1099 rates for Engineering Consultant

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Colorado Guy
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1099 rates for Engineering Consultant

Post by Colorado Guy »

I retired earlier this year, and find myself sometimes wondering how did I get things done when working (often I did not). I have held several jobs over the years, generally as a senior or principal engineering consultant in the renewable energy industry. In the last few weeks as companies are emerging from the shutdowns, I have been contacted by several companies seeking part time consulting support. For me, part time is ok, full time not so much.

My (last) company wants to rehire me as a 1099 contractor immediately for a specific task, which may be expanded (need to be careful not to go full time on this). As I had hired consultants before for the companies I worked for, am aware of current engineering consultant rates, but not 1099 rates.

Have looked at some previous BH threads on 1099 rates, generally it is up to 2x former salary, no benefits, and project expenses reimbursed. Reasonable? Thoughts would be appreciated.

A related question: I suspect that this will be less than $40,000 annually in total. What is not clear to me is the additional taxes to be paid as a 1099 contractor, and when I need to pay them (quarterly or at the end of the year)?

While I have thought of going the LLC route instead, I have not (yet) pursued this option. Would that be better overall?
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Svensk Anga
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Re: 1099 rates for Engineering Consultant

Post by Svensk Anga »

When I started consulting, I joined a tiny engineering company as a W2 employee. This company pays half the FICA tax, provides E&O insurance, etc. They take 19% of the gross billing, which leaves me with very near 2X my former salary as an hourly rate. From this perspective, 2X as a 1099 looks a bit low.
WildBill
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Re: 1099 rates for Engineering Consultant

Post by WildBill »

Howdy

Re taxes there are a lot of moving parts when you are a contractor. If you are a 1099 instead of a W 2 employee you will be filing a schedule C. To reduce your net there are multiple expenses you can write off against income. You can also contribute to a self directed employment plan, such as a self directed Keough. You can also write off health insurance premiums and Medicare premiums.

You will pay self employment tax of 15% on the net income of your business. You can also take a 20% deduction called the QBI against the net income of your business.

Head hurting yet?

The way it shakes out, there are a lot of moving parts, some of which you can control, so being a contractor is a pretty decent deal. I charge 2x what I made as a W 2 and net more on an hourly basis than I did before.but my advice is to charge whatever you think the market will bear.

Good luck.


W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
WildBill
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Re: 1099 rates for Engineering Consultant

Post by WildBill »

Howdy again

Here is an earlier thread on setting up a contracting business. References to LLCs and obtaining liability insurance are solid. LLC probably not necessary for you, E&O insurance probably.



viewtopic.php?f=2&t=313377&p=5219914#p5219914

Good luck

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
AB609
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Re: 1099 rates for Engineering Consultant

Post by AB609 »

I have a consulting business in addition to my regular W-2 job. 2X my W2 job is my nominal rate for consulting. It depends somewhat on the nature of the task, however. Travel time and remote training presentations I bill at a somewhat lower rate. I try not to squeeze the last buck out of every project as I'm interested in building business and retaining clients since repeat business tends to be more profitable.

As a 1099 consultant, you will need to file quarterly taxes with the IRS, plus State and Local as applicable in your situation. You will also need liability insurance. I also carry insurance on my business equipment as my homeowners will not cover it.

Track all you expenses and income carefully. Set up a Solo 401K so you can tax defer a good chunk of your earnings. You need to plan ahead for his since you can't do it right before the tax deadline like a individual IRA.
WS1
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Re: 1099 rates for Engineering Consultant

Post by WS1 »

Colorado Guy wrote: Fri Jul 03, 2020 7:36 am I retired earlier this year, and find myself sometimes wondering how did I get things done when working (often I did not). I have held several jobs over the years, generally as a senior or principal engineering consultant in the renewable energy industry. In the last few weeks as companies are emerging from the shutdowns, I have been contacted by several companies seeking part time consulting support. For me, part time is ok, full time not so much.

My (last) company wants to rehire me as a 1099 contractor immediately for a specific task, which may be expanded (need to be careful not to go full time on this). As I had hired consultants before for the companies I worked for, am aware of current engineering consultant rates, but not 1099 rates.

Have looked at some previous BH threads on 1099 rates, generally it is up to 2x former salary, no benefits, and project expenses reimbursed. Reasonable? Thoughts would be appreciated.

A related question: I suspect that this will be less than $40,000 annually in total. What is not clear to me is the additional taxes to be paid as a 1099 contractor, and when I need to pay them (quarterly or at the end of the year)?

While I have thought of going the LLC route instead, I have not (yet) pursued this option. Would that be better overall?
PM’d you with some off topic industry questions
Topic Author
Colorado Guy
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Re: 1099 rates for Engineering Consultant

Post by Colorado Guy »

WildBill wrote: Fri Jul 03, 2020 10:16 am You will pay self employment tax of 15% on the net income of your business. You can also take a 20% deduction called the QBI against the net income of your business.

