Best Billing Options for a Contract Position? 282
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."
i'd like to know too (Score:1)
Re:i'd like to know too -- Me too (Score:1)
And no, I don't have an @aol.com email address
Re:i'd like to know too (Score:2, Informative)
Top Echelon Contracting [topechelon.com] They become your legal employer of record (W2) no 1099's etc. to hassle with... Recommeded recruiter [recommendedrecruiter.com]
Tax Considerations, Most Likely (Score:2, Insightful)
Re:Tax Considerations, Most Likely (Score:3, Informative)
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
Re:Tax Considerations, Most Likely (Score:4, Insightful)
As you don't state whether you are in the U.S. or not, I will assume that you are.
The recommendation regarding an S-corporation is sensible. If you are inclined to go that route, I would, however, advise you to consider a Limited Liability Corporation (LLC). This structure provides less stringent reporting requirements and is considerably easier to set up and run. The statutes of most, if not all, U.S. states allow single-member LLCs.
For more information regarding LLCs, S-corporations, other legal structures, and sundry issues concerning small business, I refer you to the Small Business section of Nolo [nolo.com]'s Law Center. I can also highly recommend their library of legal self-help books catering to the (prospective) small business owner.
S-corp (Score:2)
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.
Re:Tax Considerations, Most Likely (Score:1, Informative)
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
Re:Tax Considerations, Most Likely (Score:2)
~$300 per month for minimal insurance. I have a high deductible, because I and my family don't go to the doctor much; my insurance is in case of catastrophe.
80*my hourly rate annually for vacation
8*n*my hourly rate for n sick days (very low for me)
I had an accountant do all the corporation paperwork for me, that was about $600 (in Texas).
Frankly, I have yet to see a salary that begins to compare to my hourly rate. Also consider that if you are salaried, your overtime is unpaid, whereas a contractor gets paid for the hours he works (and only those hours).
Another thing I like about contracting is that if I feel that something is worth taking time off, I take the time off. I have no guilt wondering if I am cheating the company by taking time off for a cold.
That said, contracting is better done when the economic climate is good (contractors are the first to be laid off), and when you have skills the company can't do without. I recommend waiting until you have two years experience in your field of expertise before you begin contracting. Over time, as you contract the most important thing is to KEEP UP WITH CURRENT TECHNOLOGY!! Making money hand over fist for three years contracting is great, but if you can't find the time to keep your skills up to date (and don't expect your companies to fund it), you'll find yourself with high dollar expenses and no job, and no hope of getting any but a low dollar job.
Also generally recommended is to live well below your means, but I think that goes for everyone. Money in the bank is as good as, well, money in the bank.
IRS [U.S. Centric] (Score:5, Informative)
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).
Experience (Score:1, Informative)
I'd go for option 3 (Score:1)
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.
No Pain -- no Pain! (Score:1)
Concentrate on your work, skills, and Fragging. Leave the IRS stuff to HR.
Re:No Pain -- no Pain! (Score:2, Interesting)
There are a lot of little things that can get tricky depending on your state. Things like writing off mileage and such can get hairy, or you could just take the lazy route and not write that off as I did then you don't have to worry as much come audit time. Of course if you are driving 100 miles a day to different sites then keeping track of your mileage would give you a little tax break. I had a desk so I couldn't write mileage off to my main employer and I only went on site 4 or 5 times a year within 20 miles so the $5 I would have been able to write off wasn't worth the hassle of keeping track of my mileage.
Re:No Pain -- no Pain! (Score:2)
One more thing self-employment makes abundantly clear is how ridiculously overtaxed we are. You tend to notice such things when you're writing $1000+ checks every so often. That's another discussion for another topic, though...
(This assumes, of course, that your state doesn't levy an income tax. Having never paid state income tax myself, I don't know what additional paperwork burden you would be stuck with if you're self-employed in a state that collects income tax.)
Re:No Pain -- no Pain! (Score:2)
I haven't noticed if TurboTax has caught that or not...it probably has, but I haven't noticed. I figured all of the "self-employment tax" (read: SS/Medicare double-whammy) was money tossed down a rathole that I'll never see again.
