Consulting: Sole Prop vs Employees: 401k and other issues

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Saving$
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Consulting: Sole Prop vs Employees: 401k and other issues

Post by Saving$ » Sat Sep 06, 2014 11:45 am

Hoping some of the consultants on this board can offer advice or links that have advice.

Consulting as an employee of a consulting company is simplest and safest, yet the least flexible.
Consulting as a Sole Proprietor or the only consultant in your own LLC trades some safety/predictability of income and admin for greater flexibility. If your LLC is a pass through for tax purposes, the admin of your own health insurance, paying quarterly taxes and a Solo 401k is relatively uncomplicated.

However, if you are good at what you do, ideally your business would grow and your client would want more of your time. What is the defining line of your client hiring your LLC on an hourly basis for tasks y and z, when the total of those hours becomes full time and you are working exclusively for one client. Do you need to have more than one client of the LLC? What about if you only want to work part time and have one client? The question is, when do they need to call you an employee rather than a consultant? Does it matter if your agreement with them is with your personally or with your LLC?

What about if your LLC needs more people when the client project grows, and completing the tasks takes more than full time? That gets into complications of employees - payroll taxes, you can no longer use the Solo 401k, etc. etc. It seems the overhead of adding that first employee would cause a big financial hit.

I see that many consultants outsource certain components of certain projects to other consultants. What is the defining line in sub consultants vs. needing to have these sub-consultants be regular employees? As long as that sub consultant is not 100% on your project, and has other clients, is that ok?

Spirit Rider
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Re: Consulting: Sole Prop vs Employees: 401k and other issue

Post by Spirit Rider » Sat Sep 06, 2014 12:58 pm

Saving$ wrote:Hoping some of the consultants on this board can offer advice or links that have advice.

Consulting as an employee of a consulting company is simplest and safest, yet the least flexible.
Consulting as a Sole Proprietor or the only consultant in your own LLC trades some safety/predictability of income and admin for greater flexibility. If your LLC is a pass through for tax purposes, the admin of your own health insurance, paying quarterly taxes and a Solo 401k is relatively uncomplicated.
Yes, being an employee is the simplest with the least flexibility. However, safest might be an illusion. I have just been laid off from one of the largest business services divisions of any company in the US. This will mark the fourth time in forty years from different companies. Six years of declining profits (not revenues) will cause even the largest companies to reduce staff. I survived many rounds and actually was the last technical person left in the SBU. When you are an independent contractor you have much better predictive capability that your services will no longer be needed then as an employee.
However, if you are good at what you do, ideally your business would grow and your client would want more of your time. What is the defining line of your client hiring your LLC on an hourly basis for tasks y and z, when the total of those hours becomes full time and you are working exclusively for one client. Do you need to have more than one client of the LLC? What about if you only want to work part time and have one client? The question is, when do they need to call you an employee rather than a consultant? Does it matter if your agreement with them is with your personally or with your LLC?
The length of the contract and only having a single client are just two of many considerations that factor into whether or not you should be classified as an independent contractor. You can clearly structure your relationship such that these are not binding factors. Whether you are a sole proprietor, LLC (disregarded entity), LLS (S-Corp election), or corporation (S or C) is also another consideration. You can have a dozen other factors that strongly dictate you are in fact an independent contractor. However, sometimes whoever is responsible for compliance at a company will use one or more of the above as mandatory determinants (for example, all contracts limited to one year).
What about if your LLC needs more people when the client project grows, and completing the tasks takes more than full time? That gets into complications of employees - payroll taxes, you can no longer use the Solo 401k, etc. etc. It seems the overhead of adding that first employee would cause a big financial hit.
It isn't necessarily so much a financial hit. Employee management, i.e payroll, etc... are fairly inexpensive these days. It is really just the loss of the Solo 401k that hurts. Here the trade off is you either pay $2K-$3K for one of the best small business 401k plans, have a somewhat less beneficial (to you by about $5K) SIMPLE IRA with minimal expenses, or a SEP IRA that the percentage contributions have to be the same for all employees and no expenses. Also, you can generally exclude new employees from the plans for at least a year (depending on plan type and options selected.)
I see that many consultants outsource certain components of certain projects to other consultants. What is the defining line in sub consultants vs. needing to have these sub-consultants be regular employees? As long as that sub consultant is not 100% on your project, and has other clients, is that ok?
Here again there are ways to proactively structure the contract such that they are clearly independent businesses providing you with services. 100% on your project is not necessarily a go/no-go consideration.

assumer
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Re: Consulting: Sole Prop vs Employees: 401k and other issue

Post by assumer » Sat Sep 06, 2014 1:00 pm

What is the defining line of your client hiring your LLC on an hourly basis for tasks y and z, when the total of those hours becomes full time and you are working exclusively for one client.
That's such a personal question. As with consulting versus employment, and pretty much most financial decisions you make throughout your life, you are trading security for freedom.
Do you need to have more than one client of the LLC?
No.
The question is, when do they need to call you an employee rather than a consultant?
There are both legal as well as accounting answers to this question.

Legally: It's somewhat subjective, but it depends on if they dictate how you do the work or just what you need to provide. You should really pay a lawyer the $500 and get a professional answer.

