Contractor or
Employee?
Q: Currently I am
employed as a developer for a small company. I have no benefits
other than three weeks of vacation. I would like to start my own
business and work as a contractor for this company. What advantages
would there be to this arrangement, both for my current company and
for me?
A: Your accountant
can give you a lot more detail, but the bottom line is that
you'll need other clients to be considered a contractor. If you
become a contractor and only work for this one company, the
IRS will classify
you as an employee anyway. There is a list of rules that you can
get (your accountant or the IRS will have them) that tells you
whether you are a contractor or an employee.
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That aside, advantages for you would be more flexibility (if
they tell you when or where to work, then the IRS will say you are
an employee), the ability to find other projects (and perhaps
become in demand enough to raise your rates), and the feeling of
being your own boss. The disadvantages are that you'd have to
pay your own Social Security and employment taxes-be sure that if
you become a contractor, you get more than you get now, because
your expenses will increase. Plus, the company will have a lot less
of a commitment to you-it is much easier to "lay off" a
contractor than an employee.
Deductions
Q: I am starting an
HR Consulting and Training business. My question is very broad:
What are deductible expenses for a small, homebased start-up?
A: You'll
definitely want to talk to an accountant to get the official
version, but here is some basic data:
Any miles that you drive for business purposes-to a meeting, to
buy company supplies and equipment, and so on-can be deducted. The
easiest thing (and the most defendable to the IRS) is to get a
mileage book from any office supply store and, whenever you get in
your car, ask "Is this for business?" If so, record the
beginning and ending mileage on that trip. Some people combine
personal trips with business trips, but I'm not sure how the
IRS views that.
Other things you could probably deduct would be computer
equipment in your home office, possibly furniture and other
supplies for that office, a digital camera or camcorder if you can
show that you use it in your business, magazine subscriptions, and
meals with clients. The rules on these things are always changing,
so definitely check with an accountant.
Here are some good resources to help you:
Withholding
Taxes
Q: I have been
asked by a family in our city to supervise the homeschooling of
their three children. They would pay me $450 per week. Obviously, I
would owe taxes on this money. Would I be considered a small
business and responsible for my own taxes and FICA, or are the
people who hire me responsible for this?
A: You will need to
sit down with them and decide one way or another. If I had to
guess, I'd say that they have assumed you'll pay your own
taxes, and this is the typical way (as it is a fair amount of work
for them to make you an employee). If that's the case, then
make sure you know how much taxes and FICA you'd owe, and
subtract that from the $450, and make sure it is worth it for that
amount. You may need to negotiate a higher amount after you take
that into consideration.
Any accountant can explain this in detail, and I'd recommend
that you contact one for detailed advice. This isn't something
you want to mess around with-you want to make sure everyone is on
the same page.
Originally published in the July 2002 issue of HomeOfficeMag.com