Self employment pitfalls ?

[Russell]

I currently work as a techie at a company through a contracting firm. The contracting firm charges the company I work at $15/hr more than what they pay me. I haven't gotten a raise in 5 yrs and its making me upset.

I've been thinking about forming my own 'contracting firm' to cut out the middle-man, they do nothing more than cut my paycheck and I don't need to pay them $15/hr for that or do I ? From what little I've read here about the self-employment taxes, ss and medicare etc I'm not sure if I'll see that $15/hr ?

Is there a way to calculate this ?

Second, would it be wise to start off as an LLC or sole-prop etc ? In the future, I might recruit a few new people and place them at other firms as consultants/contractors like myself.

[jmjj215]

Just plan on paying 15.2% for SE taxes, THEN income taxes. Start off as a SP - you don't even know if you're going to make money yet! The organization can come a bit later. I personally would incorporate as an S corp so you can get the SE tax benefits.

[34saving]

Do you do your taxes with TurboTax (or something like that?) If so, go through a re-calculate them based on your status as a sole prop. (Just make sure you do a "save as" with a NEW file name like "JUNK sole prop. stuff" or something.) That should give you a good idea where you'd be. (Dad always said 50% of Mom's income (after deductions) went to the government. She was self-employed as a piano teacher.) Everything I know about an LLC is that it isn't really worth the paper it's written on. A LLC is only worth what you're willing to pay a lawyer to defend it. Good luck!

[sweeps]

Russell, aside from the tax issues, are you sure that the client will work directly with you? Some companies contract exclusively with one or more agencies, and this could effectively shut you out from working with them.

Second, don't forget about liability insurance. Your contracting firm may be protecting you from liability. If you go out on your own, you may have to foot the bill for insurance.

[cicy33]

Insurance is exactly what you should be worried about. As others have said and I will add a few more here. My husband owns his own business. He installs siding and windows. Basic liability insurance is about $700 a year. We do some work that is just from us and some work that is contracted through companies, cuz well, income is nice! And since many companies he subs for require workers comp (even though we have no employees) that is another 700 a year. We are responsible for everything that breaks, goes wrong, and waiting for a check. When you work for someone else you get a guaranteed check every week or bi weekly, when you work for yourself, some companies pay 30 day net, some 45, and some even 60. So you have to keep going without money for those days. As said above, SE taxes will bite you in the butt. There are good aspects however, I don't want you to think that there isn't. You set your schedule. If you need time off you get it without a lot of grief. Everything from your cell phone to a portion of your home is a write off. But don't think that you are going to get rich doing this.

[jmjj215]

Ah, I disagree - you could get rich Tread carefully when writing off a portion of your home as well. And I just discovered, much to my dismay, that many states tax S-corps to some extent. Bleh. They get you from every side and then blow your money on stupid, ineffective programs.

[cicy33]

we are a simple sole proprietership. I do all the books out of our home so i am allowed to deduct a portion of all the house bills; electric, water, etc. for having an office in my home. I don't do our year end taxes I have his aunt do them, she is a cpa. And true, you COULD get rich but the likelyhood isnt' strong. Actually more than 1/2 the home businesses started each year fail.

[JBinKC]

Besides the SE tax hit you have the insurance hits liability, health, etc and the inconvenience of the record keeping and accounting for it however, you can deduct many more expenses you probably couldn't take advantage of while you were employed. I still contend income earned from financial transactions remain the best way to retain your money.

[Russell]

Thanks for the input guys. After some calculations it seems that there won't be a $15/hr difference after all the taxes and insurance. For now I've decided to look for a permanent position with a higher pay. Its amazing how much uncle Sam takes from you when you start your own business, quite discouraging to say the least.

[Snoopy2645]

I work as an IC I guess I am self employed the downfalls for me are taxes & social security & no insurance but dh covers that so I am lucky thier. ANother is if I have something come up sick kids or whatever I cant really call in. I will however call in if I am sick but that is very rarely maybe 1 time a year but that hurts my status if these companies get mad they wont keep you as contractor.

[jmjj215]

Originally Posted by cicy33

we are a simple sole proprietership. I do all the books out of our home so i am allowed to deduct a portion of all the house bills; electric, water, etc. for having an office in my home. I don't do our year end taxes I have his aunt do them, she is a cpa. And true, you COULD get rich but the likelyhood isnt' strong. Actually more than 1/2 the home businesses started each year fail.

Anyone starting a business should read "The Magic of Thinking Big". Going in w/ an attitude of, "well, I have a 50/50 chance of failing" doesn't do much good at all. Being realistic is one thing. Selling yourself short is an entirely different subject all together.

[Russell]

Speaking of reading, does anyone have recommendations for a book on the topic of starting a business that details tax laws, types of businesses etc. I'm not a big fan of books over 200 pages though

[cercis]

Russell, I'm not sure you're really going to find what you need. Each state has different laws and it's going to be next to impossible to have a book cover the whole nation.

I think, though, there are some "business for dummies" books that might help. They should give enough information to allow you to know what you need more information on.

I set up businesses through work, but I don't pretend to even understand much of what I'm doing. My boss gives me the info, I draw up the documents (simple yes or no questions) and then he explains the docs to the client.

[jmjj215]

Russell, as much as I hate to say it, the IRS website is quite informative.

[cicy33]

You can also call and speak with someone and actually I have found that some of them are really nice and helpful. I did say some.

[akaivyleaf]

That was going to be my recomendation, start with the IRS, then your state's website. As an owner of a business, my primary focus was to see how much it would cost me, before employing myself or anybody else. Insurance is the biggest chunk, even bigger than taxes, which in many cases I can defer to my client, but Insurance and equipment are huge.

[debtfreeme]

you should also check with teh small busness association here in CA. It is pretty good and tehre should be organizations where ever you are located in So Cal that work toward helping people start their own business if that is what you choose to do.

Any class at a community college entitled business 100 or 101 or something along those line should help you figure out type of business, busines and marketing plans, etc. My clas last year was very informative and i enjoyed it tremendously and all my home work was geared toward opening my own CFP or budgetary assistance office. So my business plan has already been evaluated and gone through the eval with business leaders and lenders in my area who told me what to fix, do, look for and whether they would fund my or let me fly alone. check into it.