Contract work? How do I even get started?
June 26, 2014 8:40 AM   Subscribe

So I left my previous job (as of this month) and was quickly offered contract work by a past manager who is a higher-up at a different company now. I respect this person, and would be happy to work for him again -- the "unsaid" (on paper) purpose is to bring me in as a full-time employee. That said, I don't even know how to get started with contract work.

(I realize that some of this is best answered by a lawyer/accountant, but if any of you could share your personal experiences/opinions, I would appreciate it!)

- How much should I charge, and how do I do it? (hourly, by project, etc) Judging from other threads, I'm guessing that it would be something like (salary/1000*1.3)? This would be for a relatively specific purpose that used to be only part of my old job, and the aim is to charge a rate that would be equivalent to at least $100k/yr, but probably a bit higher to incentive them to just bring me on full time asap.

- Sole proprietorship/LLC: I'll be the only one doing the work, expect that this contract might be the only one, and likely for only ~4-6mos until they bring me on full time. Which business structure is best in this case? I'm assuming this will be 1099 work - do I just end up "paying myself"?

- Are there lawyers and/or accountants who specialize in helping to answer these types of questions, helping small businesses get on their feet?

- Any potential pratfalls I should look out for, or any other general advice?

Thanks all!
posted by theplatypus to Work & Money (11 answers total) 14 users marked this as a favorite
I am assuming you are in the US since you mention 1099s. I do a lot of contract work and have for decades. For something small like this as long as you have a clear idea of how taxes work, you don't have to do anything weird to get this going and have it work out just fine.

1. Really depends on the project and what your work style is like. You are right that you should charge higher rates for contract work, both to incentivize them to hire you but also because you will be paying your own benefits, your own social security and are paying for your own gear/travel/etc. My back-of-envelope calculations is that I won't see roughly 25% of whatever I charge because it just goes to taxes/SSI. Upside: you can take deductions for anything work-related and so you should keep track of all business-related expenses. You can still use Turbo Tax or something similar to do this. You are supposed to file taxes quarterly and pay "estimated" taxes but you can (probably) skip this if it's just a short term contract. I am not a tax person, this is just how I deal with it.

2. Ignore this. Just get people to pay you. If you want, you can get a DBA (doing business as) bank account so they can pay Platypus Solutions if you like this better than them just paying you but most places just expect to pay you and it's a rare place (usually governments, I have found) who require you to be a business or have a business ID.

3. Yes and there are also groups like SCORE who will give out free advice for getting-start3ed stuff. You probably do not need a lawyer at this point if you aren't doing anything fancy. An accountant would be good to make sure you're doing your taxes properly but again, not necessary. A "for dummies" book will help you make sure you know the obvious stuff.

4. Don't overthink it. You don't have to incorporate or anything complicated just to do small contract work unless you're in a situation where you'd have a lot of liability or would need complicated insurance or licensing. If you DO have any of these things, start with SCORE or a good book from the library and that should help you figure out how to move forward.
posted by jessamyn at 8:52 AM on June 26, 2014 [2 favorites]

Good advice from jessamyn - I would just like to reiterate that you should set aside a LOT of your gross 1099 income to account for taxes - at your target income, probably more like 40% once state income, federal income, SSI and self-employment tax are all added up. And of course, propose your hourly rate (or per-project fee) with this in mind.

You may want to talk to an accountant or lawyer with small-business experience solely to get a good idea of what you may deduct as pre-tax business-related expenses. It is a lot of stuff! More than I had expected. I don't know what kind of work you do, but you can often deduct things such as mileage on your car, office supplies (including computers), any other business tools and materials, and possibly a portion of your rent or mortgage if you genuinely reserve a room as your professional office. You should, of course, follow up with a professional for specifics in your situation.
posted by Joey Buttafoucault at 9:00 AM on June 26, 2014

billing by project can go south on you very very quickly. i wouldn't recommend doing this when you are first starting out.

i don't recommend it at all, actually.
posted by lescour at 9:36 AM on June 26, 2014 [2 favorites]

In Connecticut, I had to register with the state as a sales tax collecter because computer services, including programming, are taxable. That meant filing a monthly report whether or not I collected any tax that month. I missed once and paid a fine/fee.

I registered a DBA name with the City of Stamford, and had a bank account under that name.

I did not have any special insurance (e.g. errors and ommisions).

At the time, the IRS was hostile to one-man programmers since, in their view, it was mostly a dodge on the part of employers to avoid their responsibilities, to avoid paying taxes, and/or to avoid withholding. I don't know about now.

You are probably not going to have employees, but be warned: payroll ups the paperwork a lot.
posted by SemiSalt at 9:36 AM on June 26, 2014

How to charge: probably by the hour or day. If there's some other objective unit of measure that lends itself to your work, that's another option. Charging by the project can work if you've got the terms laid out extremely rigorously—i.e., no chance to overload the project with tacked-on work, extra rounds of revisions, etc.

Regardless, you want a clear statement of work/contract/whatever that you and your client agree to, to set the scope of the project, define deliverables, etc.

What to charge: What everyone else said. Don't forget that you're paying for your own health insurance.

Sole proprietorship is fine for this. You don't need to register as any kind of business entity. You don't need a special lawyer or accountant, or even an ordinary one. I do have a tax guy (not a CPA) do my taxes, and he knows everything to look out for.

