seems like a remote thing, but it would suck to loose yer house.
S and C class corps differ in how they are taxed. C class corps are taxed on their income. Ie, you bill for hours, get paid $1000, a nice chunk goes straight to taxes. Then you pay yourself. More taxes. C class is not the right route for you.
S class corps don't pay federal taxes. You bring in income, you have expenses. You are taxed on the difference. Note that there may be a small state tax on the corp income, depending on where you live.
The poster w/ the FUD was referring to C class corps.
You pay yourself two ways. You pay yourself a base salary, which much be reasonable. Say $30 - $40k per year. That gets taxed normally, federal, state, SS, etc. The company (your company) must match some of these things too (like SSN) and so you pay it twice, in a way.
The cool way you pay yourself is that basically income - expenses - salary/salary taxes is yours. You pay simple fed/state taxes. No SSN, etc. If you are billing $50 - $75/hr this will be significant.
As people brought up, things can be expensed if they are reasonably used for your work. Course you need a mail server and web server, and a nice home connection to do occaisional (or full time) work from home. That nice static DSL, your mail/web server, monitor, etc. all count. Expensed doesn't mean you save the money; it means you don't PAY TAXES on the money. So figure if you spend $3000 in expenses, you would have had to make $4000 or so in taxed salary to be left with the $3000 for the stuff.
I would not recommend trying to b2b right off. I have not done this but I assume its a bit of a pain to do the invoice paperwork. There is probably a larger lag between when you finish your work period and bill for it and you actually see the money. You need a good cash buffer already to do this, to kinda weather the paperwork.
I do straight 1099 consulting through a recruiting company. They take some cut. I bill them for my hours. I get a direct deposit 2 weeks later, hours * rate. I've been on the same contract for 3 years now.
The worst option to me seems like it would be to W2 with a recruiting company who then places you somewhere for 6 months. No corp nice things, like expensing, etc. And then after 6 months, you will likely find the best avaliable work elsewhere, and have to switch yer insurance and everything.
Here's how it worked for me:
You incorporate. This is simple if its just you. I dunno how much, between $150 - $300 depending. Go to a real attorney, not some strip mall job.
You find an accountant. I found a great one through word of mouth. My first one was kinda lame. You want one who is aggresive but sharp, and not illegal. Heh. Getting audited will at least cost you a lot of lost work time, do the math.
You get health insurance. I believe (in my state anyway) you just get the health insurance on your own, because its considered a benefit instead of a business expense, so you would get taxed on it either way. I pay about $150/month for a non-HMO setup that is very good. Auto-paid from my checking.
Most 1099 contract work (as opposed to W2 contracts) will require insurance in case you drop one of their $100k rack systems. I pay $400/yr.
Every quarter, you file forms with the state and fed. 3 of them, detailing how much salary you paid your employees. You can/should just have your accountant fill these out. I actually technically pay myself salary once per your; then the forms are all zeros except for 4th quarter. This is easier but takes DISCIPLINE.
In december you work with your accountant to do a
final witholding of taxes and make it all nice and neat for the end of the year. December is also when your accountant can tell you how much of that pot of gold you have accumulated is yours. Hope you had been saving some, or else it may be the month when your accountant tells you that you have to withold money you have already spent.
1st quarter the account works up final corp tax filings and april your personal taxes.
This is all very simple. I perhaps pay $750 per year to my accountant, and save many many thousands. When I'm ready to start setting up retirement stuff, etc, I will save yet more, and have complete control. The important thing is having a good accountant that will find ways to save you money, and stay on tops of things.
If you are really in a hurry or have no money to even start a corp, take a 6 month W2 contract and save a bit. You can start the corp while you are in that contract. If you can take a little time and spend a little money, I'd get it setup anyway.
If you do it, SAVE SOME MONEY. Build up so that you can go a few months without work easily. This will cover the 1 month vacation you take at the end of the 6 month contract, the 1 month you spend lazily talking to recruiters and working on your own projects, etc. The risk is very small if you view it over a longer term; if you have $200 in the bank and you are on the street suddenly (it can happen in 5 mins without warning), then you are screwed.
The other nice thing is that with the corp already setup, you can do additional projects on the side of a main contract, or just do small projects entirely, and you already have the corp structure setup to bill, etc.
Anyway, highly recommended.
As a first job, go for the employment option. Unless you have some killer ideas and are more concerned about intellectual property rights than salary, plan to hire others and expand, or want to contract for firm deliverables at some high price, let somebody else run the business.
Nobody plans to have problems with a project, but there are a lot of ways for a project to go bad that aren't your fault. You do not want to be in a situation where you have to be fixing bugs for the next 3 years (I speak from personal experience).
As an employee, you get paid at the end of the month. If you do a crappy job maybe you get fired or transfered to another project, but you get paid for the time you spent. Not happy with working at that company? Quit! But you still got paid. If you are a corp or consultant, you are probably obligated to (1) finish the project and (2) do it correctly or risk getting sued or not getting paid.
There is a standard 20 question list, and you'll have to prove that you are classified correctly. Important questions include:
"...For the following questions, a "yes" answer means the worker is an employee.
- 1. Does the principal provide instructions to the worker about when, where, and how he or she is to perform the work?
... - 7. Does the principal set the work hours and schedule?
- 8. Does the worker devote substantially full time to the business of the principal?..."
"For the following questions, a "yes" answer means the worker is an independent contractor...Firstly, even if he does nothing wrong, it's still possible to get sued for big bucks. This is especially true if he has any worthwhile assets, such as a house, outside of his actual business. It happens more often than you think.
Secondly, even without getting sued, he is still liable for any and all debts of his business under a proprietorship. Whereas under a corporation, he would generally not be.
Thirdly, if he ever wants substantial investment, the investors will likely demand that he form a corporation so that they cannot be held personally liable (for either of the above reasons).
Lastly, the particular laws and taxes can vary substantially from state to state. I would not be so quick to make a recommendation, especially without having a feel for the size and the scope of his desired business.
... at overtime rates.
I have done route 1 before, and was burned.
1. There is a steep learning curve (evernything is new, complex, and has to be done right, the first time). You may know lots about IT management, Java development, etc, but you will need to know all of this, as well as what EI, PAYE, Tx's, etc. Trust me, even if you have an accountant (which I highly recommend), you will need to make decisions which require knowledge beyond what you can learn in the time required. For at least the first year, you will be 'flying by the seat of your pants'.
2. AS 1, you need to be more than just competent in your skill set, i.e. you have to be better than what you need to be to be a full-time employee.
