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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."
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.
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.
- 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?
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
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!
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.
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.