Keep good records of your expenses (including utilities, phone, ISP), don't forget about business use of your home/vehicle. You can claim deductions on all that stuff.

Yes, you'll be doing 1099-MISC work.
posted by adamrice at 10:14 AM on June 26, 2014

Here is a super simple set up:

1. Sole proprietorship in your own name. Nothing to do here.

2. Open two separate business accounts, one checking and one savings.

3. When you receive a check, deposit it into your business checking, and immediately transfer 30%-50% into your business savings (whatever % you think your tax bracket is, and you don't have to be precise, just a ballpark).

4. When you spend money on anything business-related (google for what you can deduct), use the debit card that came with your business checking. Never use a personal card and keep all the receipts in one envelope. If you don't think that you will remember what the purchases were for, keep a log of your purchases, or just write a brief note on the back of the receipt.

3. When you file at the end of the year, download a list of transactions from your business checking. Give it to your accountant. They may ask you to detail the expenses, which you can do very quickly since you kept the receipts/log above.

4. Your accountant can now tell you how much to pay and to whom. Because you've been setting aside money in step 3, you have enough to do this.

That's it! Very simple.

A couple notes re. answers above.

I don't think payroll is needed at all - you don't have to pay yourself a salary, you can just take distributions instead, being the single proprietor.

In general, you are highly unlikely to incur any penalties given the short period that you'll be in business. For example, there are penalties if you don't pay quarterly tax estimates, but you will not have gone even one year in business/without payment, which is not enough time to establish the baseline for penalties.

(To clarify, penalties are established when you do not pay *estimated* taxes, so let's say your income is $100k a year and so you owe $5k every quarter to the IRS... well, 4-6 months is really not enough to predict your income for the year and IRS is not going to just make up a number to calculate their penalty off of).

For free personal advice, find your local Score chapter. They have retired business owners who volunteer to give advice on a range of topics. I don't think you necessarily need it, if you just do what I outlined above, but it's free so why not.

As far as your rate, depending on your health insurance situation, to make a $100k I would ask roughly for $50-$60/hour if the expectation is 40 hour weeks. However, this seems like a backwards approach... if the market rate is higher than that, why undercharge? And if it's lower, why would they overpay? Seems like you should research based on your skills and the current freelance market, not some target number.
posted by rada at 10:20 AM on June 26, 2014

As a 1099 contractor for an established company, most likely they'll cover the work agreement. Other than that, you just have to come up with a number that you like that will cover your overhead. Full time specialist work for a bit over 100K/yr? $80/hr. If you charge more, people will respect you more. If your ex/newboss doesn't like that number they can counter with another, like any negotiation. Don't worry about an LLC.
posted by rhizome at 10:52 AM on June 26, 2014

likely for only ~4-6mos until they bring me on full time.

If they plan to bring you on FT, that's one of the factors that usually makes it illegal to classify someone as a 1099 "Independent contractor." A lot of companies ignore these rules, but they exist.

But what they should be doing, and what I came to suggest, is being on a W2. This means they treat you like any other employee, except you probably don't have benefits. This is how I always worked as a contractor when I went to someone's office FT, though it was usually via an agency.

All the taxes get withheld right away, tax liability may be higher, though it's complex.
Companies may want to pay less since it costs them more in taxes to hire you this way.

No weird tax situations to worry about.
Avoid any weird local taxes that may accrue for running your "own business' (eg: City of L.A. business tax)
And the BIG ONE: If for whatever reason it doesn't work out and they end the contract/don't bring you on FT, having been recently working on W2 makes you eligible for Unemployment, which the other ways absolutely do not.
posted by drjimmy11 at 11:21 AM on June 26, 2014 [2 favorites]

At any rate, if you're really going to work for a maximum of six months before going back to FT, the cost, tax liability and general pain in the butt of setting up your own corporation is almost certainly not worth it.
posted by drjimmy11 at 11:31 AM on June 26, 2014

I've been a very small independent contractor/sole proprietor at several different times in my life.
- I would suggest billing hourly - it is much similar to manage and allows your employer to use you services more flexibly over time.
- you do not need to do anything to set up your business if you want to just operate as yourself, which is the simplest. The business just write out the checks out to you personally when you get paid and you use your social security number.
- it is a good idea to set up a separate checking and saving account for the business to keep things clear for tax purposes. however, the bank does not need to know that it is a business account - it is usually cheaper to just set it up as a regular personal account since you won't have the high volume of transactions or special needs of business.
- if you are trying to calculate what contractor rate will be equivalent to your salary, remember that contractors only get paid for hours actually worked - no vacation, holidays or sick leave.
- make sure you know what the process is for getting paid. You will probably submit an invoice (weekly? Monthly?) and then it will have to go through their accounts payable process before they write you a check. You will be lucky if you get paid within 30 days of when you invoice them so plan on having a period with no income before the first check shows up. If possible, make sure there is a late fee if payments that are past due. It creates at least some small incentive for them to pay you on time.
posted by metahawk at 1:14 PM on June 26, 2014

And don't forget that "contract" is embedded in the term "contract work." You should hire a lawyer to create a contract or at least review one that you create yourself. You're going to be making $100k. Don't skimp on this step.
posted by Leontine at 2:36 PM on June 26, 2014 [1 favorite]

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