Head hurting yet?
It's starting to. :) Self employment tax in addition to the FICA payroll taxes? I will be figuring out what my rates should be this weekend.

The QBI is something I need to look at. In essence, I will have some direct expenses (travel) that I will be reimbursed for. For the home office, I have a room set up where I actually did work while a W2 employee, internet access, phone, etc. Haven't thought of deducting this cost from the income.

"QBI against the net income"?
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Elric
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Re: 1099 rates for Engineering Consultant

Post by Elric »

Colorado Guy wrote: Fri Jul 03, 2020 7:36 am As I had hired consultants before for the companies I worked for, am aware of current engineering consultant rates, but not 1099 rates.
Consultants receive 1099's from the companies they contract with. What is it that you're thinking distinguishes "consultant rates" from "1099 rates"? If you know the going rates for consultants in your field, you're in good shape to know what companies are willing to pay.
"No man is free who works for a living." | Illya Kuryakin
Topic Author
Colorado Guy
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Re: 1099 rates for Engineering Consultant

Post by Colorado Guy »

AB609 wrote: Fri Jul 03, 2020 10:43 am I have a consulting business in addition to my regular W-2 job. 2X my W2 job is my nominal rate for consulting. It depends somewhat on the nature of the task, however. Travel time and remote training presentations I bill at a somewhat lower rate. I try not to squeeze the last buck out of every project as I'm interested in building business and retaining clients since repeat business tends to be more profitable.

As a 1099 consultant, you will need to file quarterly taxes with the IRS, plus State and Local as applicable in your situation. You will also need liability insurance. I also carry insurance on my business equipment as my homeowners will not cover it.

Track all you expenses and income carefully. Set up a Solo 401K so you can tax defer a good chunk of your earnings. You need to plan ahead for his since you can't do it right before the tax deadline like a individual IRA.
Excellent. Agree with a lower rate for travel and such, I may end up not charging for some of that time as opposed to having multiple rates. It will be situation dependent...

The quarterly taxes is something I was expecting, just not sure how to do that yet. If I start in July, I should get paid in the 3rd quarter, so file taxes at the end of the 3rd quarter? Up to now, I have used TurboTax for my annual IRS contribution, will I need to supplement this with paper Schedule C and any necessary State forms?

Regarding tracking expenses, it is advisable to set up a separate bank account for this venture, or co-mingle it with my normal Credit Union account?

Good idea about the 401k. I have nearly maxed out my corporate 401k for this year, but there is some remaining that I could contribute ($8,000). Would it need to be a solo 401k or can I place this into my existing Vanguard IRA? I am sure Vanguard could help me with the steps required.
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Colorado Guy
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Re: 1099 rates for Engineering Consultant

Post by Colorado Guy »

WildBill wrote: Fri Jul 03, 2020 10:35 am Howdy again

Here is an earlier thread on setting up a contracting business. References to LLCs and obtaining liability insurance are solid. LLC probably not necessary for you, E&O insurance probably.

viewtopic.php?f=2&t=313377&p=5219914#p5219914

Good luck

W B
WildBill, thx!

E&O insurance is a question mark in my mind, and I will look into this. I tend to think of this as only required if I have to use my PE certification, which I will not for the tasks. Where would I even start to look for this, and at what cost for a single part time consultant? This could affect my billing rate for sure...
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Colorado Guy
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Re: 1099 rates for Engineering Consultant

Post by Colorado Guy »

Elric wrote: Sat Jul 04, 2020 9:00 am
Colorado Guy wrote: Fri Jul 03, 2020 7:36 am As I had hired consultants before for the companies I worked for, am aware of current engineering consultant rates, but not 1099 rates.
Consultants receive 1099's from the companies they contract with. What is it that you're thinking distinguishes "consultant rates" from "1099 rates"? If you know the going rates for consultants in your field, you're in good shape to know what companies are willing to pay.
Perhaps you are correct, and there is no difference between a "consultant rates" from "1099 rates".

Here is the crux of my concern: The senior level (experienced) consultants I have hired last year were up to 235% of my monetary salary. While previously a consultant, I have been billed at more than that, so it is not out of line for this field. So, perhaps I could charge a higher rate.

On the other hand, for the initial task they are requesting, it is actually something I would typically assign to one of my less experienced engineers. They want me to do it as I have done it a number of years ago, and they are currently short staffed. So that encourages me to set a lower rate. On the flip side, they may be asking me for additional help in other areas which are more technically and professionally challenging, pushing me higher.
WildBill
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Re: 1099 rates for Engineering Consultant

Post by WildBill »

Colorado Guy wrote: Sat Jul 04, 2020 8:52 am
WildBill wrote: Fri Jul 03, 2020 10:16 am You will pay self employment tax of 15% on the net income of your business. You can also take a 20% deduction called the QBI against the net income of your business.

