Working as an Independant Contractor

[Kelly_Bramble]

Reposted for mmdeacon..... I lost it original post somehow...

mmdeacon has just posted in the Engineering Main Forum forum of Engineers Edge Engineering Forum under the title of Working as an Independant Contractor.


Here is the message that has just been posted:
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I have been offered a job as an independent contractor doing Industrial Engineering work for a start up company. I have three questions: 1) How should I set a pay rate? This will be a IRS form 1099 position. 2) What do I need as far as independent contractor insurance? 3) Anything else that's really important that I need to know about?

[Kelly_Bramble]

Technically, your question is outside the purview of this forum; however I think answers to your question could be helpful. I’ll assume you are working in the USA.

Pay rate: As a general rule most contractors/consultants charge 3X the industry standard pay rate for the job being done.

The reasons (logic) are:

Your tax rate on these earned monies goes up. When you work for a corporation you’re actually splitting parts of the tax bill with your employer – they pay some and your pay what you see on your pay check. Your effective tax rate should be about 40 – 60% more than is you work in a corporate environment. The good news is that you can write off expenses if you’re a LLC or declare your self as a proprietor. So, your taxable rate is equal to revenue(income) – cost of doing business(expenses) = net. Net is what you pay taxes on.

The first year you can file your taxes on your earnings normally (April 15), however the second year and beyond you will be required to pay taxes quarterly.

Depending on what state you live in, I recommend you take between 40 - 50% of your net income and save for federal taxes plus a percentage for state taxes if you have it. In my state (Georgia) I keep 5% for state taxes. If you don’t plan and save your taxes it will be painful come tax time.

Insurance: Contractor insurance? I don’t know you need to ask your client/customer what their requirements are while on site. Yes, you need to increase your rate to reflect this cost item or bill your customer/client for this.

For personal medical insurance – this is where you will get an education on what’s wrong with our medical system – expensive and insurance and medical companies are sneaky!! I recommend you buy major medical coverage so you’re not financially destroyed by the medical industry if you break a toe or equivalent. Just pay for office visits out of your pocket.

If I think of anything else I’ll post here…

[jboggs]

1) First, this is not a "job". Don't mislead yourself into thinking that way. You will be an independent business providing value for a fee. No value, no fee. No need, no value. Don't fall into that "employee" mindset. That's dangerous.

2) The best way to set a rate is to investigate the rates others in your area in similar fields are charging for their work. Ask around. Contact old buddies. Build your network. Contact other similar businesses to see what you can learn from them. Go above and beyond. Get creative. You're not an employee, you're a business man.

When I was an independent contractor I always preferred fixed fee / fixed scope arrangements when possible. That way you never get questions about documenting the hours you worked. The down side is that you have to be VERY GOOD at defining a FIXED scope of work and FIXED deliverables up front that you and your client both clearly understand. Your client will inevitably request additional work. He has to understand that your first response will be to clarify exactly what this additional work is, and what the additional fee will be BEFORE YOU BEGIN THE ADDITIONAL WORK.

However fixed fee projects are not always possible, especially in the beginning of a new relationship. In that case I recommend starting with some very small projects of limited scope that will produce something of value for the client, but more importantly will help you both learn about working with each other. You can do that without creating a big financial risk for either of you. You should still try to clearly define as much of the scope of work, the deliverables, the schedule, the fee, and the payment schedule as possible up front before starting. The client will appreciate someone that approaches their work professionally. Then its easier to build on that relationship with the next larger step.

One other tip - when I was working on hourly arrangements I always tried to make sure my client received an invoice for my services SOON AFTER he had received the deliverables. In 10 years I never had a single client refuse to pay, or even delay it.

3) Insurance? Well what kind are you talking about? Personal health and medical? Professional liability? Workers compensation? Errors and omissions?

[mmdeacon]

Thanks for your comments jboggs and Kelly Bramble, The opportunity is in California. The type of insurance I am asking about is Professional Liability Insurance as well as Workers Compensation and Errors and Omissions.

[jboggs]

State laws will apply, so check them out. Also your client may have some requirements about Workers Comp and Errors and Omissions. Some of mine did. Beyond the minumum requirements of the state and your client, anything else is purely up to you. Make sure you understand the risks and check your gut for "risk vs cost" analysis.

[PinkertonD]

Get an Accountant if you do not already have one and makes sure they are a CPA. It is money well spent. They can advise youon a lot of the financial stuff before you start.

Consider creating an Inc. or LLC and request the IRS issue you S-Corp status that way you are only Taxed once on the total income. Also a LLC or Corp. (I prefer Corp.) can indemnify (virtually) against liablity and save on the insurance. If the company is worth $2, let them sue.

Medical insurance for sole operator? Forget it.