Hi, thank you for submitting your question to Google Answers, I hope I
can provide the information you are seeking.
I AM a consultant for what that?s worth as you read this.
First, I have to tell you that you have already met the absolutely
most critical part of becoming a consultant ? you have a client
willing to hire you.
You see, unless there is some sort of licensing requirement (there
isn?t in your (our) IT procession) a consultant is simply an
independent contractor.
That?s all, nothing more, nothing less.
There are no legal requirements you have to meet other than those
which the IRS will impose on both you and the company and those are
all focused on making certain that everyone pays their proper share of
taxes.
That said; I do have some specific recommendations which will make
that task easier over the long run if you are paid enough to bother.
First, after checking with your potential client to see if they have
any objection (I seriously doubt they would), consider incorporating,
specifically as a Pennsylvania C corporation (NOT S).
There are a great many tax benefits for incorporating but, rather than
go into those, I suggest you simply buy TurboTax Corporate, it has a
LOT of useful tips about deductions which are normal business
practices for a corporation but not an individual.
For a small company double taxation is a complete myth, simply spend
all the company?s money by the end of the fiscal year, lend it enough
cash to keep operating, and you will only have the PA corporation fee
to worry about (should run about $200/year depending on several
factors.)
Unlike other forms of business, a corporation isn?t required to show a
profit ? not ever! In fact, only publicly held corporations normally
have any profits.
It also means that, unless you were engaged in some pretty nasty
criminal practices, your personal assets are never at risk if the
corporation gets sued.
Costs to incorporate in PA will run about $500-$800 to incorporate
(don?t let a lawyer charge a lot more) and this will include stock
issued to the corporation, corporate seal, and the right to open a
corporate bank account. You can incorporate online in many states but
you need a lawyer the first time, just don?t overpay, it is a very
simple and standard job.
The downside of forming a corporation is that you will have to pay
yearly fees, but if you are going to make about $40,000 a year or so,
the savings will be well worth it.
Figure also about $600/year to have a CPA do your taxes ? this is the
best way to avoid any audit problems and cheap at the price ?
especially their advice. It?s also tax deductible, as are lunches,
medical insurance, prescription drugs, leases, rent, computer
equipment, vehicle purchases (with certain restrictions that require
you to buy an SUV or something similar), professional fees, books,
what you pay for this answer, legal fees, the list goes on and on. You
can back charge the corporation for what it costs you personally to
set up the business.
If your calculations show that you are about at the break-even point
on the cost of forming a corporation, the liability shield and the
professional standing should push you over easily.
Just consider that you will probably want other clients in the future.
Would you hire Joe Blow? Or Expert IT Consultants, Inc.?
A corporation (even with one employee) makes you look very
professional and sets you far above many others who are simply
dabbling at being consultants.
Whether you go this route or not, you will also need professional
looking letterhead, or so people will tell you. Personally I have done
mine on a computer since ink-jet printers came along and do just fine.
Splurge on business cards instead.
That seems to cover ?How I can become a consultant.? You simply call yourself one.
As well as ?What is involved in becoming a consultant, including
costs, paperwork, etc?? because you can keep the costs very low. About
the only big thing is to learn the IRS rules and hire a CPA who
understands small businesses, especially corporations if you go that
route. That should run about $200 for a quick initial consultation.
?What do I have to do to be ready to accept a consultant position
offering when the company I am working for makes an offer??
Virtually nothing if you aren?t going to incorporate, just consult (!)
with the client you have lined up and ask how they want to handle
things as far as a contract goes. This can be pretty simple since they
will probably want to be able to terminate you at any time and, unless
you are extremely valuable to them, you won?t be able to negotiate
much more, but that?s a personal situation and perhaps you can.
Best pay?
Remember that you should get paid MORE as a consultant than a similar
employee would get as a straight salary because you have more expenses
(even though they are actually deductible) but that shouldn't be a
problem since the company saves money on taxes as well as bookkeeping.
See below for an estimate from the Small Business Administration.
Don't expect to gouge them, but you should expect a 10-15% bump over
what you get now unless you are already working as an independent
contractor, in which case, don't expect any increase. It may still be
a big benefit because you go from a semi-employee to a business owner
and this won't be the last place you "consult."