<offtopic>
That's debatable...not from a tax-dodge standpoint, but from a standpoint of the near-zero likelihood of ever getting any money out of the Ponzi scheme known as Social Security. It has become one of the largest wealth-transfer schemes in the world, one that shifts money from people who are just getting started in life to people who had decades to save up for their retirement. How does a failure on the part of old people to plan for their futures constitute an entitlement to the money of today's working stiffs? Maybe people would have some incentive to save up for retirement if they knew they would have to be responsible for themselves—and if the government wasn't already bleeding them dry to pay for those who didn't.
Why are pyramid schemes illegal when Dave Rhodes and his ilk push them, but perfectly acceptable when Uncle Sam is behind them?
</offtopic>
Say WHAT? (Score:4, Interesting)
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.
Re:Say WHAT? (Score:1)
Re:Say WHAT? (Score:3, Informative)
Re:Say WHAT? (Score:2)
This may be true, but it's not the only reason to incorporate in Delaware. My company's CFO keeps telling me that Delaware is very friendly to corporations from a tax point of view. Now that we're going international, it turns out the same thing holds for The Netherlands. We're setting up a holding company to do business (through subsidiaries) in the US and Australia, and the holding company is going to be incorporated in The Hague. Makes no sense to me, but the bean-counters tell me it's the right thing to do.
Why was this topical again? Oh, well. Easy karma, easy goma.
Re:Say WHAT? (Score:2)
Re:Say WHAT? (Score:2)
As for the Delaware thing, I'm sure you're right. I do not pretend to understand the ways of financial types; they are subtle and quick to anger.
I wonder, now, if that's the same reason our new venture is going to incorporate in The Netherlands.
Re:Say WHAT? (Score:2)
Re:Say WHAT? (Score:2)
That's correct, but you DO have to be licensed in any particular state that you do business in. Sure, you can incorporate in Delaware, but if you do business in Texas (meaning, you accept payments in Texas at a Texas PO box or address), your corporation has to be licensed in Texas as well.
Re:No kidding! (Score:2, Informative)
Re:Say WHAT? (Score:2)
That's known as a DBA in Texas, and it's free here. It's the incorporation that we're talking about, so you can put Inc or Corp after your name, and you're free of most liabilities.
your time is the real cost (Score:5, Insightful)
Re:your time is the real cost (Score:5, Informative)
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.
Re:your time is the real cost (Score:2)
No, really this is what happens sometimes from what I've seen - I haven't gone this route, but it has been considered - only to be rejected by me because of all the extra work invloved in getting other people to work. That and I do have a "day" job that requires a good portion of my time. Good insight!
Re:your time is the real cost (Score:2)
Re:your time is the real cost (Score:2, Informative)
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.
Re:your time is the real cost (Score:2, Interesting)
Our Univeristy IT contract... (Score:1)
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...
Re: Best Billing Options for a Contract Position (Score:2, Informative)
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
Best option of all (Score:5, Funny)
(4) Say that you're a management consulting firm (310% payrate)
In a nutshell (Score:2, Interesting)
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
Don't start a corporation (Score:2, Informative)
It really doesn't make sense for an individual, unless you like the idea of learning accounting in all of your free time.
Contract Where? (Score:2, Informative)
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.
is it just about money? (Score:1)
A few tips... (Score:5, Informative)
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.
Re:A few tips... (Score:3, Informative)
#1 - Subchapter S is a form you file with the IRS. This prevents the kind of double-taxation referred to by gillbates. Piece of cake (relatively) to avoid. True you can't seize the cash but you could decide to make yourself a low-interest loan right before the tax year ends. Corporations have more paperwork but that's to facilitate the large number of loopholes and tax advantages provided to corps vs. individuals.
#2 - No comments... why would you want 86%?
#3 A - depending on where you work employees may or may not be more difficult to get rid of. South Carolina is a 'right-to-work' state which means you can quit at any time for any reason with no notice but also allows your employer to terminate you at any time for any reason with no notice.
#3 B - Liability insurance is a nice thing to have and part of the cost of doing business. As a corporation, however, you have created an entirely separate legal entity which can be sued, etc, for damages but protects your personal assets (car, house, accounts) behind a corporate veil. The veil can be pierced but that's why you're paying a lawyer to make sure it's set up right.
Good Luck!