3. You need to spend as many hours *at work* if not more as you would as an employee, and then you *also* have to do administration, which is at least 2 hours a week, in you *social* time.
Bottom line, is that when you do a cost / benefit justification of the various alternatives, you have to considder the extra work (at overtime rates because it is all weekend / evening stuff), the extra stress, the extra accountant, the extra learning, and the fact that *you* have to pay for training (twice - because you don't get paid at work, and pay again for the course - if you can get the time off...), that *you* have to pay for sick-leave and normal leave, and that *you* have to pay extra insurance, and that *you* have to keep a clear head about what money belongs where, and that *you* have to take the risk of a contract termination.
Personally I found that this dod not add up for me, and I changed to being an employee. It makes more sense / cents, and I have a happier life. It is also more flexible because it is easier to resign than to terminate your contract, and it is harder for the employer to fire, than the 'client' to terminate.
Finally, as a company, you sell a service, i.e. you sell what you already have (and the client is not interested in you becomming a better person), wheras as an employee, the company (should be / is) interested in your *potential*.
So, as a new grad, your first lesson will be that you have to learn a lot still, and your best position for that is as an employee. You wil be in way over your head if you go the tough route first.
Obvously, YMMV.
gus
.. if only.
1) Find a good accountant. get some advice based upon your goals and needs. They can usually set you up and they are tax deductable (business expense). You can usually ask around and find someone witha good reputation.
2) Get a good attorney for the same reasons.
3) Ignore anyone else.
I am self employed and love it. But don't do it w/o good professional advice first.
putting the 'B' in LGBTQ+
It's actually a lot more expensive to shut down a corporation then to start one. Had a co-worker in California who worked as his own corporation for a couple years. It cost him about $2000 to get out of it when he wanted to become an employee again.
In your position I would contact some other temporary agencies and find out what their rates for "Payrolling" contractors. If you get a better deal that way take corp to corp. My experience from years of contracting is always be paid on a W-2, even if you have to do the extra work to bring in a third party (temp agency or accounting firm) to payroll you. If you work W-2 you're eligible for Unemployment, Disability, Workman's comp, etc. (always make sure that the payroller can offer you a good group rate on Health Insurance too). If you work 1099 you get none of the benefits -- and if you make a mistake in filing your quarterlies or don't have the cash to make the quarterly payment, you're going to bend over for the IRS.
Minds get scrambled like eggs, abused and erased when you live in a brain storm
Hi. The first four years after college I worked as an employee, and for the last 7 years as an independent, C corp consultant.
If you have some basic accounting background, incorporate as a C corp, and get yourself contracted out through a consulting agency, and expect that they'll get about a 10% cut. A 14% cut (in your example) seems a bit high, but not too unreasonable. I personally find the 10% cut quite acceptable, given the fact that the consulting agency has much better contacts and jobs available through them, and will fill your invoices on a regular schedule (instead of you having to wait god knows when for the company to cut you a check, each time). If you don't mind hassling your client each time they're late on an invoince, then go the full distance, and try getting the gigs all by yourself. Personally, I think that setting up a relationship with a reputable consulting agency that has plenty of contacts in the 'biz', and will try not to keep you 'on the beach' for too long, is worth the small cut that they get.
In my opinion, W2 consulting is the worst option. The cut is too much, and you really don't get anything in return. If you were to set yourself up as a C corp consultant, then you'd be able to write off reasonable expenses with pre-tax money, and set up reasonable benefits that can match anything you can possibly get as an employee. As a W2 consultant you end up giving up a much larger cut, without getting anything in return. Some consulting companies will actually provide their W2 consultant with reasonable benefits, but that's a rare exception.
If you have some accounting knowledge yourself, you should be able to handle being an independent consultant without really needing an accountant. I am not an accountant, but my gigs tend to be in the financial industry, and what I know seems to be enough for me to handle this. With over-the-counter small business acccounting software, such as QuickBooks, or Peachtree Accounting, you'll be able to calculate your own paychecks, and keep track of your tax liabilities by yourself. I've been doing that for the last seven years, and I've never had any problems. Yes, you will have to fill out some additional paperwork. You'll need to fill out some paperwork each time you make a tax deposit (or once a month as long as your annual lialibilities are below a certain amount, I think $50K, or for each actual tax deposit if you're over that), plus fill out a couple of forms each quarter, and additional corporate returns at the end of the year. I don't find that to be too difficult - Quickbooks will even print out the quarterly 941s and annual 940s for you, and TurboTax for Business will take care of your annual 1120 filings (plus your equivalent state filings).
Depending on the laws in your state, you may also have to arrange for liability insurance, workers' comp, disability, and unemployment insurance. This does sound like a hassle, but it's really not. There's a little bit of a hassle to set everything up, and after that it's just a matter of cutting a couple of checks, each year. Expect all of this overhead to run you about 2K-3K a year. Not bad when you're pulling in 200K.
If this bookkeeping deal is not your cup of tea, then just get an accountant.
Good luck.
#1 is so wrong. This person should not have written about something he doesn't understand.
In a nutshell, the corporate profits are taxed. However, I can't think of a single reason that your company should turn a profit. If it looks like you company doesn't have enough expenses and it might turn a profit, give yourself a bonus.
This isn't "working the sytem", it's the way that small businesses work.
That which does not kill me only makes me whinier
In Oregon an LLC (and all other corps...) that have less than 5 major controlling shareholders are considered either Sole Proprietorships or Limited Partnerships for the purpose of taxation. And for the purpose of most laws. Which turns out to be the same as if you check the box that says "self employed."
This is why it's often a good choice to just be an independent contractor. You might end up getting a lot less than you expect in return for all your additional paperwork.
But everyone is forgetting the best part about being a FTE.. DOT COM STOCK OPTIONS!!!!
Real men don't use GUIs.
I'm pretty sure I paid $10 for the two I have. Each.
Many of the posts here revolve around the relative level of work for each option, but there are other considerations here. If your desire is to be on your own (i.e. you really don't want to be somebody's employee), then the first two are your only choice.
However, there is a significant difference between the two in the context of being able to find and keep clients. In my experience, what you're calling an Independent Contractor (or sole-proprietorship as the IRS likes to call it), might work for some cases but not many. Many corporations and even contract management companies won't do business unless there's a legal entity between you and the "business". This helps to save their ass when the IRS comes knocking on their door and asking why they didn't pay-as-you-go for individual XYZ.
