Become Independent Blog

Business Management for Contractors

2013 Cheryl Gabatin Contracting, Independence

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Independent contractors have a great opportunity to increase their earning power. However, with an increase in earning power comes an increase in responsibilities.

In this article, we cover essential business management tips and tricks as they relate to the three different types of independent contractors: W-2’s, 1099’s, and corp-to-corp.

Independent Contractor Types & Definitions
W-2 Contractors 1099 Contractors Corp-to-Corp Contractors

Our definition: Employed by a vendor (recruiting firm or staffing agency)

IRS definition:Leased Employees

Our definition: Unincorporated Sole Proprietor. You receive a 1099-misc from your vendors (recruiters, staffing agencies)

IRS definition: 1099 who files

Our definition: Incorporated business entities (LLC, Scorp, Corps, etc). You do not need to receive a 1099-misc by vendors (recruiters, staffing agencies)

IRS definition: Definition of a Corporation

 

How to Negotiate Your Bill Rate for 1099’s and Corp-to-Corp Contractors

Client$130/hr Client’s Maximum Bill Rate
Vendor- $30/hr Vendor Commission
Independent Contractor$100/hr Your Bill Rate

The most important thing to understand about the bill rate negotiation process is the three different rates above. The first is the maximum client’s bill rate (your bill rate + vendor commission). The second is the vendor’s commission (also called the vendor’s markup). And the third is your bill rate (client’s bill rate minus vendor commission).

In general, the vendor‘s commission is the amount a vendor (recruiter or staffing agent) charges the client for fees related to the placement and processing of your contract. The vendor can charge as much as 20-30% or more of your bill rate.

Here’s the dilemma. If the client offers you a job directly (i.e. without the help from a vendor) and the client requires you to use an approved vendor to process your contract, then you may be able to negotiate a higher bill rate for yourself. The challenge is finding a vendor that is willing to disclose their markup. Here is our advice for finding them:

  • Contact us for connecting with our large network of fair approved vendors who will disclose their markups and guarantee reasonable flat fee markups.
Time & Billing T
W-2 Contractors 1099 Contractors Corp-to-Corp Contractors

Most vendors will provide you a timesheet. If not, request one.

W-2 contractors submit timesheets to vendors.

Some vendors provide time sheets.

If not, save time by using software or online applications such as those suggested below for tracking time and generating invoices automatically.

Your income will depend on your project duration, but also the payment terms of your client contracts. In most cases you will start your contract on a X net basis; this means that you will get paid X number of days after your first invoice.

Be aware of the invoice terms Net 30 or 60 as part of your working contract, but don’t worry about the delay, after one month the schedule of paychecks will normalize and you will get paid monthly or bi- monthly until your next contract.


Here is our recommended time and billing tools for saving time:

Getting Paid
W-2 Contractors 1099 Contractors Corp-to-Corp Contractors

You get regular paychecks net of state and federal taxes and your share of social security taxes.

If offered, use direct deposit. It’s paperless and convenient.

You are paid a higher bill rate (compared to a w-2’s) because you get pre-taxed earnings.

If offered by your vendor, use direct deposit. It’s paperless and convenient.

Use a separate bank and/or credit card account. Makes bookkeeping so much cleaner and easier.



Deductable Business Expenses
W-2 Contractors 1099 Contractors Corp-to-Corp Contractors

If you have an accountable plan with your w-2 vendor stating that they will reimburse you for certain business expenses, then those business expenses are not deductible.

If you have a non-accountable plan, i.e. you are not reimbursed, but you pay your business expenses from your w-2 wages, then these expenses are deductible. Read more about this on IRS.gov deductible employee business expenses.

 

Sole Proprietors (unincorporated businesses) and DBA sole proprietors report business deductions on Form 1040 Schedule C or C-EZ .

LLC Sole Proprietors (single member disregarded entities) deduct on Form 1040 Schedule C .

LLC Filing as Partnerships deduct on Form 1065.

LLC Filing as a Corporation (elected form 8832) deduct on 1120.

LLC Filing as S-Corp deduct on 1120-s.

S-Corps deduct on form 1120-s.

Common business expenseshttp://taxguide.completetax.com/text/Q13_2570.asp

 



Setting up a Bank Account
W-2 Contractors 1099 Contractors Corp-to-Corp Contractors

You will not need a separate bank account for your w-2 wages.

We recommend using a designated bank and/or credit card account for making your business transactions. This keeps your business separate from your personal transactions and makes bookkeeping, recordkeeping, and tax filing so much cleaner and easier.


Recordkeeping Tips & Tricks
W-2 Contractors 1099 Contractors Corp-to-Corp Contractors

Maintain records for deductible business expenses.

Read IRS recordkeeping guidelines

Use electronic/paperless methods. See 1099 and corp-to-corp for details.

Here are the IRS guidelines for recordkeeping. In general, paperless electronic methods are the most convenient and simple methods for recordkeeping. Electronic methods include debit or credit cards, online billing methods, and direct deposit for making your business related transactions. If you don’t have a bookkeeper, then use do-it-yourself accounting software or online applications such as outright.com ormint.com. These applications automate the itemization process of your electronic records.

 

ated Taxes Tips & Tricks
W-2 Contractors 1099 Contractors Corp-to-Corp Contractors

In general, you do not need to pay estimated taxes on w-2 wages with employer withheld taxes.

The pay-as-you-go IRS law says that any non w-2 income is subject to estimated taxes.

Utilize eftps.gov for making scheduled online federal estimated tax payments and ftb.ca.gov (for California estimated tax payments).

 

ent Savings Tips & Tricks
W-2 Contractors 1099 Contractors Corp-to-Corp Contractors
Some w-2 vendors offer 401k contribution plans. The most recommended retirement plans for self-employed independent contractors are Individual 401k, SEP,and SIMPLE. To help you with your research, here are a few sites that offer comparisons:

trustetc/compare-plans

wellsfargo.com/compare plans

bankrate.com retirement plans for self employed

americancentury/business owner accounts comparison

fidelity.com/small business compare plans chart

Learn about tax deductions for the above retirement plans here: IRS Publication 560.