Contract Employee Corporation
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Why not set up your own company?

If you've been let go from your job at a "normal company", or if you've simply come to the conclusion that you don't want to work for someone else, your might decide to start your own company.

You can open a store, or diner, or take a chance on a francise, but maybe you want to get into the "fee for service" kind of business. You take your expertise in computing, or managing, or doctoring, or building, or whatever, and, for a fee, you rent yourself out to clients.

While there are lots of names that apply to this..."consultants", "contractors", "temp workers" lets call them all "contractors".

There's one thing that distinguishes a contractor from normal company employees. Normal companies report how much they pay normal workers to the IRS using Form 941...and the employee gets a Form W2 each year that they must in turn file with their income tax returns. For contractors, a company uses an IRS Form 1099, both to report to the IRS and to give to the contractor. The contractor files the Form 1099 with their income tax return, and is responsible for paying all of the taxes related to this.

As an Individual
 
Your Gross Revenue
- IRS Allowable Expenses
- IRS Allowable Benefits
- Business Insurance Costs
- Accountant Fees
- Legal Fees
- Finance Charges
=  Your Gross Wages
-   Self Employment Taxes
-   Employee Taxes
-   After Tax Benefits
-   Non Allowable Expenses
-   Non-available Benefits
 
=    What's left.....
       (Your Take Home Pay)
 
  
Let's look at how that all works.

As an individual, you choose to be either a "sole proprietor" or form a company. As a sole proprietor, you can simply hang out a sign that says "open for business" and you start collecting the money.

If you form a company, chances are you want a lawyer or accountant to help you do that. There are many ways you can put a company together...LLC, C Corporation, S Corporation, etc. Some have better tax advantages than others, but in general the accounting all works the same.

You charge your clients for your services. You might charge by the hour, day, week, or job, but no matter how you charge, this is Your Gross Revenue.

Because you are a "company", you are allowed by the IRS to pay for some expenses before you deal with taxes. Your report your IRS Allowable Expenses on Schedule C.

The IRS does allow certain benefits for sole proprietors or single person companies to be paid with before tax dollars. These IRS Allowable Benefits include medical insurance, certain type of retirement programs, and few other categories.

If you're confident that your work can "do no harm" or if you're willing to bet your house and home that if you do cause someone a problem, they won't sue, you might not carry Business Insurance. Obviously, you're taking a risk if you don't, but honestly many small companies and independent contractors get along quite well without it. Sometimes, however, your client may require that you carry liability insurance before they will even do work with you.

Unless the busines you're in happens to be accounting, you probably have an accountant that looks after all the legal fees and taxes a business has to deal with. And, you almost certainly have a lawyer to keep you out of trouble. You have to pay both.

Next comes Finance Charges. Again, this is not something most people think about. Here's the way it works: say, on Monday, you bill your client for work you did last week...does the client usually write you a check right then?

No. Usually, you don't actually get paid for that work until several weeks...or even months...later. That's all right if you've been at it for awhile and have lots of previous invoices outstanding, and you can count on one or two checks showing up each week. But, each time you start a new project, or if you've been on vacation or sick, or if your clients Accounts Payable person goes away for awhile, you have to wait on your money. If you're prudent, you've put a little money in the bank for such times, but if not...dust off the credit cards. That's where the Finance Charges come in...it's the cost of borrowing money to help your company handle "Cash Flow". Depending on a lot of things, this can be considered a legitimate business expense, and therefore allowed by the IRS. But again, it depends on if and how you set up your company.

Anyway, after all that, what's left is your Gross Wages

Out of this comes Employee Taxes AND Self Employment Taxes. Most people recognize the first, but might, initially, overlook the second. Self Employment Taxes are an additional set of taxes that the IRS and certain states require self-employed individuals to pay. Basically, this is the same as the Employment Taxes that a normal company pays for the privilege of having employees...Social Security, Medicare, and (in some states) Unemployment and Disability. Although most sole proprietors and single person companies do indeed deal with the first two, most ignore the others. Some states may charge you a penalty if they find out about that...and, at the very least, you won't be able to file for unemployment when you're not billable.

Next, you pay for whatever After Tax Benefit Cost and Non Allowable Expenses that you can't claim on your income tax returns. The biggest hit usually comes from medical insurance. This year (2004) the IRS does permit 100% of medical insurance premiums as a deductible tax item. But...this has to be in a plan set up by your business...and you can't be eligible for another plan, like your spouse's, and...there's a whole bunch of other rules that apply. You need a tax professional to wade through it all.

Anyway, what's left is what goes in your pocket.

Sounds good, right? Well it can be better...and that's where Contract Employee Corporation comes in.
Copyright, 2004 - Contract Employee Corporation. - All rights reserved.
Disclaimer: Note that this site is still under construction. Details related to the concept presented here may change before the site is completed.