Some other things to consider: If you want to go out on your own you'll need lots of insurance. If you have an office or equipment you'll need Property, you will need General Liability of at least $1 million. These two can cost around $3000/year, depending on who you go through, etc. Also, I would highly recommend Errors and Omissions insurance, which is very expensive, but worth the cost. (Something else to consider is that it can be very difficult to actually get these insurance policies).
Get a great attorney, and make sure you like them and they'll do good work for you. Find an accountant that will do all of your corporate and personal accounting; you should be good to go.
Good luck!
The benefit for number one is usually a liabilty shield. You will have to observe all the corporate formalities (ie have board meetings or at least minutes from them), keep the books straight and not treat it like your personal account, etc. Otherwise the corporation will be invalid. Starting it up is realatively easy. Go file a registration with the Sec. of State in your state.
Option number 2 or 3 would probably be the easist. Do you really want to have to worry about filing all the IRS stuff your self?
I've looked into independent contracting. I even did a business plan. Right now rates where I am are shyte. I do plan on incorporating in my home state, New Hampshire. NH next to DE has easier to take rules on incoporating.
If I did contract I would outsource my payroll and billing to an "Employer of Record" firm. Basically they do all your payroll, taxes, billing and collections for you; freeing your time up for more billable hours. They collect the money from your clients, cut you a W-2 paycheck. Also you can get business insurance at a good rate. All for a small fee. You're still working for yourself but don't have the hassles of nitty-gritty of doing your own payroll and collections.
In the eyes if your banker and the IRS, you are a W2 employee but you get to call the shots as a contractor. These agencies also offer discount health and dental insurance. they offer retirement savings plans as well. Take a look at Youcor [Yucor], a company that offers this service. Also there is ZeroChaos and Guru.com has similar services.
Lots of interesting comments below. As far as option (1) is concerned: Although being in business for yourself is a Good Thing (I've had my own business since 1980), this is not a step to take for tax reasons or billing rate reasons or because of any similar short-term economic calculation. The reason to have your own business is to be an entrepreneur -- to be your own boss, and to accept all the plusses and minuses that go with that. In general, few newcomers to business should take this route; it's better to spend some time in the trenches, and learn firsthand whether a) you hate the bureaucratic bullshit and would rather take responsibility for everything, or b) you are willing to trade some bureaucracy for the security of not having to sell every billable hour, having a regular paycheck, getting health insurance, getting some coverage for periods of weak business, etc. For me, it's a no-brainer, but for most people, this independence is terrifying. And you simply won't know how you'll feel about it until you've been over the ground on both sides. IOW: It doesn't hurt to be a wage slave for a while.
Consider a parallel (actually orthogonal) argument: It's never a good idea to make a business decision or an investment decision purely for tax reasons. Why? Because, though tax issues might affect your tactics, they should not dictate your long-term strategy. Taxes should never be more than a detail. So, in the same way: Going into business for yourself is a huge decision, and it should not be done for a few apparent percentage points in billing rate. Those tradeoffs will all disappear. Instead, there's a much more fundamental choice involved that will affect you for many years, and so this choice should not be taken lightly, either way.
If you don't immediately understand what I'm saying, then you probably should spend a little more time in the trenches getting a sense for how business works. Eventually, you'll see a stark contrast between those who do-for-others and those who do-for-themselves, with advantages on both sides.
Here's another way to view the contrast. Picture an experienced chef who works for a Marriott hotel, and contrast that career with that of a chef who owns a bistro in a small town. They both do similar technical things; but their lives are very different. They each face real risks -- each job can be lost due to bad sales, because of bad employees, each can get sick, etc. -- but the chef/owner accepts a much broader range of challenges and makes a longer personal investment.
I hope these comments are useful. Obviously, there's a certain fungibility in contemporary consulting contracts that makes an independent tech contractor less like a chef-owner. Yet there's no intrinsic reason this contracting/employment situation must persist. After five years as a quasi-independent, you might find that you've either a) falsely convinced yourself that you're really running a small business, without a good enough understanding of the business side to make it on your own for the long term; or you've b) cut yourself out of a legit corporate job, if you're really a PHB at heart; those years as a corporate gofer are important training if you want to play those games. And there's nothing intrinsically wrong with aspiring to be a PHB. We joke about it, but most of us wind up seeking that path.
HTH
-- We all have enough strength to endure the misfortunes of other people. La Rochefoucauld
i chated myself tremendously. fortunately, i merged my company into a larger, publicly traded company (www.organic.com), and that was where i got to learn a LOT.. dealing with people on a different level, etc...
a lot of the people here are also bringing up a good point: your personal knowledge. you can go through the motions of setting up a corporation, etc.... but the time you're going to invest, and the "trial by fire" approach you'll likely take won't make it worth your while. You'll be getting a 14% increase in pay grade, but you'll be investing an extra 30% of your time, easily.
my advice is to have them 1099 you and act as in independent contractor. you're still able to deduct a reasonable level of expenses. sure, corporations have more "play" in what is taxable and what is not taxable, but the pay you're going to be receiving, and the work you're going to be doing likely won't require or allow you to take the liberties that a full-blown corporation will have.
if you DO decide to go w/ option #1, though, form an LLC (Limited Liability Company), NOT a true corporation. an LLC is treated like a partnership (and yes, you can have an LLC with as few as ONE persons), it requires fewer reporting obligations, but it provides you with all the benefits of a corporation, including NON-double taxation and generous deductions.
those were my two cents.
i want to live life, not just go through the motions
I've been doing corp-to-corp or W-2 for years. I figure the difference at 10%. I have recruiters who have over the years become friends. They confide in me that they figure it that way too. They give me the option, corp-to-corp at one rate or W-2 at 10% off. They will not do independant contractor. Not in Houston, anyway, you can't find much of anyone who'll take you up on it. Too much of a burn with the IRS.
I used to take the corp route because I wanted the deductions, and if the job involves travel I still do. But otherwise I save myself the hassle of all of the bookkeeping and invoicing and expense of an accountant and take the W-2. Like I said, I've been doing this for a few years.
But no way I'd shave off 38% off of the top for a few minutes with a spreadsheet or accounting package, and a 30 minute meeting with my accountant once a month. You didn't tell us what kind of rate you were talking about, but at my rate it don't fly.
I don't "do" Windows. Unless I find it bent over. Especially if it has that nice new Telly Tubbies world for background flying. Luv that stuff.
If you are starting your own corporation (business), talk with an accountant *and* a lawyer. Books and websites are great for studying the basics, but sometimes nothing replaces the advice of a professional.