The client should simply get your monthly invoices (print them up
simply on a computer ? I just e-mail them plain text) and cut you a
check with no deductions at all. At the end of the year you will get a
1099 MISC.
You will need to make estimated tax payments both for yourself and, if
you form one, for the corporation, but the corporate ones should
always be zero if you plan correctly.
This site,
http://www.sendemissary.com/compass.nsf/key/irs.htm
although it goes on about many specific exceptions which don?t apply
to you, provides a good summary of the basic IRS rules used to
determine if you are an independent contractor or an employee.
Incorporating pretty much eliminates that question but you still need
to know the general rules.
By the way, check with a lawyer or CPA to be certain, but I believe if
you are later judged to be an employee, almost all the financial
burden will fall on your employer anyway, not on you ? it may not be
much of a risk for you either way.
You can begin your research at the Small Business Administration:
http://www.sba.gov/starting_business/index.html
The SBA information on the IRS rules is at
http://www.sba.gov/cgi-bin/byebye.pl?TO=http://www.ftmn.com/Employee.html
You want to download IRS Pub 1179 for more information on the rules
http://www.irs.gov/pub/irs-pdf/p1779.pdf
is probably the fastest link.
According to the SBA, an employer will save about 30% by paying a
consultant the same amount as an employee.
http://www.sba.gov/starting_business/employees/contractor.html
Remember that when you discuss compensation.
You?ll find lots of SBS stories about consulting businesses at
http://search.sba.gov/query.html?col=sbaweb&qt=start+a+consulting+business&charset=iso-8859-1
Questions to consider.
Are you a good enough salesperson to get other jobs? If not, then a
corporation may not be worth the investment.
Are you prepared to spend a day or two learning about the IRS rules
and especially the corporate rules?
Are you ready to give up any pension? (Practically nobody gets them
anyway these days.)
Are you prepared to give up unemployment benefits? Actually, if you
have a spouse or parent who can be the single required officer of a PA
C corporation, you can be a corporate employee and get unemployment
payments during slow times.
Just remember to keep things simple and inexpensive. About the only
thing to splurge on are clothes and business cards.
DO keep personal and business expenses separate. Get a separate
checking account as soon as you can do it legally (you have to ask
your bank for details.) Also, designate one credit card just for
business ? it can be one you already have, even if you form a
corporation, just file the bills and get reimbursed by the
corporation.
Also, since you have a job ready, you can accept the consulting gig as
soon as you have read over the basic IRS rules for determining whether
you are an independent contractor and negotiating payment and working
conditions.
Even if you want a corporate structure, you don?t have to wait to
start your business, all the paperwork and such can come later, the
IRS will treat you as a business from the day you say you became one
as long as you do things in a business-like fashion and quickly move
to do things correctly.
You will need an EIN, Employer Identification Number, but that?s
simple and you can actually start working as a consultant while you
wait to get it.
http://www.sba.gov/starting_business/taxes/ein.html
You just file IRS Form SS-4 to get an EIN
www.irs.gov/pub/irs-pdf/iss4.pdf
You may be able to apply online
www.irs.gov/businesses/ small/article/0,,id=102767,00.html
That?s about it, you are a consultant when you SAY you are a
consultant, just start learning the IRS and other rules pretty
quickly. But if you keep your finances honest it is easy. I recommend
you simply get business-style checks and keep all your records there,
that?s complex enough for most small businesses ? be certain you
record ALL income properly and keep as many receipts as you can
conveniently.
Forget any of the courses on becoming a consultant and such, they are
mostly about promoting yourself which is important, but something you
will do mostly by word of mouth since you already have a potential
client.
Go to work, then start the incorporation process if you go that route,
that way you won?t have any big up front expenses, as with being a
consultant, you essentially ARE a corporation/business as soon as you
say you are, but ONLY if you proceed to quickly complete the proper
forms and such.
As for any local rules, you don?t need to tell anyone you have a
business, so you can probably use your home as an office (don?t charge
that off on your taxes) and check to see if there are any special
business license rules locally, you may need to register with someone.
Use a mail drop if necessary to avoid zoning problems, and, if you
want to splurge and have a good reason, go to www.ureach.com and get
yourself a complete unified messaging system complete with answering
and forwarding services, toll-free number, e-mail, and fax services ?
it will run about $10 per month if you don?t use it excessively.
Thank you again for turning to Google Answers for your research needs. |
