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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."
Set up a Subchapter S corporation and you are taxed as an individual, with no corporate tax involved. The main restriction is that you can have no more than 16 shareholders, which of course should not be a problem.
Remember that you can write off your computer equipment used in your work, which can have the interesting result of sheltering a great deal of your income. I did that all the time when I was an independent contractor.
Hope that helps.
D
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.
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
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.
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.
Think LLC
it's a corporation, but your taxable income passes throught the corporate entity. This means, you only get taxed once! There are other reasons why to do this or not, but look up info on becoming LLC. (it has worked for me so far btw as a small two person IT consulting business.)
good luck
.cig
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.
Totally depends on what state you're in. Deleware charges like $10 or something... half the more mysterious-looking junk mail I get has a DE return address because it's so cheap to register a corporation there.
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.
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.
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!
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
The advice you got from terpia is very wise. Unless, of course, you would like to start your own business. I'm an employee but I work with about 40% contractors.
Something I see a lot is that somebody comes in a does a great job. The company says, "You're awesome. Are there any more like you?"
Guy replies, "Yep, there sure are. They work for $75 per hour just me."
Guy calls friend, "Hey, you're good and I like my job. Want to make $50 per hour working with me? I'll do the paperwork."
This continues until the guy realizes that he can quit his job and manage his new company.
Anyway, it's just a thought. You might be inclined to go this route and I've seen a couple of people succeed going this route.
That which does not kill me only makes me whinier
Cost me $50 in Colorado. Remember, you don't have to incorperate in the state you live in. You can find out how to do this with a quick Google search. Delaware has many state laws that are advantagious to the corperation. Hence many comapnies are incorperated in Delaware.
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
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.
- 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.
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
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.
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.
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.
TOP ECHELON!!!!!!!!
Top Echelon Contracting They become your legal employer of record (W2) no 1099's etc. to hassle with... Recommeded recruiter
If you do what you always did, you get what you always got.
One company that does all of the business end stuff for you is Independent Professional Sertvices (IPS) You charge whatever rate you want, they collect, do expenses reports, etc for you, and they take a chunk. I belive you can control the amount they take based on the amount you charge. Kind of a best of both worlds middle ground.
Short snippet from their site:
Why IPS
Independent Professional Services (IPS) is the nation's most respected back-office support organization for Independent Professionals. We offer financial and administrative services designed to help you maximize your earning potential without compromising your independence.
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.
you don't have to incorporate in the state you live in. some states, like nevada and delaware, have much better deals that legally protect you as an owner. it's much harder to be personally held liable for any failure of the company if it is a company in those states.
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.
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+
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.
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.
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.
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.