Head hurting yet?
It's starting to. :) Self employment tax in addition to the FICA payroll taxes? I will be figuring out what my rates should be this weekend.

The QBI is something I need to look at. In essence, I will have some direct expenses (travel) that I will be reimbursed for. For the home office, I have a room set up where I actually did work while a W2 employee, internet access, phone, etc. Haven't thought of deducting this cost from the income.

"QBI against the net income"?
Howdy

Hang on a minute. If you are a 1099 employee you are not paying FICA. That is the reason for the self employment tax. Basically the self employment tax replaces SS and Medicare taxes for 1099 employees. You do not pay both.

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
WildBill
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Re: 1099 rates for Engineering Consultant

Post by WildBill »

Colorado Guy wrote: Sat Jul 04, 2020 8:52 am
WildBill wrote: Fri Jul 03, 2020 10:16 am You will pay self employment tax of 15% on the net income of your business. You can also take a 20% deduction called the QBI against the net income of your business.

Head hurting yet?
It's starting to. :) Self employment tax in addition to the FICA payroll taxes? I will be figuring out what my rates should be this weekend.

The QBI is something I need to look at. In essence, I will have some direct expenses (travel) that I will be reimbursed for. For the home office, I have a room set up where I actually did work while a W2 employee, internet access, phone, etc. Haven't thought of deducting this cost from the income.

"QBI against the net income"?
Howdy

QBI is a deduction for Qualified Business Income.

Here is the deal. As a 1099 employee you fill out a schedule C. Schedule C has all of your consulting income and all of your consulting expenses. After subtracting expenses from income you have net income. You pay self employment tax of 15 % on the net. You also get a deduction of 20% on all income from QBI, which lowers your total taxable income and thus your total taxes. It is a deduction similar to the standard deduction.

Head still hurting?

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
WildBill
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Re: 1099 rates for Engineering Consultant

Post by WildBill »

Colorado Guy wrote: Sat Jul 04, 2020 9:09 am
WildBill wrote: Fri Jul 03, 2020 10:35 am Howdy again

Here is an earlier thread on setting up a contracting business. References to LLCs and obtaining liability insurance are solid. LLC probably not necessary for you, E&O insurance probably.

viewtopic.php?f=2&t=313377&p=5219914#p5219914

Good luck

W B
WildBill, thx!

E&O insurance is a question mark in my mind, and I will look into this. I tend to think of this as only required if I have to use my PE certification, which I will not for the tasks. Where would I even start to look for this, and at what cost for a single part time consultant? This could affect my billing rate for sure...
Howdy

If you have some risk associated with the work I would have E&O insurance. Only you can judge if you have any risk and what level it is. Basically if you do work and someone acts on it and is damaged you might potentially get sued. It may be very unlikely in the work you are doing. In that case skip the insurance.

If you do decide to get it, contact any insurance broker or even the guys you have your current homeowners with. A 2 million E&O policy will run about $1000 a year.

Good luck

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
Spirit Rider
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Re: 1099 rates for Engineering Consultant

Post by Spirit Rider »

Keep in mind that under the final IRS Section 199A regulations, a former employee is presumed to be ineligible for the QBI deduction for three (3) years after separation.
Topic Author
Colorado Guy
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Re: 1099 rates for Engineering Consultant

Post by Colorado Guy »

Spirit Rider wrote: Sat Jul 04, 2020 5:15 pm Keep in mind that under the final IRS Section 199A regulations, a former employee is presumed to be ineligible for the QBI deduction for three (3) years after separation.
Thank you for the clarification. I will not count on this being available then.
JonnyB
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Re: 1099 rates for Engineering Consultant

Post by JonnyB »

Colorado Guy wrote: Sat Jul 04, 2020 8:52 am
WildBill wrote: Fri Jul 03, 2020 10:16 am You will pay self employment tax of 15% on the net income of your business. You can also take a 20% deduction called the QBI against the net income of your business.

Head hurting yet?
It's starting to. :) Self employment tax in addition to the FICA payroll taxes? I will be figuring out what my rates should be this weekend.
There's a lot more to it than just taxes. You get no vacation pay, no holiday pay, no sick pay, no health insurance, no dental insurance, no vision insurance, no disability insurance, no unemployment insurance, no employer retirement contribution, no defined benefit pension,
and possibly a big one, no pay between contracts. Unless you bill by the hour, you take all the risk of contract estimates.