Anyone have experience with something like a Nevada corporation? I hear that it provides alot of advantages, because Nevada has no corporate income tax, and because they have strict privacy laws so you can limit your liability by makeing it extremely difficult to prove you're the real owner of the corporation. If you can do the bulk of your contracting work on your laptop while you visit Vegas, then it could be a huge advantage tax wise.
I also hear that they and florida are the only states that won't share tax information with the IRS. Anyone have experience with this?
The definitive source for computer contracting information is http://www.realrates.com/ There is a message-board off the main page where plenty of experts gather and discuss this stuff ad infinitum.
As at least one other poster has mentioned, there is a fourth option - use an umbrella company. I currently use an umbrella company and am very happy. They do all the back-office work, they sell me benefits like 401k and insurance and best of all, they stay with me as I go from job to job making those benefits fairly consistent. All for a fee of about 4% of billings that drops to 2% after I bill $125K per annum. Of course 401k and insurance are on top of that, the fee is just for the paperwork and dealing with the IRS - that ugly stuff. They also let me write-off all kinds of stuff directly rather than having to itemize when I file my personal taxes.
Here is a link to an FAQ like document on the way umbrellas work. It is maintained by one fairly good umbrella company, but the document is totally unbiased.
http://rmpcp.com/umbrellas.html
When information is power, privacy is freedom.
As a company full time employee, if you get shitcanned for whatever reason, you at least will have unemployment benefits and potentially a severence package. When job cuts come, the contract employees go first because they are the cheapest to fire.
In addition, a salaried employee typically gets some type of health benefits, 401k, profit sharing etc....
I am not sure what country or state you are in, but if you are int eh Usa nd you are letting King George take 38% of your salary, then you need to increase your exemptions
Mhy only question is are you ready to be self employed and contract based. If you do the 1st option that can terminate your contract for any reason that they feel sought and have no legal responsablity. If you go the thrid route and they fire you, well you can sue them if it was wrongful discharge.
Silly Rabbit...Sig's are for kids.
Good advise OB-1. I do this (opton 1) and have for several years. I write off my car, several expensive subscriptions, and computer equimpent. It does only save you in your tax dollars, but it come off the top of the company. The big advantage I have, is by keeping my computer equipment up to date and my software subscriptions (like MSDN) I don't become a dinosaur.
It is a lot of work though. Probably the only reason I can do it is because my wife is a CPA and I have a good lawyer. I think if I were you, I would work out in the world for a bit, get some business skills, then go for the independant contracting. Besides, you have to build your skill level coming out of college and make enough contacts to be able to keep yourself working.
IMHO
The percentages are wrong in the first place. Corp to corp may save some taxes at some points, but has a generic fixed cost of about $1000. So, you probably get 80-85% minus $1000 a year with some hassle and work. Independent contractor still has to pay normal rates beyond social security once you get into the bracket. Social security is just paid at twice the rate. Regular employees are only different in that they get taxes deducted in the paycheck. If they end up in a lower tax bracket than the company thought, they get the money at the end of the year. Tax-wise, ind. contractor and employee should be similar as long as you can read the fine print and know salaries before and after taxes (if the paycheck says $30/hr, it's more for an employee because the ind contractor has to pay taxes later), but independence and benefits make for a trade-off.
ROFLMAO. Get over it!
:-( --- argh. Despair, I owe again.
This question is really too complex to be addressed in this forum. I have read several of the responses and have seen a number of well meaning, but wrong, responses. Unfortunately, YOU are the one who is responsible for the issues. Relying on generic "advice" can cost you a substantial amount of money. Taxing agencies will simply not care if "you did not know."
I have been a CEO, small business owner, CIO, and start-up advisor. I cannot stress the following enough -- invest approximately $2000.00 in some good legal and accounting advice. Frankly, if you cannot invest $2000.00, I would not go into business. I have learned a lot of lessons in business -- many the hard way. When I was starting my first business a number of years ago, I thought spending money on accountants and lawyers was crazy --after all, I had to save all I could for the business. I quickly learned that this was not the case.
Some tips:
1. Ignore the specific advice in these threads. Variations is circumstances, state taxes, state business entity issues etc. preclude any real advice in this forum. Be smart. Go to local experts.
2. Find a good accountant -- get a reference from someone you know who uses an accountant. Try to find an accountant who knows your business -- that works with technology clients for example. This is important to reduce the time it takes to train your accountant.
3. Get an attorney. I hate them, but they are essential.
4. Get a good BUSINESS insurance agent. The family life insurance rep won't cut it. Look for business insurance agents -- preferably close by.
5. Talk to your banker. No, they probably will NOT loan you money (unless you go through a government corporate welfare program). But it is critical to build a relationship with the banker for later funding.
6. Visit with your local SCORE (Retired Executives) or SBA (Small Business Administration) office.
Don't go into business if your motivation is to make more money through lucritive deductions and high pay rates. In almost all cases, you will be disappointed. Running a business is costly, time consuming, and frought with perils.
Some examples: (these are illustrations only)
You incorporate. It is just you as the "employee." OSHA visits your office. No OSHA poster? You will be fined. No first aid kit? Fine. Many states require several hundred dollars per year to re-register a corporation. Miss the re-registration? You may be stripped of S corp status or worse lose your C corp status. [Don't even waste your time with those Delaware Corps unless you are in Delaware.] Miss a tax payment? Penalties accrue. Think you can just hold on to your money and pay at the end of the year? Wrong. Think that incorporation shields you from liability? Think again. In most states this is not a blanket protection. If you knowingly (or unknowingly but should have known) commit acts that are illegal, the corporate shieled can be dissolved -- look at Enron and Tyson recently.
My point is, running a business is not a game. You must do it right; and it can become tedious very, very, very quickly. You will need to decide if you want to run a business or if you want to work. I like running a business. But if I truly wanted to make money, I would be an employee in a second.
Before I get into IP I would like to say that option 2 is probably corp to corp as well because most companies won't risk the possible tax liabilities inherent in paying a non corporation. You wind up paying a fee to a corporation to be able to be billed as a corporation.
One of the greatest benefits of working for your own corporation is the protection of your own IP. About a year an a half ago I was offered a job with a consulting outfit. The contract I was asked to sign defined work for hire as anything I did at any time for any reason. When I mowed my lawn the company would own that work. I brought the contract to an attorney specializing in employment issues where my suspicions were confirmed and I learned about the definition of work for hire. I attempted to negotiate a more reasonable definition of work for hire but the company declined. As they were only accepting W3 employment, I turned the job down. This issue is as likely to turn up as not in W3 employment situations.
