Apparently, there was a engineer who used to work where I currently work. This guy was a total guru when it came to his area of expertise. From what I understand he decided to quit, but what he did was form a LLC and was then used by the company I work for to continue working on a very hot/important project. I assume as a consultant.
Does anyone know what this is all about, and how one would go about doing something like this? I gotta think that the company I work for was all for it because they kept him on for a year and paid him, and I just wonder if this is a common practice in today’s world.
If i understand your question correctly, you are asking whether it would be a good idea for you to remain an employee of your company or to become an independent contractor, form an LLC, and perform work for your company in that manner. Assuming your employer would consent to you doing this, there are a number of factors you would need to consider before deciding if it would be economically beneficial for you to do so.
As an independent contractor you would no longer be paid as an employee, which means that you would be paid (or your LLC paid) either at a fixed hourly rate or at some other contract based negotiated amount per project or per some other contracted amount. All of your earnings would be paid in full without any taxes withheld by the company.
The big disadvantage to this is that you would be liable to pay both halves (the employer and employee) of the FICA taxes, Social Security and Medicare. This would mean an additional 7.65% of your yearly net income from your business work paid to uncle sam. You would also likely have to make quarterly estimated tax payments to the IRS and possibly a state taxing agency as well to not get hit with underpayment penalties come tax time.
The big advantage would be that you could fully deduct certain expenses related to your work that could not be deducted fully as an employee.
Also note that if you form a single member LLC (meaning that you are sole owner of the LLC) that is considerd a disregarded entity for tax purposes and the activity of the LLC would be reported yearly on Schedule C of your Form 1040, and no additional tax return would be filed. A multi-member LLC would have to file a separate tax return to report its activity, either a 1065 or possibly an 1120S.
There are many other considerations (both economically and otherwise) to take into account before making this decision so it would be in your benefit to consult with a tax accountant or tax attorney to advise you and to assist with the creation of the LLC if that ends up being the route you take.
I know someone who thought that this would be a great idea - he was the IT support for a small supplier. He thought he could get better money for the same work, and believed that he was the only one who could do the job.
His boss laughed in his face, but kindly decided not to fire the idiot.
This is a many-faceted question. Obviously, the answer is “Yes, you can” but circumstances have to allow it.
The most important is that your employer has to agree with it. You may have a contract with non-compete provisions that would prohibit you from operating independently. They may just refuse without needing to provide a good reason.
Then you have to be in compliance with labor laws. There are rules about who can be an independent contractor vs. an employee. For example, if your boss can complain about you coming to work late, then you’re virtually always going to be an employee under the terms of the law (because that shows the boss can control what you do - an independent contractor can only be controlled in terms of deadline and work result, not work methods, schedules, etc).
Forming an LLC is not necessary. Depending on your state and job, it might not even be the best option. (In WA state, for example, an engineer would probably prefer a PLLC). You’ll also have to comply with all laws relating to business. This varies, but most states and cities have registration requirements. There may be additional state or city taxes (for example, WA state would impose a 1.8% tax on gross receipts for an engineer’s services and Seattle would tack on another 0.415%).
From a federal income tax standpoint, there are many options because LLCs choose how they want to be taxed. I have plenty of single-member LLCs taxed as corporations because they can limit the employment taxes. This is not a DIY decision - you definitely want to talk to a CPA or other professional.
Remember that you’ll lose your retirement, health, vacation and any other perks you enjoy as an employee and will have to pay for those yourself.
You’ll also have to do bookkeeping and keep records as required by federal and state laws. You might even have to do payroll if you elect to be taxed as a corporation.
One thing to remember is if your company has bids. I worked for a large hotel company and when we hired a contractor, we had to get at LEAST three bids from people.
You could find yourself working for a company and then quitting, then not getting the lowest bid and find yourself out on your…Well you know.
The best thing to do in this case is keep the job and then test the water by doing little jobs and advertising on Craigslist and such. Just tell your present employer you need to make some part time money for Christmas or such.
I’ve been out of the market for a while, but consultants were normally paid in one of 2 ways. I think the most common was to get paid directly on a 1099 (the route I went) as a subcontractor to the firm who had the contract with the employer. The other was to have a corporation and have either the employer or the primary contractor pay the corporation. I don’t recall anyone doing it through an LLC but I can’t tell you way this wasn’t popular. I would guess there are differences in how liability is handled. I normally saw people like doctors and lawyer form LLC’s since they couldn’t limit their liability through incorporation (for whatever reason - IDK). Everyone else seemed to go with an S-type corporation.