Accounting: My accountant sent me this: IRS publication (page 2), for specific states here is New Jersey's.
What about if your LLC needs more people when the client project grows, and completing the tasks takes more than full time? That gets into complications of employees - payroll taxes, you can no longer use the Solo 401k, etc. etc. It seems the overhead of adding that first employee would cause a big financial hit.
You can subcontract it out instead of having employees, as long as you don't treat them as employees (see the latest court case last week with Fedex which will likely get appealed and reversed).

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Zabar
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Re: Consulting: Sole Prop vs Employees: 401k and other issue

Post by Zabar » Sat Sep 06, 2014 2:29 pm

Saving$ wrote:However, if you are good at what you do, ideally your business would grow and your client would want more of your time. What is the defining line of your client hiring your LLC on an hourly basis for tasks y and z, when the total of those hours becomes full time and you are working exclusively for one client. Do you need to have more than one client of the LLC? What about if you only want to work part time and have one client? The question is, when do they need to call you an employee rather than a consultant? Does it matter if your agreement with them is with your personally or with your LLC?

What about if your LLC needs more people when the client project grows, and completing the tasks takes more than full time? That gets into complications of employees - payroll taxes, you can no longer use the Solo 401k, etc. etc. It seems the overhead of adding that first employee would cause a big financial hit.

I see that many consultants outsource certain components of certain projects to other consultants. What is the defining line in sub consultants vs. needing to have these sub-consultants be regular employees? As long as that sub consultant is not 100% on your project, and has other clients, is that ok?
There's a fundamental problem with your logic. In my experience, having worked as an independent consultant for quite a few years, most highly successful consultants don't charge by the hour; they charge by the project based upon its value to the client. There's an inherent conflict of interest in time-based charges. Also, it punishes the consultant for efficiency.

I've never had a problem subcontracting work when needed for projects. If the subcontractor has a Sub-S Corp or LLC, they have an EIN, so there are no tax issues. For individuals, I make sure that they meet the IRS requirements for subcontractors vs. employees. That way, a Solo 401(k) isn't affected.

I've had employees and run solo. These days, it would take a lot for me to hire anyone as an employee since I can purchase so many services just when I need them.

WhyNotUs
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Re: Consulting: Sole Prop vs Employees: 401k and other issue

Post by WhyNotUs » Sat Sep 06, 2014 9:09 pm

IRS publication, some states will have supplemental rules.

http://www.irs.gov/pub/irs-pdf/p15a.pdf

Not an IRS expert and have never been audited, YMMV.

I have had years when I only had one client and was independent contractor. However, I have 25 years of Schedule Cs and many, many clients. In general, I think showing a variety of clients makes your case.
When I need help, they are independent contractors. While I provide direction, I rely on the fact that the individuals are contractors with other clients and maintain their own business identity. There are a pool of people that I am comfortable working with and we join forces when the project calls for it and work independently most of the time.

Not much reason for taking on employees unless that is your business plan, in which case you could set up your business for that from the start as an S-Corp. Work with CPA to set it up correctly from the start.
I own the next hot stock- VTSAX

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vitaflo
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Re: Consulting: Sole Prop vs Employees: 401k and other issue

Post by vitaflo » Sat Sep 06, 2014 10:47 pm

Zabar wrote: In my experience, having worked as an independent consultant for quite a few years, most highly successful consultants don't charge by the hour; they charge by the project based upon its value to the client. There's an inherent conflict of interest in time-based charges. Also, it punishes the consultant for efficiency.
In my experience it is the exact opposite, because clients will always attempt add scope creep to get more for less. Also, I don't know how many times I've been asked to do a fixed bid project for $10k, tell them I bill on time and materials only, and they agree and I end up contracting on the project for 10 months. If I would have taken the bid instead of just charged for time, I would have missed out on 90% of the income.

Of course part of this depends on the type of contracting you do, but businesses will always think short term and not see how long something will actually take, which is why I never take fixed bid projects.

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Zabar
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Re: Consulting: Sole Prop vs Employees: 401k and other issue

Post by Zabar » Sat Sep 06, 2014 11:37 pm

vitaflo wrote:
Zabar wrote: In my experience, having worked as an independent consultant for quite a few years, most highly successful consultants don't charge by the hour; they charge by the project based upon its value to the client. There's an inherent conflict of interest in time-based charges. Also, it punishes the consultant for efficiency.
In my experience it is the exact opposite, because clients will always attempt add scope creep to get more for less. Also, I don't know how many times I've been asked to do a fixed bid project for $10k, tell them I bill on time and materials only, and they agree and I end up contracting on the project for 10 months. If I would have taken the bid instead of just charged for time, I would have missed out on 90% of the income.

Of course part of this depends on the type of contracting you do, but businesses will always think short term and not see how long something will actually take, which is why I never take fixed bid projects.
When a client tries to expand the parameters of a project, I point that out and tell them that we'll need an additional contract for the additional work. That takes care of scope creep.

Of course clients don't know how long a project will take. That's why they need the expertise of a consultant. But that expertise means that you, the consultant, should have a good idea of how long it will take. More important, the consultant should have a good idea of the value of the results of the project to the client. That, not the time involved, should be the basis of the fee charged.

This is a radical concept for many consultants. Even when they give a fixed bid, they calculate it by estimating hours. I take a value-based billing approach. Time limits what you can charge; value does not. Time-based consultants are often viewed as "vendors," as if they are commodities. Value-based consultants are viewed as peers.

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