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Q: The tasks involved with becoming a consultant ( Answered 5 out of 5 stars,   8 Comments )
Question  
Subject: The tasks involved with becoming a consultant
Category: Business and Money > Consulting
Asked by: jperk10000-ga
List Price: $60.00
Posted: 13 Mar 2005 22:06 PST
Expires: 12 Apr 2005 23:06 PDT
Question ID: 494229
I have been working as a co-op in the Network Operations Center within
my company for the past 6 months. My co-op ends in 2 weeks, though I
want to continue working with the company. My manager and his manager
want to keep me, though no jobs are available at present. I can't
continue as a co-op, and the resolution they've come to is to hire me
as a consultant. It is likely that a job opportunity will present
itself in the next 6 months to a year. I want to work as a consultant
with the company, and I want to get the best pay I possibly can. I'm
not even sure how being a consultant works. I'm interested in learning
how I can become a consultant. What is involved in becoming a
consultant, including costs, paperwork, etc?  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?

Clarification of Question by jperk10000-ga on 13 Mar 2005 22:47 PST
In the instance that location matters, I both live and work in
Philadelphia, Pennslvania - USA.
Answer  
Subject: Re: The tasks involved with becoming a consultant
Answered By: siliconsamurai-ga on 14 Mar 2005 03:31 PST
Rated:5 out of 5 stars
 
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.
jperk10000-ga rated this answer:5 out of 5 stars and gave an additional tip of: $10.00
Silicon Samurai,
Thank you so very much for your prompt and exceptionally insightful
reply. This is my first time using google answers, and I feel it is an
amazing resource to everyone when someone as knowledgeable and
experienced as you can offer such informative feedback. I am going to
hear from my companies HR department tomorrow regarding their pay
offering, and I will be sure to heed your advice. I will gladly
recommend you to my friends and family, thanks again!

Best regards,
James

Comments  
Subject: Re: The tasks involved with becoming a consultant
From: siliconsamurai-ga on 14 Mar 2005 05:59 PST
 
The location did matter since the costs of incorporating differ in
other states saving a few bucks by going to a cheaper state isn't
usually worth the extra hassle of operating in two states.
Subject: Re: The tasks involved with becoming a consultant
From: dreamboat-ga on 14 Mar 2005 07:55 PST
 
siliconsamurai-ga:  What a terrific answer. Good on you! :)
Subject: Re: The tasks involved with becoming a consultant
From: siliconsamurai-ga on 14 Mar 2005 09:54 PST
 
Thanks dreamer, hope the client agrees! (GRIN)
Subject: Re: The tasks involved with becoming a consultant
From: dancingbear-ga on 14 Mar 2005 15:14 PST
 
I am also a consultant who has been in business for himself for over 5
years- having transitioned from being an employee in a lrager firm.  I
thibnk you got a lot of good advice in your official google answer-
but here are a few other trhings to consider if it's not too late:

siliconsamurai said:

"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."

I would have to say that this a low for a contractor.  I would have
said that you should go for 1.5 - 2.5 x the current hourly rate for
the positon you desire.  if you price yourself too low, as in a 10-15%
increase- you may have priced tyourself out of a permanent job.  It is
easier for companies to hold on to contractors who can be easily
dismissed thant to fire or layoff employee.  If the contractor is
cheap- there is little to no incentive for the company to convert that
person to an employee with beneifts.  Assuming that if you are
employed- and you do get benefits- employee benefits are of
considerable value that contracotrs do not receive.

If you go for the lower increased amount as suggested by samurai- you
are setting yourself up for being dissapointed- since you are not
creating an incentive for the company to make you a full time
empployee.  this may seem counterintuitive at first- but in my
experience it has always been the way things work.  For example-
secretaries who are temped out are paid $10-15/hour- but the company
acutally pays the temp service $25-50/hour.  I guess what I'm saying
is don't undersell yourself- you will be happier whether they hire you
as a contracotr or an employee.
Subject: Re: The tasks involved with becoming a consultant
From: siliconsamurai-ga on 16 Mar 2005 08:38 PST
 
Jperk, thank you for the nice rating and also thank you for the nice tip.
Subject: Re: The tasks involved with becoming a consultant
From: acleverguy-ga on 18 Mar 2005 17:26 PST
 
Incorporating in Delaware is something anyone from any state can do
and still conduct business anywhere. There is some interesting
information at http://www.TheDelawareCompany.com hope it helps.
Subject: Re: The tasks involved with becoming a consultant
From: siliconsamurai-ga on 20 Mar 2005 04:58 PST
 
acleaver - Yes, obviously anyone can register in Deleware but for a
small business operating in another state it looks very suspicious to
say the least.

People use Deleware because of the laws which favor corps there and
because of the low taxes - a very personal sort of business such as a
one-person consulting business definately should not do this unless
they are actually based in Deleware.

For this client appearance is everything, if it weren't he could
incorporate overseas.
Subject: Re: The tasks involved with becoming a consultant
From: getyergig-ga on 28 Sep 2005 16:23 PDT
 
At the risk of oversimplifying - let's not forget that you can bypass
the hassle of incorporating by simply working as a W2 employee through
a reputable firm (note use of the word reputable).  Depending on the
client, you might face a procurement nightmare and lose out on a
contract simply because you're not an approved vendor.  Seek out the
top staff augmentation firms in your field and see what companies they
do business with.  If you can tell a hiring manager, "Not only can I
do the job, but all you have to do is open a PO for 'X' firm," you'll
make a permanent ally.  Few managers have the time to do business with
new guys.  If working with you means more work for them,
ooooouuuuccchhhhhh.............

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