Re:A few tips... (Score:4, Interesting)
If you set up an S-corp, then it doesn't have to pay any taxes. Instead, all tax liability gets passed on to the stockholders. S-corps are usually used for businesses that will show a loss for tax purposes, allowing the owners to reduce their taxes, but they can be useful for consultants as well. One nice trick is to pass 50% of the profits to the owners (i.e., you) to cover your tax bill, the rest stays with the company to cover business expenses (computers, cell phones, etc.).
I understand that LLC's offer the same tax advantages as S-corps, but I've never owned any of them.
Danger, Will Robinson... (Score:2, Informative)
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.
Re:A few tips... (Score:2)
Of course, ideally you won't have any "profits" because you'll be spending a lot of money on:
Re:A few tips... (Score:2)
It's also possible that the IRS may say that you are not really a corp at all.
Re:A few tips... (Score:2, Interesting)
1. If you work corp to corp, yes, you do have to start a corporation and pay taxes. Typically, you get bilked, because your corporation must hire you, and pay you a salary. Not only will you have to pay taxes on the income you are paid by your own corporation, but your corporation will have to pay taxes on the money they pay you. Any additional income is subject to taxation as well - and unlike an independent contractor, you cannot just seize any excess cash in the corporation and claim it as your own.
Its only that difficult if you form a Chapter C corporation. A Subchapter S is simpler (and avoids the double taxation), and an LLC is downright easy (at least in Florida, where all you have to do to maintain it is to register it for about $100 and pay the $50 renewal fee every year). You also don't have to go through the hassle of hiring yourself and paying yourself a salary, since all the profits from the LLC not reinvested in the company are distributed between the owners, and that distribution is only taxed in the owner's personal income tax (under Florida law). The best way to go is probably LLC (or LLP), but not all states allow LLC/LLPs.
Re:A few tips... (Score:2)
Many large companies have complicated billing procedures that can break down and cause you to go without pay for weeks or even months at a time. Sure, you'll get it all in the end, but it's a hassle.
You might get assurances that this is not a problem today, and you might even talk to people who swear they've never had a problem with billing, but should the organization change it's billing procedures/software/personnel, or there be major reorganization or merger, things could change. If the company hits a rough spot, they might try paying slower to improve their cash flow numbers also.
Re:A few tips... (Score:2, Informative)
Corps get taxed on profits not on revenue. Employee wages and salaries are expenses which get subtracted off of the revenues. So you only get taxed once.
See http://ftp.fedworld.gov/pub/irs-pdf/f1120.pdf [fedworld.gov]
Note lines 11, 13 and 30. So your statement is true to some extent. If you charged a rate of $100/hour two taxes occur:
Typically, if you are a corp doing business with another corp, you will be able to charge more money than if you were an independant contractor. Plus it is less complicated for the hiring company to hire a corp to do the work.
Re:A few tips... (Score:5, Informative)
If you work corp to corp, yes, you do have to start a corporation and pay taxes. Typically, you get bilked, because your corporation must hire you, and pay you a salary. Not only will you have to pay taxes on the income you are paid by your own corporation, but your corporation will have to pay taxes on the money they pay you. Any additional income is subject to taxation as well - and unlike an independent contractor, you cannot just seize any excess cash in the corporation and claim it as your own.
This is just plain wrong. If you have an C corporation, you're taxed personally on the income that your corporation pays you. Any money that your corporation is paid that isn't paid to you is taxed at the corporate rate. It's true that you're taxed, then you're taxed, but the corporate *profit* is taxed at the corporate rate which starts at 15%, and your personal income is taxed as usual, but since your personal income is less than what the corporation made, you're in a lower tax bracket. And in many cases, your corporation may still officially make less profit because of the deductions. Consider this: If you have a car lease payment of, say $500 a month. And you consider (for taxation purposes) that car to be a business car, you can deduct the entire $500 (plus maintenance and repairs) per month. As a person with a $500 payment, you really are paying, oh, $650-$700 a month in pre-tax dollars. But the corporation only paid $500. So where did the rest go? It was taxed at 15% instead of your higher personal income tax rate, it also didn't contribute to an increase in your tax bracket. Because really, you can now afford to pay yourself less income because that lease payment isn't coming from your personal income anymore. The deductions go on and on. There's also nothing that says that you can't work 1099 for your own corporation. Or have more than one corporation in order to limit your exposure to state income taxes and limit liability. So really, there's nothing that says you have to become an actual employee of your corporation. And it's true that you can't just take the money from your corporation, but in most cases, you wont need or want to. And if you do need it, there are ways around it such as your corporation loaning you money.
