It occurs to me that I haven’t talked about contracting.  This is a very important aspect of the job search, especially if you’re in IT.  So, I’ve decided to do a 3 part series on contracting this week and next.  We started last week with common questions regarding contracting; followed it up with considerations one should make before contracting; and finally today, a post on what it means to be a Sole Proprietor.

If you’re considering contracting directly with a company (not using a contracting agency) and you don’t own a company, this article applies to you.

Independent Contractors (1099)

You may have heard the term “1099” (ten ninety-nine).  1099 is a form that any business is required to submit to the IRS when they have paid money to individuals other than employees.

When an individual enters into a contract with a company to do business (and gets paid), the IRS treats that individual as what is called a “Sole Proprietor”.  It means, an individual doing business and it’s the simplest corporate entity to form, because there’s virtually no paper work involved.

There are a number of things to remember and prepare for if you are a Sole Proprietor…

1. Taxes – Many people are not aware that half of their Medicare and Social Security Taxes are paid by their employer.  When you’re a Sole Proprietor Uncle Sam expects you to foot the whole bill.  So instead of the normal 6.2% for Social Security and 1.45% for Medicare Taxes, Uncle Sam expects you to pay 12.4% and 2.9%.  This is one reason you should set your rate higher as an independent contractor than you would if you were to contract through an agency.
2. More Taxes – Employers pay payroll taxes throughout the year.  If you’re an employee, it comes out of your check based on how you filled out your W2 for the year.  As a Sole Proprietor, the company you’re contracting with isn’t paying those taxes, so you have to pay estimated quarterly taxes.  You can get the forms from the IRS web site or TurboTax.  The IRS website will tell you when they are due and how much you will have to pay.  If you wait until your taxes are due to pay these (pay late), you might not go to jail, but you will pay a penalty.
3. Liability – if you screw up something important the company can come after you.  Liability insurance is generally affordable. Whereas other corporate entities protect the owner’s assets, a sole proprietorship does not.  Consider liability insurance if there are significant liabilities with the work you’re doing.
4. Legal Matters – contracting agencies have lawyers working for them to ensure their best interests are accounted for.  If you’re a sole proprietor, at minimum, you’ll need a contract written by an attorney.  This contract defines the relationship between you and the company.  Remember, a verbal contract is only as good as the paper it’s written on!

Hopefully, these three articles have helped you understand a little more about contracting and the various considerations for contracting.  Good luck!