You can add up what all of those are worth. The point is, you are paying for these benefits out of your own pocket instead of your client's pocket. They should reimburse you for them because you are saving them the cost of those benefits as a contractor.
AB609
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Re: 1099 rates for Engineering Consultant

Post by AB609 »

Colorado Guy wrote: Sat Jul 04, 2020 9:04 am
AB609 wrote: Fri Jul 03, 2020 10:43 am I have a consulting business in addition to my regular W-2 job. 2X my W2 job is my nominal rate for consulting. It depends somewhat on the nature of the task, however. Travel time and remote training presentations I bill at a somewhat lower rate. I try not to squeeze the last buck out of every project as I'm interested in building business and retaining clients since repeat business tends to be more profitable.

As a 1099 consultant, you will need to file quarterly taxes with the IRS, plus State and Local as applicable in your situation. You will also need liability insurance. I also carry insurance on my business equipment as my homeowners will not cover it.

Track all you expenses and income carefully. Set up a Solo 401K so you can tax defer a good chunk of your earnings. You need to plan ahead for his since you can't do it right before the tax deadline like a individual IRA.
Excellent. Agree with a lower rate for travel and such, I may end up not charging for some of that time as opposed to having multiple rates. It will be situation dependent...

The quarterly taxes is something I was expecting, just not sure how to do that yet. If I start in July, I should get paid in the 3rd quarter, so file taxes at the end of the 3rd quarter? Up to now, I have used TurboTax for my annual IRS contribution, will I need to supplement this with paper Schedule C and any necessary State forms?

Regarding tracking expenses, it is advisable to set up a separate bank account for this venture, or co-mingle it with my normal Credit Union account?

Good idea about the 401k. I have nearly maxed out my corporate 401k for this year, but there is some remaining that I could contribute ($8,000). Would it need to be a solo 401k or can I place this into my existing Vanguard IRA? I am sure Vanguard could help me with the steps required.
I should note that I generally don't bill clients by the hour. I usually bill by the job but build my price internally using a labor rate and direct cost worksheet. My work in very repetitive and I'm at low risk of a project blowing up on me. My business is distinctly different from what you are doing and the fixed project cost is easier for all involved.

I would definitely recommend you open a separate bank account for your business. It makes doing taxes much easier. I also have a credit card I only use of business expenses.

For the estimated taxes, you can make a copy in turbo tax of your 2019 tax return and add in your expected consulting income and expenses pretending it happened last year. It will give you an idea of the taxes will look like next year. The program will allow you to estimate and printout the estimated tax vouchers for this year and you can pay the estimated on line. Obviously, you won't file this return -- it is only for estimating purposes. I wouldn't get to caught up on the estimated taxes. If you underestimate, you'll get a penalty but it's not that large unless you are really off.

The Solo 401K is a separate account from your existing 401K. You are acting as both the employer and employee and can make both salary deferral (employee) and profit sharing contributions (employer). You'll need to educate yourself on the rules. Your regular W2 job 401k contributions have an effect on how much you can contribute.
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ClevrChico
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Re: 1099 rates for Engineering Consultant

Post by ClevrChico »

As far as 1099 rates, a benchmark that I fall back to is: hourly rate = w2 annual salary/1000
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Colorado Guy
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Re: 1099 rates for Engineering Consultant

Post by Colorado Guy »

AB609, a lot of good material here, thank you.
AB609 wrote: Tue Jul 07, 2020 9:26 am For the estimated taxes, you can make a copy in turbo tax of your 2019 tax return and add in your expected consulting income and expenses pretending it happened last year. It will give you an idea of the taxes will look like next year. The program will allow you to estimate and printout the estimated tax vouchers for this year and you can pay the estimated on line. Obviously, you won't file this return -- it is only for estimating purposes. I wouldn't get to caught up on the estimated taxes. If you underestimate, you'll get a penalty but it's not that large unless you are really off.
AB609, let me see if I understand this, using made up numbers.
From a regular W-2 position in 2020, before retirement, made $150k, with taxes taken out.
In the last quarter of 2020, expect SS to provide $18,000 (different story, survivor benefits and such).
From Independent Consulting, over the next 2 quarters of 2020, expect to receive $30,000.

So, I can take my 2019 TurboTax, input the above 3 items, and figure out what my additional taxes will be for the Independent Consulting only, for the year, and then divide by 1/2 (only 2 quarters left), and make a 1st estimated tax payment prior to 15 Sept, 2020.
AB609 wrote: Tue Jul 07, 2020 9:26 am The program will allow you to estimate and printout the estimated tax vouchers for this year and you can pay the estimated on line.
Haven't done an online payment before. Tied to my SS number? Is it accompanied by a Schedule C Form (and/or anything else)? Looking at the IRS site, I only find 2019 versions of Schedule C available.

I assume there is something comparable on the state level as well.

Interestingly, my withheld W-2 taxes are based on a full year of salary at a specified rate, and I only worked a partial year. So, I believe I overpaid on my W-2 taxes.

