How can independent consultants drive down their taxes?
What are your business structure options?
Independent Consultants (ICs) land in this career due to 2 different situations:
1) This career is chosen. ICs can have as many projects/clients as they want. They create their own rates, work their own hours, and so forth.… all while being able to write off all business-related expenses in order to reduce tax liability. The independence from corporate bureaucracy can be a breath of fresh air.
2) This career is forced upon them. This happens when an individual is given a project to complete, rather than a full-time job (projects are becoming a typical way for companies to get work done in this new era). This contractor is now a consultant running his/her own business! The IC has to now handle all the tasks and strategies that go along with being a business-owner.
What business structures are options for the Independent Consultant?
1) You can choose to run your consulting company showing income solely on 1099’s. Your business related expenses can all be written off to decrease your tax liability. The negatives to this structure are: a) some clients are unable to work with 1099s (compliance issues), b) you’ll need to hire brokers (to get your own health care and business insurances) and you’ll need to hire an accountant/bookkeeper to organize your back-office tasks and deal with your taxes (quarterly payroll taxes and tax optimization). You are able to invoice your clients and handle the collection calls yourself.
2) You can legally set up a business. There are several legal structures in which to set your business up. The most common forms of business are sole proprietorship, partnership, corporation, S corporation and a Limited Liability Company (LLC). Go to http://www.irs.gov/businesses/small/article/0,,id=98359,00.html for specific information on the details of these forms of business. An Accountant will be helpful in order to choose the type of structure (you can set up the business on your own or hire an attorney), and then the accountant will help you determine the rules for your corporation and expenses, help you with P&L statements, balance sheets and possibly file your taxes. You will choose insurance brokers to help you get your own health care insurance and business insurances (Workers Compensation, Liability, Errors and Omissions, etc.).
3) Another method for running your consulting business would be to work with an employer-of-record. If your chosen employer-of-record uses an IRS-approved Accountable Plan, you can reduce your taxable income by all of your business-related expenses. They will file all of your quarterly taxes, and possibly provide health care insurance and business insurances (such as Workers Comp, Liability, Errors and Omissions, etc.). With an employer-of-record, an Independent Consultant can get away without needing the help of insurance brokers and accountants or bookkeepers. Though they will be in essence a W2 employee, they can have as many projects/clients as they want, choose their own rates, work their own hours, and so forth.…all while being able to write off all business-related expenses in order to reduce tax liability. Employer-of-records also provide all the back-office services (invoicing/collections and payroll) too.
Lots to choose from… Happy exploring!
Jill Freeman is a consultant’s consultant. For more information on this message or on the employer-of-record model, contact her at [email protected]