Lets say you implemented a web site for a small business in the town where you live and charged a modest fee. Or you participated in an open source project during what you believed was your own time. Then your employer finds out and informs you that they own the product as work for hire. This probably does not happen much, but it could. IANAL, but it my understanding that even without an egregious contact work for hire can be more inclusive than you think. The way work for hire is defined, any work that you do, any time of the day or night, that fits within the definition of your job description can be construed as work for hire and belongs to your employer. As mentioned above, an employment contract can be used to mitigate this risk, if the employer will allow it.
This kind of thing is much less likely to happen to a corporation. Presumably the client corporation comes to your corporation because your company specializes in that type of work. Your client would not expect to be able to claim work you did for others because it was similar to the work you did for them, as they could if you were an employee. Also you would produce a statement of work and a contract for each job. All agreements would be reviewed and approved by your legal council. Any needs the client might have for exclusivity of the work product or your company's work output would be decided in detail upfront.
So, in addition to the discussion about the overhead of corporation, you might want to factor in whether you have any outstanding intellectual property rights issues as well.
National Institute for Tax Education
There is a wealth of information that will be helpful to you.
...don't.
An S corp is a good way to go if you want to go corp-corp. I've been in an environment where many people do this. Some are very cautious with taxes and would probably be better off under a W-2. Others try and stretch the system and get into a bit of trouble. Others still stetch the system (with the help of an accountant or lawyer) and really save a whole lot of money. It's a bit of a pain to set-up but there can be some real benifits. Take a careful look at this option, and get the help of a lawyer or account or best off a tex lawyer. Good Luck.
I do not use an accountant for payroll/bookkeeping.
I use ADP to process all my payroll and related taxes (Income - State & Fed, Unemployement - State & Fed, FICA). Cost is less than my accountant, and he just does my year end taxes. Benefit is ADP pays all penalities. I choose how often I get paid (every other week, weekly, monthly, etc.) DO NOT attempt to do the payroll/taxes your self.
Notes on incorporating for personal consulting work; (for US C-type corporations)
- if you spend more $5000 per year on corporate expenses (i.e. computers, office rent) you might save money because these expenses are not taxed.
- between minimum tax payments, CPA and bank services, you must spend at least $1500/year on "accounting"
- you have to personally spend time to keep the books and paperwork in order, plus comply with local laws and the EDD.
- use NDAs and IP licencing agreements with your clients... IANAL but I don't think you really need one to use these.
warning: this statement is based on subjective experience.
There is another option, you can always contract a W2 Withholding compnay to take care of all those pesky W2's and misc. aperwork. I have used these on occasion and they normally run along the lines of $20-$40 a week and handle almost everything needed, a good buy for most contractors who make over $1K easily a week after taxes when on contract.
The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.
This thread seriously interests me, and I apologize for the second posting.
ADP, or even local payroll, are good programs. For a relatively minor fee, the payroll company will handle payment of all apparent taxes and will usually protect you should a mistake MADE BY THE PAYROLL COMPANY is uncovered -- e.g., a typo changes your $2500.00 monthly salary to $5200.00 and your bank account is overdrawn. Note, however, that if you are the cause of the error, the payroll company may not cover the error. For example, if you take a $1000.00 "salary" per month when my expected yearly income is $65,000 to reduce FICA and employment taxes, and the state or federal tax people say that you were unreasonably underpaying, you, not ADP, are responsible.
I just find it unfortunate that so many find accountants as expensive and see their skills as a cost. I pay approximately $90.00 per hour for accounting and get some peace of mind. No, in the general realm of things, I wish that all this tax stuff would go away. But an accountant is much more than "the tax guy." These people, if you get a good one, are a wealth of advice. They have seen dozens if not hundreds of companys and probably as many situations. Think of them as a mentor or coach. Sure, you can reduce your payroll costs marginally by using ADP rather than your accountant, but I don't mind paying a premium to have someone who KNOWS my business handling these affairs. I give a short call with a question. My accountant knows who I am, what my big picture situation is (not just my payroll or taxes), and what types of recommendations to make. It is up to me, as the business owner, to make the decision. This is what business is all about -- not just making money. If you just want to make more money, find a better paying job.
Deducting part of your house means it becomes partially a business asset and when you sell it you have to account for the gain. If you don't lease a car, it's a pain to expense a car you own. Expensing computers and software means depreciating them over 5 years. Just bill 10% or 20% more hours and don't worry about it.
Even as a corporation, you probably don't need liability or workman's comp insurance. It depends on the state, but in mine I don't need it until I hit 4 employees. Of course, clients want to see a certificate of insurance. I just give them a letter quoting the state law.
I've done the corporation route, but today I'm just a simple sole proprietorship doing 1099 work. I'd consider trading in to go back to an employee, but it would have to be a good offer.
I enjoy not being reorganized. Guys I've worked with have been reorganized every 3-6 months while I've had the same duties and boss for 15 months. I enjoy not being distracted by worthless stock options. I actually don't miss the Christmas party -- I never enjoyed them. I enjoy not having the IS weenies worry about what software is on my computer or having to fight them for months to order a bigger disk or more memory. I enjoy working from home with a 19" monitor and nobody watching over my shoulder as I read Slashdot.
A number of others have done a great job touching upon this, but (like everyone else), I want to add my $0.02 of personal experience, since I've done all three.
As for corp-to-corp, I own my own LLC (Limited Liability Corporation). This is most likely what you'd need to file for around $100 (it cost me $100 in the state of VA for a license, plus $50 per year renewal fee). Check with your state for specific filing info. Keep in mind your locality may tax you too. In my case, Federal = 15% of net income, State = 6%, and locality = 1% if I exceed $100,000. However, that's "Net", so if you make $150,000, deduct business expenses such as cell phone, net access, laptop, mileage, etc to the tune of $10,000, and pay yourself $125,000, you'll pay taxes on the remaining $15,000. If you do this, save ALL receipts (I think that's required for 3-5 years - you'll need to check on that. In my case, I've only been operating for two years, so the length is so far irrelevant). Much like personal taxes, if you get audited, you WILL need those receipts.