Also, it looks like I need to upgrade from my TurboTax Premier to TurboTax Self-Employed. Maybe I should do that now...
Pete3
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Re: 1099 rates for Engineering Consultant

Post by Pete3 »

Haven't done an online payment before. Tied to my SS number? Is it accompanied by a Schedule C Form (and/or anything else)? Looking at the IRS site, I only find 2019 versions of Schedule C available.
https://www.eftps.com/eftps/
Yes, tied to your SS, no you don't need any form or need to show any work - you enter how much money to take from your checking account and when to take it and they ACH it out.

I would assume most states have an equivalent for estimated state income tax payments, mine does.
Topic Author
Colorado Guy
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Re: 1099 rates for Engineering Consultant

Post by Colorado Guy »

Spirit Rider wrote: Sat Jul 04, 2020 5:15 pm Keep in mind that under the final IRS Section 199A regulations, a former employee is presumed to be ineligible for the QBI deduction for three (3) years after separation.
Spirit Rider, I found the following in the IRS explanation for QBI:
Finally, the final regulations state that former employees providing services as independent contractors to their former employer will be presumed to be acting as employees unless they provide evidence that they are providing services in a capacity other than an employee.

The three-year look back rule is to avoid having a company fire someone and then re-engaged to do the same thing. As I was in management with the former company, and would be re-engaged acting only as a senior consultant for them (on a part time basis), it seems that I would be eligible for QBI deduction. Plus, I will possibly be engaged by another former company in the last two quarters of 2020 as well. For this other former company, I would essentially be acting in the same capacity (but in a part time role) that I was while at that company, and that was in 2018. I would think that this would also be ok, as it was not a situation of being fired and then re-engaged to do the same thing.

Not sure what "evidence" would be, and how it should be documented to the IRS...

If you have additional thoughts on this, please advise.
LeeInTN
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Re: 1099 rates for Engineering Consultant

Post by LeeInTN »

OP: Have you considered working through a staffing agency? It's worth considering, since that would reduce the personal hassle (Quarterlies, SET, Liability, etc) and you'd be paid as a W2. Usually there are still no regular "benefits." I'm doing this now, and although my direct 1099 Rate is about 2x my profession's standard W2 rate, my W2 rate through the agency is about 1.5 the old W2. To me, it's worth losing the 25% to have the agency cover all the other stuff. The end-user company I'm ultimately serving pays the agency about the same as my 1099 Rate would be.
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Colorado Guy
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Re: 1099 rates for Engineering Consultant

Post by Colorado Guy »

LeeInTN wrote: Tue Jul 07, 2020 12:56 pm OP: Have you considered working through a staffing agency? It's worth considering, since that would reduce the personal hassle (Quarterlies, SET, Liability, etc) and you'd be paid as a W2. Usually there are still no regular "benefits." I'm doing this now, and although my direct 1099 Rate is about 2x my profession's standard W2 rate, my W2 rate through the agency is about 1.5 the old W2. To me, it's worth losing the 25% to have the agency cover all the other stuff. The end-user company I'm ultimately serving pays the agency about the same as my 1099 Rate would be.
LeeInTN, not really, at least not yet. But I will admit it has been somewhat more of a hassle that I just didn't expect. Maybe that's just the learning curve...

Already the limited task has increased in scope from what was originally desired. I still intend to keep this as a light part time diversion, not a full time commitment.

Thx
LeeInTN
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Re: 1099 rates for Engineering Consultant

Post by LeeInTN »

Colorado Guy wrote: Tue Jul 07, 2020 5:42 pm
LeeInTN wrote: Tue Jul 07, 2020 12:56 pm OP: Have you considered working through a staffing agency? It's worth considering, since that would reduce the personal hassle (Quarterlies, SET, Liability, etc) and you'd be paid as a W2. Usually there are still no regular "benefits." I'm doing this now, and although my direct 1099 Rate is about 2x my profession's standard W2 rate, my W2 rate through the agency is about 1.5 the old W2. To me, it's worth losing the 25% to have the agency cover all the other stuff. The end-user company I'm ultimately serving pays the agency about the same as my 1099 Rate would be.
LeeInTN, not really, at least not yet. But I will admit it has been somewhat more of a hassle that I just didn't expect. Maybe that's just the learning curve...

Already the limited task has increased in scope from what was originally desired. I still intend to keep this as a light part time diversion, not a full time commitment.

Thx
Indeed! It's a light part-time diversion for me as well (semi-retired) and provides some cash for other things. The limited number of hours makes the staffing-agency thing even more appropriate for me. Just don't allow yourself to be sucked in when the headhunters pursue you with a cool full-time gig. Enjoy the break from the corporate pressure-cooker.
Spirit Rider
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Re: 1099 rates for Engineering Consultant

Post by Spirit Rider »

Colorado Guy wrote: Tue Jul 07, 2020 12:43 pm
Spirit Rider wrote: Sat Jul 04, 2020 5:15 pm Keep in mind that under the final IRS Section 199A regulations, a former employee is presumed to be ineligible for the QBI deduction for three (3) years after separation.
Spirit Rider, I found the following in the IRS explanation for QBI:
Finally, the final regulations state that former employees providing services as independent contractors to their former employer will be presumed to be acting as employees unless they provide evidence that they are providing services in a capacity other than an employee.

