Re: Should a consultant incorporate (and how)?

[tilly]

How timely. I was just having this conversation today with multiple people, including my accountant.

For me the decision is easier than for you because I have a contracting opportunity with a company that has an internal rule that they only deal with companies. So if I want the money, I need to make a company. Of course there is still the question of what kind of company I need to make.

http://www.powerhomebiz.com/vol136/structure.htm has a reasonable overview of the differences between an LLC and an S-corporation. A very superficial explanation is that with an S-corporation there is more up front cost, and more paperwork, but you can save money on things like self-employment taxes. (However be warned that if you pay yourself too small a salary the IRS can decide you're cheating and revise your division of salary/dividend for you.) You can create either fairly easily through a service like legalzoom.

However if you have created a company, a number of steps are highly recommended. Get yourself an accounting system of some sort. Any sort. A spreadsheet may be sufficient, something like Quickbooks is better. And start a filing system. If ever you are asked by a potential client or the IRS to review your books, you should have your paperwork in order to be reviewed. This means make a copy of all invoices you send. Keep a record of how much money you made.

A strongly advised step is to get yourself a credit card in the name of the company. That makes it easy to keep a clear distinction between business and personal expenses.

As for what you can deduct, talk with a CPA for that. But yes, there are lots of things you can deduct like lunch with a client, the printer you print out invoices on, etc.

Oh, and one other detail. If you're contracting you need to ask for more money than as an employee. Employers get employees at a substantial discount because they offer security and stability. Contractors get neither security nor stability and therefore can't afford to offer that discount. You have to charge enough to cover time you are not working, clients who do not pay, etc. A general rule of thumb in IT around here seems to be that for short-term contracts you can ask about double what you'd make as an employee. (Ideally double what you'd make counting benefits.) Calculating this is surprisingly simple. Suppose you make $X/year as an employee. Full-time you work 40 hours a week, 50 weeks per year, or about 2000 hours. So you're asking for $X/2000*2 = $X/1000. For longer-term contracts you will often work at a discount to this.

Oh, and good luck.