Now for more details - an LLC helps protect you if you get sued, and it allows you to take certain deductions you might not otherwise get (though many of them are irrelevant for tech companies). If you're going to do this, go to the local bookstore and pick up a copy of "Starting Your Own Limited Liability Corporation", or some such work. If you screw up you taxes, take invalid deductions, or something similar, you could end up paying waaaay more in fines than you save by going this route, so be careful. In my case, I file Federal tax documents (Form 941) quarterly, file State Corporate taxes quarterly, and State employer withholding taxes quarterly - and no, they don't all line up. That's 12 forms per year. If you pay youself (or your employees) biweekly, weekly, monthly, etc, the withholding may need to be filed more frequently. Additionally, if you hire employees who are out of state, you'll need to withhold for those states too.
With Corp-Corp ot 1099 you'll need to pay the other half of Social Security and Medicaid (6.75%), and you won't get health insurance (which runs $219/month through Trigon/Blue Cross & Blue Shield for me). You'll also need to send in your taxes to the state and federal gov't for your earnings - otherwise you WILL be fined heavily.
In general, if it's just _you_, and W-2 is paying hourly (eg, you get paid for 45 hours if you work 45 - no 40 hour limit), then just go W-2. You'll probably get a 401k program (which you should invest in HEAVILY), and they'll take care of insurance, taxes, vacation, holidays, etc. The difference between W-2, 1099, and corp-corp will be insignificant for you, as an individual. Starting your own business is really not worth the hassle (in my personal experience) if it's just for *you*. If you consider time == money (even if time == money/3), the amount of time you'll spend filling out tax forms, yearly federal 1120, W-2's, etc is just not worth it.
Also, the pay differences you see are because:
W-2 - they pay taxes (including 6.75% for SS & Medicaid), give you vacation, holiday, and sick time, a 401k, and probably some other small benefits like tuition reimbursement for certifications and classes. You get a paycheck every two weeks, whether or not the company you're contracting at actually pays your contracting company. Read that line again. Once more. Many people/businesses get stiffed corp-corp if the company is going bankrupt. Read fuckedcompany.com if you don't believe that.
1099 - you get none of the benefits. Make sure you add in ~80 hours for holidays, and another 80-120 for vacation and sick time, plus 6.75% for SS/Med. to your yearly rate to see if you really make much more. You need to file your own taxes (and send in withholding to state, federal, and maybe locality each month). Your "pimp" (aka contracting company) will provide you a year-end 1099 form (which you'll use to file your taxes). You'll probably get paid just like under W-2, which is a good thing.
Corp-Corp - Pretty much the same as 1099, but you'll have way more paperwork involved. They won't provide you with anything (1099, etc) - that's up to you. Also, you may get paid 60 or 90 days BEHIND, because they *may* not pay you until they have been paid. If the company you're working at (not through) goes bankrupt, you may miss out on 60-90 days of pay (or more). Oh, and if the contracting company declares bankruptcy (not sure if the contracting company as well) while you're working for them, YOU CANNOT QUIT! Under federal law, you cannot stop servicing a company in bankruptcy just because they cannot pay you. READ THAT AGAIN!
Just my $0.02, but having worked W-2, 1099, and now running my own LLC, I can safely say go W-2 for a while until you get comfortable in the industry.
The problem with corp-to-corp is that ever since some contractors at microsoft sued for benefits (and won), companies are VERY reluctant to do corp to corp with a company with only one employee.
They usually keep a list of preferred companies that they routinely deal with.
But, if you can actually get a company to do corp-to-corp with you, you should jump on it. You can allow the corporation to buy many things that you use routinely for business (like your car) and it won't be taxed as your personal income.
I would recommend going to your local bookstore or favorite online bookstore and purchasing a copy of Robert Kiyosaki's Rich Dad's Guide to Investing. In this book, Kiyosaki talks about how he went about starting up various types of businesses and turned them into cash cows. The rest of the advice posted here about consulting with lawyers and CPAs is also mentioned in the book to help deal with handling taxes. After reading the book, you can visit richdad.com and post to and read the message boards on developing businesses.
This is simply not the case. You are *always* responsible for your own actions or omissions. If you cause damage, you will be liable *personally* and so will your corporation if you were "acting within the scope of your employment." The corporate shell will limit the liability of any other shareholders in the corporation who are just shareholders -- but that's the only people it protects.
This is why all consultants should consider errors and omissions (E&O) insurance, whether they are working direct (sole proprietership) or through any business entity (corporation, partnership, LLC). Not everyone gets this -- it can be expensive, so you want to weigh the risks and cost yourself. What you will probably *have* to get (because your client will demand it) is General Liability insurance which covers more usual liabilities like if you leave a cable lying around and someone trips over it.
People going into contract software employment may want to pick up a copy of Janet Ruhl's "The Computer Consultant's Guide", 2d. ed., John Wiley & Sons 1997 (http://www.amazon.com/exec/obidos/ASIN/0471176494 ). There are lots of details and Janet at least touches on them all. Also, her web site http://www.realrates.com has a lot of useful info (warning: some of the info is free, some is for sale.)
-Steve
Beware of the apparent glamour of 1099. The rules for writing things off are very strict. For example, you can't write off you apartment, only the percentage that is used for your office. The deductions are very grey area and throw up a red flag that says "audit me"!
With W2, you can take advantage of hi-lo perdiem and save some of your pay from being taxed. No accounting / record keeping needed. No suspect deductions. Someone else does all of the work for you.
Try to get W2 without buying all of the things they are selling you, like the health plan and retirement. Go get those things on your own, so you can stick with the same ones. You'll soon be with a headhunter and have to start all over again with building up member benefits.
It's one thing for someone who has been around for awhile to go off and do some consulting as an independent contractor, or for someone who has loads of experience to establish a company. But if you're just starting out you need the credibility of working for a company. You need to show that someone else thinks you are valuable enough to hire, you need to establish that you can work with other people in an office environment, and you need to build up a resume - and contacts, and references.
Not to mention the fact that working as an independent contractor stinks. You're responsible for filing your own quarterly taxes, and for paying the 6.2% employer portion of FICA Social Security, which is a complete pain. Your employer CAN'T provide you with benefits, which means you have to go out and get your own medical insurance. Depending on where you live, this could be very expensive - and the insurance is generally pretty bad, with high deductibles and maximum coverate amounts. There's no way to access other benefits like dental insurance or a 401(k) plan. You don't generate any employer loyalty, so you're usually the first to go when things get bad, and no one will bother paying you severence. Most of the same arguments apply to establishing a corporation except that the taxes become even more painful.
Independent contracting is not for everyone. You can make (a lot ) more $$$ then a regular employee. BUT you have to be prepared, and be able to deal with complex legal and tax issues, deal with the uncertainty of never knowing when your contract ends or maybe getting sued. If uncertainty or legal issues stress you out, don't be a contractor.