The three-year look back rule is to avoid having a company fire someone and then re-engaged to do the same thing. As I was in management with the former company, and would be re-engaged acting only as a senior consultant for them (on a part time basis), it seems that I would be eligible for QBI deduction. Plus, I will possibly be engaged by another former company in the last two quarters of 2020 as well. For this other former company, I would essentially be acting in the same capacity (but in a part time role) that I was while at that company, and that was in 2018. I would think that this would also be ok, as it was not a situation of being fired and then re-engaged to do the same thing.

Not sure what "evidence" would be, and how it should be documented to the IRS...

If you have additional thoughts on this, please advise.
It does not matter whether you were fired, laid off or voluntary separated. In fact, it is the latter case that the IRS was most likely concerned with. CPAs and financial planners were all over the internet proposing that high income professionals arrange with their employers to quit their jobs and go to work for them as independent contractors in able to take the QBI deduction.

It is very hard say there is a big difference between being in management and now acting a a senior consultant. Especially if this involves any of the issues you helped investigate, planned. executed, etc... Management by definition is a consulting role.

The fact that it is part-time is irrelevant.

Based on your fact pattern, by your own words. I would say you are exactly the facts and circumstance the regulations were promulgated to prevent.

When the IRS uses the word "presumed". The burden of proof is 100% on the taxpayer. You have to have compelling and overwhelming facts and circumstances to buttress their case. You simply don't have it.
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cchrissyy
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Re: 1099 rates for Engineering Consultant

Post by cchrissyy »

The people above who said you need to file quarterly taxes might be confusing you with the word choice . You only file taxes once a year same as before. The new thing you might start doing quarterly is sending an estimated payment.
deserat
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Re: 1099 rates for Engineering Consultant

Post by deserat »

"I should note that I generally don't bill clients by the hour. I usually bill by the job but build my price internally using a labor rate and direct cost worksheet. My work in very repetitive and I'm at low risk of a project blowing up on me. My business is distinctly different from what you are doing and the fixed project cost is easier for all involved.

I would definitely recommend you open a separate bank account for your business. It makes doing taxes much easier. I also have a credit card I only use of business expenses.

For the estimated taxes, you can make a copy in turbo tax of your 2019 tax return and add in your expected consulting income and expenses pretending it happened last year. It will give you an idea of the taxes will look like next year. The program will allow you to estimate and printout the estimated tax vouchers for this year and you can pay the estimated on line. Obviously, you won't file this return -- it is only for estimating purposes. I wouldn't get to caught up on the estimated taxes. If you underestimate, you'll get a penalty but it's not that large unless you are really off.

The Solo 401K is a separate account from your existing 401K. You are acting as both the employer and employee and can make both salary deferral (employee) and profit sharing contributions (employer). You'll need to educate yourself on the rules. Your regular W2 job 401k contributions have an effect on how much you can contribute."

Spirit Rider: I have been a solo engineering consultant for 12 years now. I have combined it with employment at different times as well. What is written above is good advice.

I prefer to charge by project - it's called value pricing. When people ask you your hourly rate, they usually have an overall project number in mind; I usually say I'd prefer to bill for the project as we are essentially negotiating on the final price. It cuts to the chase - most clients prefer that as it makes it easier from a billing management viewpoint. You can set it up like getting a paycheck every two weeks or month. And then deliver the work - deliver beyond what they believe they should get and you have also built in good will.k

As for your rates: ask for double what you think you might want and see what happens. If they agree quickly, you've probably underbid what they were expecting. You've got some great inside information from being on the other side. Use it. If they balk, then start talking about what you might be able to remove from your task from a value standpoint, i.e., less meetings, less reports, less items in report, fewer items to review, etc. If you immediately agree to a discount, they now know that you were sort of bluffing. You can get to an agreement, just be firm and professional. Clients appreciate the honesty. And they like to think they've gotten a good deal, as well, from an expert.

I did not set up a Solo 401K, I set up an SEP IRA. The rules and ease for a Solo 401K were different 12 years ago. I've still done fine as the amounts you can save in an SEP IRA still are much larger than that which you can save in an employer deferred account (401K or 403B).