If you work as an independent contractor, yes, you will still have to pay taxes, and be responsible for insurance, etc, but you won't get taxed twice. You will still have to pay taxes at the self-employed rate, which can be substantial.
You really shouldn't work 1099. Instead, get an S corporation and you'll get all the benefits of 1099, but more tax flexibility. You should always work corp to corp. Make sure the check is made out to your company name and not your personal name. And there's nothing magical or frightening about the self-employment tax. When you're an employee, you pay half of your social security and other things and the company pays half. When you're self employed, you have to pay all of it. That's the self employment tax. You're really not winning or losing. You break even.
As an employee, your employer worries about taxes and insurance, and you have two additional advantages:
Employees are usually harder to fire/get rid of when the project ends. If your current employer doesn't like you, they need do little more than a non-renewal of your contract to get rid of you. However, as an employee, most good corporations will have firing procedures which must be used, and in some, it takes six months or more to fire an employee. This means that you will have ample time to search for another job should things go south. As a contractor, your workplace could wait up to the last minute to tell you that they aren't going to renew your contract.
This is also completely wrong. I've been far more stable as a contractor than an employee. This is because companies hide bad news from employees so that there's isn't an exodus. It's true that companies can end contracts with no notice, but most states are right-to-work states where employers can do that also. Companies may have policies that dictate firing procedures, but when the company is hurting, they can change policies instantly. Usually, you see when contracts are ending and can plan for them. Also, the extra money (assuming you're fiscally responsible) can help when searching for a new contract. This year, I've been out of work for two weeks. I had three days notice from a contract. That was the first time ever I didn't have a new contract the following monday.
Liability: if you accidentally hose the database as a contractor, you can be held (in some cases) criminally liable for the data loss. As an employee, the only thing that they can do is fire you. If you go with the contract option, you will have to get insurance to cover this kind of situation, where as an employee, you won't.
This is partially true. But as a contractor you can get (well, most clients require it) liability insurance. This insurance costs a few hundred dollars a year. Not a bad sum when you consider that you can make double as a contractor. Also, I seriously doubt you would be charged with a criminal offence. IANAL, but they would need to show intent. If it was an accident, they could certainly sue *your corporation* in *civil* court. That's what the insurance is for.
MOD THIS DOWN (Score:2)
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.
Non payment (Score:2)
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.
My Rates (Score:2, Funny)
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 . . .
Re:This is good advice (Score:2)
I never got paid
Have you had a talk with your freindly local collection agency? Another option is getting a judgement for non-payment.
100% sounds like a no-brainer (Score:3, Informative)
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 corp-to-corp different than 1099? (Score:1)
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
Here's the poop (Score:5, Informative)
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.
LLC is best (Score:5, Informative)
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.
Re:LLC is best (Score:2)
Do you get socked twice for taxes in an LLC?
Re:LLC is best (Score:2, Informative)
I used to run a consulting business about 8 years ago; it was an LLC. I liked it, because it provided me the limited liability of a corporation... but without the hassle of the paperwork, nor the double taxation issues.
Ryan
Re:LLC is best (Score:2, Interesting)
The "bad" things about being self-employed,in my opinion,are:
Extra Social Security.
Hideously expensive medical insurance.
The fact that Uncle Sam doesn't let you deduct all of the medical premium (but if you're salaried your medical insurance is a benefit). My accountant referred to it as "BOHICA" - Bend Over, Here It Comes Again.
No work, no pay (now I get 20 vacation + public holidays + sick time)
You only get hired for what you know but if you're salaried there's always a chance of employer-paid education.
But, whatever, good luck.
why is W-2 more taxes than Sole Prop? (Score:2)
Deductions (Score:3, Insightful)
Not exactly (Score:3, Informative)
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.
The rundown (Score:5, Informative)
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.
Tax advice (Score:3, Insightful)
- TaxACT [taxact.com]
- TaxCut [taxcut.com]
- TaxSlayer [taxslayer.com]
- TurboTax [turbotax.com]
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.Welcome... (Score:5, Insightful)
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
1099 is the sweetest option (Score:5, Informative)
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
Re:1099 is the sweetest option (Score:2)
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.
