Hacker 2/HACKER2.mdf/secrets/ch2.txt

Text File | 1995-01-03 | 8KB | 134 lines

                  HOW TO BECOME AN INDEPENDENT CONTRACTOR

               If you structure your job properly, you can turn
          an employer into a client and end up getting more money
          for doing the same job by becoming an independent
          contractor.  Your former employer no longer has to pay
          your Social Security, unemployment compensation taxes,
          or workman's compensation benefits.  And he is free
          from the bookkeeping headaches of calculating and
          deducting Social Security and income taxes and
          forwarding the money to the government, of processing
          paperwork for your health insurance, and of providing
          you with supplies.
               You may be able to negotiate splitting some of
          those savings with your boss when you go solo.
               Don't dismiss this option as a wild-eyed dream
          reserved for mavericks.  Thousands of mainstream folks
          do it each year.  House painters, floor layers,
          researchers, writers, custom seamstresses, management
          experts, engineers, carpenters, electricians, insurance
          claims processors, bookkeepers, and people from dozens
          of other fields successfully turn to private
          contracting -- at least in part as a means of reducing
          taxes.
               Independent contracting won't relieve you
          completely of taxes.  But you pay income tax only after
          deducting all your business expenses, including some
          personal and fringe benefit expenses.  (More on this
          later.)
               In addition to income taxes, you pay Social
          Security tax, in the form of "self-employment tax,"
          which is about 2% or 3% less than the tax companies pay
          for employees.
               The IRS is well aware of the tax benefits of being
          an independent contractor, so follow the rules.  One
          mistake, and the IRS may attack.  The courts tend to
          back up the IRS on this issue.  You also cannot dodge
          tax withholding by going out on your own.  You must
          estimate your income taxes for the coming year and send
          a quarter of the estimated amount to the federal and
          state government each calendar quarter.
               The key to determining whether you are an employee
          or a contractor is the degree of control you have over
          your work.  The more control you have, the more you
          look like an independent contractor.   The more your
          boss can boss you around, the more you look like an
          employee.
               To appear independent -- at least to the IRS --
          you have to control the number of hours you work and
          when you work them.  It also helps to get paid by the
          product rather than by the hour.  A true independent
          contractor should also control everything about a job
          except the result.  Your client generally cannot
          dictate how to reach that result.  His only legitimate
          concerns are the quality of your product and how long
          it took you to do it.
               Eventually -- but the sooner the better -- you'll
          need to pick up more clients.  If you work as an
          employee for a number of years, then convert to
          independent contractor status, you could be in trouble
          if you still spend 90% of your time working for your
          former boss.  The IRS may view this as an employment
          relationship.  Try to line up small assignments with
          other firms as soon as possible.
               This may seem tough, but you'd be surprised how
          many new independents get flooded with work.
               Another sticky point with the IRS is office space.
          You must have an office in your home or somewhere other
          than on your former employer's business premises.  Some
          advisors say you should only have office space you pay
          for if you want to look like an independent contractor.

               Also, pay for your own office supplies and
          equipment.  Make sure you have basic supplies that make
          you look like a business -- such as stationery and
          business cards.
               Put together a written contract covering all these
          points.  It can be as simple as a "letter of agreement"
          between you and your new clients outlining the product
          you will deliver, when it is due, and what your fee
          will be.  Having a contract doesn't seal your case, but
          it creates a strong presumption in your favor.  The IRS
          will check the facts to see if the parties are abiding
          by the contract.
               Under new tax laws, the IRS looks more closely at
          these arrangements than in the past.  If you plan to
          work as an independent contractor for just one company,
          it's a good idea to talk to a professional tax advisor.
               A change to consultant with your current employer
          will allow you to negotiate your benefits to a dollar
          value included in your fees.  Take into account the
          value of benefits such as sick leave, employee
          discounts, and health, disability, and life insurance.
          As an unincorporated business, you must pay for these
          items yourself, and for the most part, they are not
          deductible on your tax return.
               The self-employment Social Security tax of 12.3%
          is a big bite and is not deductible for you or the
          business.  Balance this with the benefits.  If you
          incorporate -- an option we'll get to later -- you can
          deduct some of these expenses.  Keep in mind too that
          you may be able to get your new client to boost your
          fee to cover these items.
               If you don't incorporate, you may be able to take
          the lucrative home office deduction.  Whether you
          incorporate or not, you can deduct many otherwise
          personal expenses.
               If you're not sure about breaking away from the
          security of your job right away, start with a sideline
          business in your spare time.  You can keep your present
          job while starting on the road to self-employment and
          make the full-time jump later, if ever.
               The easiest way to do this is to make a business
          out of something that you love to do and are spending
          time and money doing anyway.  Whenever you can convert
          a personal expense into a business expense, you can
          save tax dollars.  Even if you're not realizing profit
          on it you may as well gain the tax advantage.  There
          are countless sideline business possibilities: real
          estate, accounting, free-lance writing, graphic art,
          auto repair, teaching night school, and tutoring.  If
          you make crafts for friends and relatives, start
          selling them at flea markets and fairs.  Look for
          distant craft shows, combine the business with your
          vacations and write off not only the craft supplies
          (which you were buying anyway) but also part of your
          vacations (which you were taking anyway).