If you do well, you will write quarterly estimated tax checks that will make you cry. Figure about close to 40-50% of what you make is paid in taxes. 15.3% for SS/FICA/etc; your federal taxes; your state taxes. That's why managing your finances is very important. The Schedule C is important as well. Read the directions for that form carefully as you will find out that a lot can be expensed against your income. Carefully track your expenses; I used to travel a lot - I would expense the travel and then add on a vacation where I was going if it was of interest. Remember, you must earn money to cover your expenses. Even better, travel expenses are paid separately from your professional fee. I would expense half my cell phone and Wifi expenses; I had a room in my house that was my office and I took the room deduction; any professional organizational dues/journal subscriptions were expensed; office supplies were expensed (computers, software, etc); contributions to your SEP IRA were included/expensed as well as payment for your health insurance/etc (I believe this is done on a separate area of the 1040). What all of that does is drive down your profit, which is what you are taxed on.

I got an EIN and set myself up as an LLC in FL. The IRS has changed their rules and wants me to use my SSN as I am considered a solo proprietor and pass-through entity. I still note the EIN on my tax documents. I have a separate business credit card and separate business bank account. All business )no personal) financial activities flow through that account.

I used an excel spreadsheet I built that tracks my expenses, income and calculates the taxes, IRA, etc. At the end of the year, I look at how much more I can put in the SEP IRA so that when I do my estimated taxes on 15 Jan, I've pretty much zeroed it all out and when I file on 15 April, there is very little owed either way.

The Nolo book on being self-employed helped me a lot. I also used a WSJ article about being self-employed to help build my spreadsheet. A lot of people use an accounting software, however, my consulting work does not require that and I just have Word templates for my invoices and proposal documents.

Hope the above helps. Best of luck to you in your new journey. I have thoroughly enjoyed being a self-employed consultant and will probably try to keep doing it even when retired. It has allowed me to stay intellectually challenged while avoiding office politics. They pay is nice, too. :-)
Topic Author
Colorado Guy
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Re: 1099 rates for Engineering Consultant

Post by Colorado Guy »

Spirit Rider wrote: Tue Jul 07, 2020 9:58 pm
It does not matter whether you were fired, laid off or voluntary separated. In fact, it is the latter case that the IRS was most likely concerned with. CPAs and financial planners were all over the internet proposing that high income professionals arrange with their employers to quit their jobs and go to work for them as independent contractors in able to take the QBI deduction.

It is very hard say there is a big difference between being in management and now acting a a senior consultant. Especially if this involves any of the issues you helped investigate, planned. executed, etc... Management by definition is a consulting role.
Good morning. A little back story that may affect this. When I was a senior consultant working for this client, I was doing a specific set of tasks. When they hired me as a direct employee (to lower consultant costs), I was quickly promoted to management. I was both hiring and building an engineering team. Two of those I trained to perform the tasks I had done previously. Shortly after I retired, those two also left the company. So, the company reached out to me to perform the work that I was not doing while employed at the company.

We definitely have differences of opinions between management and a senior consultant roles.

Edit: In any event, this is not a make/break item for me. I will probably set a rate that does not count on this tax break, and be happy if it does. Thx again.
Last edited by Colorado Guy on Wed Jul 08, 2020 7:56 am, edited 1 time in total.
Topic Author
Colorado Guy
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Re: 1099 rates for Engineering Consultant

Post by Colorado Guy »

cchrissyy wrote: Tue Jul 07, 2020 10:56 pm The people above who said you need to file quarterly taxes might be confusing you with the word choice . You only file taxes once a year same as before. The new thing you might start doing quarterly is sending an estimated payment.
Got it now. Thx
Topic Author
Colorado Guy
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Re: 1099 rates for Engineering Consultant

Post by Colorado Guy »

deserat wrote: Wed Jul 08, 2020 4:31 am Hope the above helps. Best of luck to you in your new journey. I have thoroughly enjoyed being a self-employed consultant and will probably try to keep doing it even when retired. It has allowed me to stay intellectually challenged while avoiding office politics. They pay is nice, too. :-)
Deserat, thank you, very thorough and helpful response. While ready for retirement and not working full time, one of my fears of retirement was discarding all that knowledge and not being able to use it to help others (and get compensated for...). Avoiding office politics is also a plus.

Good counsel on rate determination, although paying 40-50% taxes is not what I was thinking! I need to talk to the company regarding all the tasks they may need assistance on, and go from there.

Interesting learning experience on this side. Appreciate all the comments and advice.
AB609
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Re: 1099 rates for Engineering Consultant

Post by AB609 »

Colorado Guy wrote: Tue Jul 07, 2020 12:23 pm AB609, a lot of good material here, thank you.
AB609 wrote: Tue Jul 07, 2020 9:26 am For the estimated taxes, you can make a copy in turbo tax of your 2019 tax return and add in your expected consulting income and expenses pretending it happened last year. It will give you an idea of the taxes will look like next year. The program will allow you to estimate and printout the estimated tax vouchers for this year and you can pay the estimated on line. Obviously, you won't file this return -- it is only for estimating purposes. I wouldn't get to caught up on the estimated taxes. If you underestimate, you'll get a penalty but it's not that large unless you are really off.
AB609, let me see if I understand this, using made up numbers.
From a regular W-2 position in 2020, before retirement, made $150k, with taxes taken out.
In the last quarter of 2020, expect SS to provide $18,000 (different story, survivor benefits and such).
From Independent Consulting, over the next 2 quarters of 2020, expect to receive $30,000.