But the good thing is you get more freedom and it is possible (not assured) to make more money.
here is a good contracting message board
http://pub2.ezboard.com/bcomputerconsultants
Assuming you still want to do it...
First thing (and I know this is hard) save up at _least_ three months expenses (rent, food, electricity, insurance, car payments etc). Put the money in the bank and forget about it. You WILL need that money when your contract ends. It can take quite a while to land a new gig (especially in this economy). You better have that money saved up while you look for a new client, or you are going to have to go crawling to Dad to ask him to pay your rent.
Contractors get paid more cash then employees. One of the reasons for that, is there are a bunch of costs that you have to pass on to the client. Here are some of the costs.....
By law, all companies have to pay half of regular employee's social security and Medicare. As a self employed person, you have to pay that tax yourself, so figure an extra 7.5% self employment tax if you are not W2 (on the first $80, 400)
http://www.irs.gov/prod/forms_pubs/pubs/p533toc
You will need to provide your own benefits. Health insurance alone can run you $5k to $9k per year. Don't skimp on this. Just pass the cost along to your client.
You are not in the company 401k. On the other hand you can set up a SEP which is actually much, much better (but more work because you have to it set up)
http://www.quicken.com/cms/viewers/article/reti
Contractors almost never get stock options.
You will have to pay estimated taxes 4 times a year. That means you have to do your own withholding. You have to set aside the money from *EVERY* paycheck, and NOT spend it and say "oh I will put it back later".
Set up a seperate personal bank account for the tax money. If you put it in a good money market account your can make a nice little bonus on the interest.
You really should find a good accountant to do your taxes. This can run several hundred dollars a year, more if your situation gets complicated. This is money well spent because he should show you how to lower your taxes.
You really, really, really should get Business insurance and E&O insurance. People get sued for the stupidest crap.
For just that reason, you should set up either an LLC or an S-Corp, and keep business assets in the company name. The company is to provide an layer of protection between you and lawsuits. See Nolo
for the difference between companies legal structures
http://www.nolo.com/lawcenter/ency/category.cfm
You should set up a separate business bank account and pay all your business expenses out of that. Only keep about $1k in that account. In lawsuits there is something called "piercing the corporate veil". It is when you mix personal and business finances. It gives the lawyers a chance to go after your personal assets such as your car or house. They might anyway, that that makes it easier for them.
Depending on the state you work in, there will be a variety of filing fees and forms. This can be several hundred to several thousand dollars.
If you are charging hourly, and take the afternoon off to go to the dentist, there will be a couple hundred bucks less in your pay check. It makes long holidays kind of painful. On the other hand, if the company has a crunch, and needs you 60 hrs a week, you could rake it in.
So there are a bunch of costs, but on that other hand you can take a lot of them as tax deductions. See your accountant
If you want to take a big loan, such as a mortgage for a new house, banks will charge self employed people who are just starting out higher rates. This can be a LOT of money. But the higher rates go away after you have been in business for several years. The terms vary with the bank.
Other general advice...
I have used an incorporation web site. It was a bad experience. They did not get the papers right and then I could not get in contact with them.
Find an accountant that is recommended by other contractors in your area and ask him to set you up with an LLC. It will cost more up front, but the work may be higher quality.
Also if you register in Delaware, and then work in another state, that state may stick you with a "out of state/ foreign corporation fee" Massachusetts does to the tune of $500. On the other hand, I work is multiple states so Delaware made sense for me.
Have a lawyer experienced in business contract law look over the contract before you sign it. This will cost a couple hundred bucks but is well worth it if he finds any land mines in the contract.
Start looking for your NEXT contract while your are working on THIS contract.
Always act professional.
I've been in the business for almost ten years now, the last several as a contractor with a firm. I'm considering going independent and have just done all the homework on this.
Before you start, consider your risks, the level of security you need, and then expand that assessment to the next five years.
I'm married with a young boy, so I can't imagine taking any extra risk. That has pushed me to start an S-Corporation and have an accountant manage the bills, payroll, taxes, etc. I figured out what it costs net for my family to live and had the accountant work backward from that to figure minimum bill rates. I had him figure in retirement and insurances, etc. It gives me a great picture of what it's going to take for me to be successful without question.
For an individual who's not married, no real responsibilities of home and health and all that, you might be money ahead to be a sole proprietorship and simply pay income tax. Save the accountant and attorney fees, invest what you want. Spend the rest.
I'd suggest having a qualified law firm handle the incorporation. If your charter isn't right and it gets challenged for some reason you'll have BIG headaches in tax court and who knows what else. Spend the $1500-$2000 to get it done right.
There's an organization called the Independent Computer Consultants Organization that can help with a lot of things, including contract drafts, etc. Membership isn't that bad, like $150-$200 for an individual or small firm.
Do the work up front. Surprises are always costly, and they generally leave your customer unwilling to do business again. And as an independent of any type, that's the biggest mistake to make. One bad customer can take a dozen with him if he's connected.
- Sig this!
I'm in NJ too, but since many of my clients are in other states (NY, CA) I have been stiffed big time. It is cheaper sometimes to simply write off the non-payment as a loss rather than sue.
I am owed several thousand dollars for about a months work by a company in CA, but since the contract states that all disputes must be settled in CA, I procrastinated in suing their butts. Now they are gone. Not bankrupt, gone. The phone number is disconnected, the email does not work. I found out they owe several other contractors as much or more than they owe me.
Ummm, Jon, aren't you supposed to be dead...? - Otter(3800)
A *big* consideration in my book is the fact that the law pretty much says companies have to pay you on time if you're a W-2 employee. There is apparently an unwritten law that if you're a contractor then you can be used by the company to help them manage their cash flow ie pay you when they feel it. YMMV but it's worht considering.
Exactly. I know a few people who have done this. Just pay yourself like $30,000. You have to pay income (??%) and FICA (15%) on that, but the rest of the income is to the corp, not to you. Sure you get the corp's profit, but it is viewed not as income, but as a dividend...so you don't pay fica...you save 15% on the remaining 100k or whatever...and I think $15,000 is probably worth the time (buy an S2000 in two years with the savings).
Example (will vary depending on state)...Someone making $200,000
Sole Proprietorship (spelled wrong?):
- Tax: 36% income tax + 15% FICA = 51%
- Take home pay: $98,000
Corp:
- Tax: 36% (what you pay on both what you pay yourself and what the corp earns) + 15% on $30,000
- Take home pay: $127,500.
