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Consulting: Small biz or "other income"?

I've got a question about the mechanics of being a consultant, and would like to get some opinions on it.

I'm working full-time right now, and working on my Masters degree (will be done in early 2005) and I think its about time that I get a web site together for the consulting work that I plan to do when I graduate.  What I would like to do is start consulting part-time ( i.e. for small companies that don't want/can't afford a full-time consultant ) and build up my resume until I finish my Masters (my current employer is fine with me working outside of it).  Once I finish my masters I'd like to do it as my full time profession.

My question is to how do many of you consultants do this.  i.e. did you start a small company, and have that company pay you as an employee?  Do you label all of the income on the Schedule C IRS form, or do you just claim it as "other income" ?  I'm really interested in the mechanics of all of this, and if you could point me to some good reading material I would be grateful.

Andrew Hurst
Sunday, December 14, 2003

I'm in Canada, your mileage may vary.

As a single consultant, your company would likely start off as a sole-propiertership. In this case, your company taxes are included in your personal taxes. If you do need some of the legal advantages required by incorporating your business, you then have to file separate taxes for the business and yourself.

To start off, you really just have to get a business license (<$100 here), and you're off to the races.

NC
Monday, December 15, 2003

bah, proprietorship.

NC
Monday, December 15, 2003

IANATE (Tax Expert) and this is not tax advice, but basically you will need to set up your consulting operation as a business (i.e., "other income" is not the right line on your tax return). This doesn't have to be a big deal. There are various types of business structures you can use, ranging from a sole proprietorship to an LLC to a corporation. In a sole prop or a single-owner LLC, you're treated as the owner rather than an employee; your net business income simply flows through to you individually, and you declare it on your schedule C. In a corporation, the corporation would pay you more or less like an employer would, and you would declare the income as regular wages/salary (and the corp. has to handle all the payroll tax stuff).

A few other formalities to remember. You will probably need a state and possibly a city or county business license, and these various entities may require you to pay business taxes beyond your personal income taxes. Also, as a self-employed individual, you will have to file schedule SE and will be responsible for both halves of the FICA and Medicare taxes. Additionally, depending on the type of work you are doing and the state you are in, your sales or services may be subject to sales tax. So you should do your homework, but really the hurdles are not that high.

Nolo Press ( www.nolo.com ) has some very good books and Web resources that can help give you an overview of areas like these. IRS publications, if you can bear the tedium, explain all the gory details about what constitutes income and deductible expenses and whatnot. Depending on where you are, your state and city Web sites may actually have some pretty good information on steps to take to start a business. They will also have references to the local tax boards and the like, and you can presumably call them with questions and speak to actual human beings.

John C.
Monday, December 15, 2003

The contracting I've done has all ended up on a schedule C.  Put there by my accountant.


Monday, December 15, 2003

Started Schedule C.  Incorporated later.  YMMV, but here is how it played out:

Part time work is harder to get because most clients want you there. (Just like your boss).  It is also hard to get small companies to understand that "X" dollars / hour is not much, when it is more than the owner makes.  The benefit of a small client is you can talk with the owner most of the time.  Prepare for the "but what if I need you at 2:00 in the afternoon?"

Full time work, and bigger clients have bigger requirements, especially running solo.  Read John C.'s  post again.  It is good.  Also, many companies now want you to be incorporated AND carry liability.  Liability is about $1000/$1,000,000/year.  Most companies want $5,000,000 or nothing. (who knows why).  Many companies want LLCs or full Inc. to protect them from Perma-temp suits.  http://www.washtech.org/wt/printer.php?ID_Content=381    [IMHO  this has done more to undermine small business consulting than any law passed in the last 20 years.  This has been a godsend to the big consulting firms who use it to scare potential clients into believing we are all going to sue them later for millions. -- stepping down off my soapbox now]

If you have anything of value, house, cars, etc. Buy at least some liability insurance or be certain you contract places all liability on the client.  Also in the US, you can no longer incorporate to protect your personal assets.  Incorporation protects everyone else, not the individual who incurs the liability.

Good luck...

MSHack
Monday, December 15, 2003

A good overview of contracting and consulting:

http://www.it-proletariat.com/HowToBeAnIC.html

And in the "click your heels three times and you're in Kansas" department, the Angry Coder describes the mindset of independent consulting: (actually, it's a good article, IMO Jonathan has had success come much easier than most of us who don't come from a top tier consulting firm background):

http://www.angrycoder.com/article.aspx?cid=6&y=2003&m=12&d=10

Bored Bystander
Monday, December 15, 2003

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