Self-Employed/Contracting

[Gomez]

A good friend of mine has been after me for a few years to come and work with him at a large pharmaceutical company. The major drawback was that it would have involved a fair amount of travelling, so I was never really intereseted. He recently approached me again with a very tempting offer.

The situtation would be that I would be hired as a contractor and the contract is guaranteed for one year.

I've never worked as a contractor, other than doing some side jobs. My friend told me that I should incorporated (S corp?). I am planning on talking to a couple of accountants I know.

I've read though and gleaned some good info in Buck's post back in February I still have a few questions.

1) Is an S corp the only way to go?

2) I think the only insurance I would need is liability, about how much would that cost?

3) My wife has a full-time job, so I would be covered under her medical insurance. If for some reason, I have to get medical insurance for us, what would that cost?

I realize that the contract is only guaranteed for one year. I'm looking at it as a good opportunity to "get a foot in the door". My current job is OK, although we did have a few "unpaid holidays" over the last quarter/w3tcompact/icons/frown.gif.

Any insight or feedback would be greatly appreciated.

 

[Wingnut]

many many companies LOVE contractors. The main difference to a company between an employee and a contractor ... is that the company owes you nothing but a paycheque. No benefits, no HR, no rights not specifically set out in the contract. The contractors that I currently have cost me just a touch more than half of what my employees cost me (on my budget, of course ... I don't sign the cheques) based on benefits such as sick leave, vacation, pension, recharge of HR, etc, etc, etc.
The difference to the employee/contractor is that you are bound by the contract and are covered by no standard labor agreements or any HR standards. Anything not spelled out in the contract is not covered. Usually that means you're paid for the hours you work. But it may also include some required level of performance or output.
Check carefully on your wife's medical plan. Remember that these are all designed to pay as little benefit as possible and have seen some that exclude or limit covereage for spouses in some situations and did see one that specifically excluded "self-employment" (but I think it actually specified the trades).
I currently have 3 contractors on a 1 year contract. 2 of them are on year 2 and one is on year 7 .... so that should give you a feeling for how long a good worker can last on a one year contract.

good luck!

peter

 

[cowboydoc]

Contract labor can be a blessing and a detriment. It all depends on the person you are. If you can keep good records and keep up on the quarterly taxes, paperwork for your business, etc. then contract labor can be very lucrative. But remember you are basically self-employed. There are no paid holidays, no sick days, no retirement, etc. etc. The tax consequences can also be more or be less depending on how you handle it.

If you do it right you can save a bundle it taxes but it takes a very good accountant to do. If you are only going to do this for one year I wouldn't mess with incorporating. You have to file two tax returns, keep up with corporate rules, pay quarterly for yourself and the business, etc. etc. For the first year I would just use a schedule C to do it. If it works then I would look at doing a corporation.

As far as medical ins. goes it all depends on age, past health hx., current health hx., region, activities, etc.

 

[rocky2]

I work almost totally as a contract computer consultant. Creating your own corporation isn't always necessary, cheap or as simple as it seems. I've worked as a W2 sub contractor and as a 1099. I prefer the W2 with DoD per diem, then whoever I consult through takes care of taxes and I don't have to deal with it. Right now a buddy who already established an S corp a few years back and I are applying his company for State and DoD contracts. The advantages are, lower overhead so we can offer lower billings to the customer. I know for a fact that when I do W2 DoD work, EDS or IBM takes 30% right off the top, that's why the rates are so high. Depending on the contract requirements insurances tend to be in the half mill and up requirement, and there is more to it than just liability. Generally the contract/customer specifies what the insurance requirements are. There's quarterly taxes to consider too. In our case, the insurances and accountant are adding a considerable amount to the billings. If I were you, see if an already established consulting company has the contract bid and you go through them as a hourly W2 with per diem. Since you're by yourself wwith no employees, I'd try at the very least to work as a 1099. Myself, I try to exclusively W2 and per diem.
There are some ins and outs to per diems too. Per diems are designed for temporay meals/lodging for up to a year, and a specific amount. You can't bill 20 bucks with a 30 buck per diem. Generally the DoD rates are around 13-16 dollars per hour, more in metro areas. Stay at or a little below the DoD published rates for your area, and no problem. Since the contract is a year, with a renewable, every new contract is a new per diem start. And if whoever you're contracting through doesn't have an office site for you to go to (you only go to customer sites), you have no problem with the per diem. That nifty little deal can put 2k or more a month tax free into your pocket.

 

[Alan L.]

Forming a corporation or not is mainly a liability issue. If you do incorporate, an advantage of making an "S" election is that the possibility of double taxation is eliminated. Also, only a "reasonable" salary to yourself is subject to social security and medicare taxes, not necessarily all of your income.

Some of the advantages of not making an "S" election is that you could retain some of the income in the corporation (that is, don't pay it all out in the form of salary to yourself) and pay corporate income tax at 15% up to $50,000 each year. This is likely less than your personal rate. This all requires proper planning, meaning more professional fees. Your regular corporation can also pay your health insurance and deduct all of it (and its not income to you) and it can have a medical reimbursement plan. These advantages are not available to an S Corp.

Your state probably has something called an "LLC" (Limited Liability Company). You can form one of these, and as long as you are the only member, you can ignore it for tax purposes and just file schedule C, while getting the limited liability protection that an LLC provides.

One thing to remember - as in independent contractor, your net profit is subject to self-employment tax in addition to income tax. This is 15.3% up to $84,900 in 2002, then social security drops out and over that its 2.9%. If you are an employee your employer pays half and the other half is withheld from your check (7.65% each).