So, I can take my 2019 TurboTax, input the above 3 items, and figure out what my additional taxes will be for the Independent Consulting only, for the year, and then divide by 1/2 (only 2 quarters left), and make a 1st estimated tax payment prior to 15 Sept, 2020.
AB609 wrote: Tue Jul 07, 2020 9:26 am The program will allow you to estimate and printout the estimated tax vouchers for this year and you can pay the estimated on line.
Haven't done an online payment before. Tied to my SS number? Is it accompanied by a Schedule C Form (and/or anything else)? Looking at the IRS site, I only find 2019 versions of Schedule C available.

I assume there is something comparable on the state level as well.

Interestingly, my withheld W-2 taxes are based on a full year of salary at a specified rate, and I only worked a partial year. So, I believe I overpaid on my W-2 taxes.

Also, it looks like I need to upgrade from my TurboTax Premier to TurboTax Self-Employed. Maybe I should do that now...
Yes, I think that will work for you. If your 1099 income is only coming in the second half of the year, I think there is a way to deal with that in preparing the taxes that will avoid the penalty for only making the 3rd and 4th quarter payments, but I'm not sure of the mechanics. You don't need to supply anything with the estimated tax payments. Just the money and the voucher or pay online. I recommend paying on line. If you have a 2% cash back credit card, the card rebate will cover the CC fee and you can write the fee off on your schedule C and come out a few bucks ahead.

I would also suggest you get an EIN from the IRS (easy to do online) so as to keep your SS number off of billing documents.

You might check to see if you have a local small business incubator in your town or close by. They often offer free business startup advice and resources.

You might consider as well if you need to have a standard contract prepared that you will use for you clients. I don't currently have one but I'm considering it. I have had only one instance where I got "stiffed" on a small project (<$1000) and I'm thinking a contract would have been valuable if I decide to pursue them.
Katietsu
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Re: 1099 rates for Engineering Consultant

Post by Katietsu »

Estimated taxes are just that, an estimate. I would not worry about getting too detailed.

Also, if you already were paid $150,000 in W-2 income, you have already reached the maximum income subject to FICA. So your self employment income will only be subject to the 2.9% medicare tax not the full 15.3%.

$150 k W-2, 18k SS, and $30k consulting gets me about $41,000 in federal tax liability assuming you are single and use the standard deduction. Subtract the amount already withheld from your W-2 income and pay that in estimated taxes.
deserat
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Re: 1099 rates for Engineering Consultant

Post by deserat »

If you have a significant change in employment, you won't be penalized for not paying the similar amount of taxes from year to year.

When you do your books, you are asked about your accounting method with your schedule C, I believe: cash or accrual. I do cash. What this means is I don't book income until it is in my account.

In short, I don't pay taxes if I haven't earned any money. As a consultant, you may have quite variant income from year to year.

Read the regulations with regard to those situations where you won't be penalized carefully. It could be devastating to you financially if you go from 6 figures income to lower five figures if you give the US government an interest free loan for many months. That is why you must keep very good financial records. The timing of your income may need to be proven for the purposes of the taxes.

I have had significant swings in my income with concomitant taxes. I have never been penalized for the varied tax situations. However, I have been diligent about paying the taxes in the quarter or subsequent quarter in which the income was booked.

I do my own taxes manually and my own books manually. You can use software and/or hire a CPA. I am an engineer, so I am not intimidated by math not about reading regulations. To each his own.
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Elric
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Re: 1099 rates for Engineering Consultant

Post by Elric »

A couple of thoughts to add to the thread:
I've been a part-time consultant for about 3 years after retiring from my full-time position. Definitely DO keep records for business income and expenses. Best if you keep a business account (I found which local bank offered very low balance free business checking and a debit card that can be used as a credit card).

I keep track of my hours and travel on a simple Excel spreadsheet (Libre office or Google sheets or similar would work equally well, I already had Office). I found an invoicing template in Excel that I modified for invoicing my clients. I find the free, online Wave Accounting to be adequate for my needs, and user friendly (I'd used Quickbooks previously when I was the volunteer treasurer of a small non-profit, so I had some idea how accounting software works).

DO be sure to check what state or local business registrations and taxes are required, if any.

There is some learning curve, but it's pretty minimal and very low amount of admin. work once you set it up for the type and limited number of clients you describe.
"No man is free who works for a living." | Illya Kuryakin
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