The cut the consulting firm takes should be the same whether it's 1099 or corp to corp. Since they're different, I smell a rat. Unless this is the client telling him this in which case there may be a different reason for doing this. Independants and corps may come out of different budgets.
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).
You can *always* realize benefits from starting a corporation. If you're not, get a new accountant. In most situations, you'll get more benefits from a corp though. If you're married with a mortage, kids, and two car payments, you can reap huge rewards from incorporating. It can be a pain to maintain the corporation, but it's not that big a deal. My accountant give me free advice and I'm expecting to pay $1000 to $2000 for him to do both tax returns. The monthly accountant expense is only if you want him to track every little thing for you.
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.
W2 through a consulting firm is an ideal way to get into consulting to see if it's right for you before going to the trouble of incorporating. As a w2 employee, you can sue for your pay and win regardless of whether they were able to collect from their client. The 38% cut is a bit high. You'll hear that 30% is the norm, but you can negotiate a better cut when the economy isn't so bad. Also, if you're relying on 401ks for retirement, you're a fool. As a consultant, you can make double and put that money away in your corporation. Then your corporation can invest that money and get better tax shelters. Consider this: If you make $100 an hour, you should be able to put away $100,000 a year and still live an ok life. If you can do that for ten years, you'll have $1,000,000. But investing that money with a 10% return over that same ten years will yield a number closer to $3,000,000. Then you retire while your corporation pays you $300,000 (the 10%, remember?) a year. I'll take that over social security any day.
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.
You'll get far better deductions and investment opportunities as a corporation. Liability insurance is often *required* by clients or middle-man consulting firms. Usually, they require $1,000,000 to $2,000,000 in coverage. This costs around $400 a year. I've *never* heard of a consultant getting sued for liability. I'm sure there are horror stories here and there, but I have yet to hear one.
#1 all the way (or #4, below) (Score:5, Interesting)
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.
S Corp 100% (Score:5, Informative)
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.
Independant is the way to go (Score:5, Informative)
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.
Fourth option (Score:2, Informative)
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.
From my own experience (Score:3, Interesting)
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.
BEWARE!!! (Score:5, Informative)
- 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).
Re:BEWARE!!! (Score:2)
It is NOT true that only public companies have to file annual reports -- ALL corporations do in many states.
Filing as an S-Corp DOES NOT relieve you of the obligation to file tax returns for the corporation -- it merely shifts who pays the tax. And THIS IS OPTIONAL.
As for a law -- try the Federal Fair Labor Standards Act. Also try the Internal Revenue Code.
Suffice it to say that your opinions are all wrong and unless you have specific legal training in these very complex areas, you should really refrain from giving out advice like this. You may even be practicing law without a license. All I was attempting to do is highlight some potential problem areas that should be considered before taking this path.
What do you want? (Score:3)
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.
Corporate Options (Score:5, Informative)
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.
The best billing option? (Score:2)
re: best billing options for contract position (Score:5, Informative)
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.
corporation and workman's comp (Score:2)
Re:corporation and workman's comp (Score:2)
Here is how I did option #1 (Score:2, Interesting)
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!
As the owner of a consulting company... (Score:5, Informative)
[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.
Incorporating (Score:2)
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.
Calculate your time... (Score:2)
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
get professional advice (Score:4, Informative)
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.
Report from the trenches. (Score:4, Informative)
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.
Why to have your own company (Score:4, Interesting)
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
Sources for help: (Score:2)
incorporating out of state (Nevada?) (Score:2)
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?
Good Info here (Score:4, Informative)
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
Complex Question (Score:3, Informative)
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.
What about IP (intellectual property)? (Score:2, Informative)
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.
Keep it simple (Score:2)
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.
I speak from experience (mod this up!) (Score:3, Insightful)
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.
Re:I speak from experience (Score:2)
(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.
Big Topic -- Resources (Score:2, Interesting)
Good luck!
Re:The best advice I've ever gotten... (Score:2, Informative)
I found out the hard way though a stupid mistake.
Re:The best advice I've ever gotten... (Score:2)
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...
Re:Where? (Score:2, Funny)