Considering Independence? Know Your Options
Anyone who’s ever considered working independently has probably approached this decision with caution. And no wonder: Outside the comfortable structure of full-time employment lies a seemingly chaotic and intimidating sea of new challenges.
Unfortunately, the apparent complexities of career independence keep many talented professionals from ever realizing the increased money, control, flexibility and satisfaction that comes with consulting. But the choices aren’t nearly as intimidating as you may believe. In this article, I’ll go over the most common independent career options, briefly outlining the pros and cons of each.
1099s—so named because of the tax form they must use—work completely independently and usually sign contracts directly with clients. 1099s are typically individuals who can find contracts on their own, without relying on placement services or staffing companies. While 1099s generally don’t have to pay part of their hourly rate to an intermediary, there’s a catch: Many companies shy away from using 1099s due to potential tax law violations. Remember Microsoft a few years ago? Its 1099s were reclassified by the IRS as employees, resulting in severe financial penalties. Also, 1099s are responsible for paying self-employment taxes and “employee-side” taxes, and they must file tax estimates quarterly.
Single-person corporations (SPCs) are individuals who incorporate themselves as their own businesses. This carries the huge benefit of limiting personal liability. Like 1099s, SPCs can typically find work without placement services, must pay both employer- and employee-side taxes and represent potential risks for clients. SPCs also have startup costs to establish their corporations and bear the ongoing weight of increased administration, tax and legal considerations. In general, the SPC option is suited for experienced individuals who are accustomed to the responsibilities of independence.
W-2 independents work on contracts with various clients but are technically employees of a different company (and therefore use the familiar W-2 tax form). While there are two distinct avenues that W-2 independents can take, they all have some advantages in common. Most notably, their employer executes their contracts and provides “corporate-like” administration and benefits (payroll, insurance, client billing, collections, retirement, etc.) For W-2 independents, convenience is paramount—which makes either choice appropriate for newcomers:
- W-2 Through Staffing/Placement Companies. More individuals work through staffing companies than any other option. Why? Staffing companies are convenient on four levels: They match you with open contracts, they have relationships with many potential clients, they automatically deduct appropriate taxes from your check, and they handle the administrative services mentioned above. Unfortunately, there’s a high price to pay for this convenience. Staffing companies make their money by creating the biggest disparity between what your client pays them and what they pay you, so it’s common for staffing companies to bill clients 50 percent to 100 percent more than what they pay you.
- W-2 Through Contractor Employment Services Providers (CESPs). CESPs basically represent a low-cost hybrid of some of the options mentioned above. Like 1099s, CESP independents must find their own projects; however, CESPs have established corporate relationships that can make it much easier to land projects in big companies. As W-2 employees, CESP independents share the same corporate-like convenience that staffing company independents enjoy. And, because there’s no “1099 risk” and much lower markups than with staffing companies, clients find CESP independents particularly appealing to work with.
Choose Your Method
Which option is best for you depends on many variables—your ability to find your own contracts, need for benefits, willingness to do your own paperwork, etc. But the wide variety of alternatives means there is something for nearly everyone looking to reap the financial and emotional rewards of an independent career.
Gene Zaino is president and CEO of MyBizOffice Inc., a Reston, Va.-based provider of administrative and business management services for independent professionals and the organizations that use them. E-mail Gene at email@example.com.