If you're only making $30k-40k/year, this won't do much for you...but most contractors should be making around the $100k mark, if not more.
Zerochaos can provide a way for you to utilize the first two options more efficiently-
www.zerochaos.com
Significant problems we face can not be solved at the same level of thinking we were at when we created them. Einsten
Good luck!
I agree with your statements. My tax accountant does communicate with me as needed with the type of advice you mention.
Since ADP has a limited Power of Attorney to draft money from my payroll account into their accounts and process the taxes, etc., and make the electronic deposits to the employees accounts, there are no errors on my part.
My account doesn't want to be "bothered" with bookkeeping or payroll.
I gave me a great deal of help setting up my company. (I have my own pension plan thanks to him).
Another option that you can do is
work through an umbrella corp. This
blends 1099 and W2 in that you are
still an employee of a company, but
depending on your umbrella corp
you can do things like deduct
business equipment (i.e. "Yes Mr
Taxman, that dual AMD is a business
expense...") More info on umbrella corps
and a small list of several:
http://rmpcp.com/umbrellas.shtml
A good place for this kindof discussion
is the Real Rates BBS, which can
also help you figure out if you are being
screwed (BTW, 60% of billing sounds like
you are getting screwed, generally it
should be around 70%). At any rate,
here is the link to the board:
http://pub2.ezboard.com/bcomputerconsultants
Regards,
Chooks
-- The Genesis project? What's that?
Check out www.realrates.com, www.pacepros.com, and www.rmpcp.com for examples. If you're just starting out, going thru an umbrella corp may be the best idea.
Realrates.com has a good message board discussing all of these topics.
Having gone through this myself recently, I can point out a couple of details that came as a surprise. If you're not in the US, stop reading right now.
I elected to form a California-based S-Corporation, which cost me $180 in all at incorporatetime.com. They were reasonably efficient - it took about 2 months to get all the papers returned.
Note that although an S-corp pays no FEDERAL taxes, your state may require taxes. CA has a minimum corporate tax of $800, even if the corp has $0 income. Also, if you do business in states other than your home state, you may be liable for corporation tax in those states.
Another issue is the sheer mechanics of getting your hands on "your" money if you set up an S-corp. Obviously, the checks you receive have to be made payable to your company, otherwise the IRS will assume the income is yours personally? That means you need a corporate bank account (for which you need a Federal Tax ID). If you bill your customers in chunks of $5k or more, be aware that banks impose an extended hold on checks for this amount. Ask banks what their policy is on this.
In my case (Bank of America), this is 9 business days, which means that I receive a check on, say, Thursday the 1st, the funds won't be available in the business account until Wednesday the 14th, assuming I get the check to the bank on the Thursday. Then you may have to go through the same process with your own personal bank. In my case, this means that I can't write a personal check using the money I received on the 1st until the 29th of the month. (I have to mail in a company check to my bank).
I realize that this could be circumvented by simply paying myself more through regular payroll & reducing the need for ad-hoc checks, but my understanding is that the lower you keep your "salary", the less you'll pay in Social Security taxes (14% of salary). Once your business is set up & cash is regularly flowing, this ceases to be an issue, but you should not make the mistake I made of assuming that your savings only have to cover the time until your company receives its first check.
HTH
Dave
$100, possibly to incorporate in Delaware, or some other low-cost state. But you'll need a physical address in the State of Incorporation. There are services that do this for a fee $. Then you'll need to register in the state where you do business. Minimum taxes, quarterly filings, like the other posters are telling you.
But the worst nightmare you will encounter is Workman's Compensation. Here in NY, The State Insurance Fund is the 9000lb. Gorilla. Expect a huge upfront deposit. Then when you get audited the first quarter, they'll classify you in the same class as skydivers, deep sea divers, etc. Then they'll pull rates out of thin air, and depending on how newbie you look, they'll add additonal charges equal to the rates they're charging you, plus additional assessments.
Talk to a small (less than ten employees) business owner who has several years experience with Workman's Compensation. Talk to at least one small business owner in the construction/ carpentry/ other trades industry. They have the most problems with Workman's Comp, and those that survive the first year or two will have the know how to guide you in dealing with this monster. Forget talking to an accountant about this, or the insurance broker/producer. They know the accounting angle, and are unlikely to guide you through this minefield.
In New York State, and possibly other states, Sole proprietors, two partners, and one or two corporat officers, if they so choose, can elect to exempt themselves from workman's compensation coverage. There is a form you fill out, get notarized, and send back to their offices. Don't let them con you into going there in person. They are real d*cks about that. The form should be downloadable from their web site. If you won't be working in a company's office (from home for example) your employer may accept that. The employer is looking for one or two things. Limitation of liability if you get hurt, which won't apply if you work from home, (or in the field on someone else's property), and the employer is also avoiding being slammed by workman's comp in their audit. They need to pay workman's comp for their employees, and they will also be stuck paying workman's comp for all the employees of all the companies they do business with, if they don't have proof that the employee at the other company is covered under a different policy. Obviously, IBM has workman's comp, but the smaller companies are slammed everyday for not having the certificates on file for their sub-contractors. Then they have to pay the additional assessments until they successfully argue with WC that the worker is covered somewhere else, and this can take months. In the mean time, they are bled for the extra charges.
If your employer will accept the waiver form, showing that you are a corporate officer with no employees, and therefore cannot be required to get Workman's comp, you'll be saving yourself hundreds of dollars a week.
b.t.w., a demolition company WITH ONE EMPLOYEE $30,000 U.S. deposit required to get WC insurance. That's also the minimum fee per year. Other trades I am familiar with, $10,000 deposit, $10,000 minimum fee per year, one employee (less than $20,000 in wages declared as basis for WC fee). This was over five years ago, after rates came down considerably, and were on their way back up. Sole corporate officer exemption: $0 per year.
Put the money in bank, if you get hurt, it's there. If not, you come out way ahead.
(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt
(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;
(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or
(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.
Sorry, but you can't cancel a contract simply because they can't pay. If you're working under 1099, then, well, you can quit and leave your contracting company to fill the position. But, if you're working directly (corp-corp), then you must continue servicing your contract. If you stop servicing the bankrupt company, they can take you to court and sue you for big bucks. Your only option is to declare bankruptcy yourself to avoid your debt to them.
Not pretty, but it's the law. I worked for a company who went bankrupt, and they treatened the contracting companies who were going to pull their people out with lawsuits. You must continue servicing current contracts, even if they can't pay. That's the premise behind Chapter 11.