Why You Should Inc. Yourself
Have you noticed how fast things around you have changed in the last ten years?
- In 2008, Facebook had only a million users while Twitter was just getting started.
- What’s included in your smartphone today required at least three larger devices back then.
- You used to call a taxi to go from here to there. Now you call Uber or Lyft.
- Game of Thrones wasn’t even on the drawing board.
- Donald Trump was just completing his first year – of Celebrity Apprentice.
Change is the New Constant
Turnover of staff at US companies ranges from 16% to 35%, depending on the industry. So it’s likely that you have held at least two jobs during the past ten years, maybe three. Lifetime careers with the same employer belonged to the world of your parents and grandparents, but not yours. Freelancers (those people contracted independently by businesses and institutions) make up about a third of today’s US workforce. A full 44% of all full-time employees work at least one day per week remotely, compared to less than 20% ten years ago. And this recent survey found that 85% of respondents surveyed had side gigs (part-time or freelance), many of which could qualify the person for incorporating to provide those services.
Prediction: the rate of change in your workplace and career will accelerate over the next decade. You will not believe what the next decade will bring in terms of workplace and career changes. Are you prepared?
One strategy you should seriously consider is to form a corporation which then hires you as an employee, in order for you to offer services in your areas of expertise to businesses, organizations, and institutions.
Who is Qualified to Incorporate, and How Difficult is the Process?
Anyone who can perform a service, create or sell a product can incorporate, even if it is an occasional part-time pursuit and he or she is the only person doing the work. Today it is so simple to incorporate that most people do it themselves by using an online service. Google DIY incorporation and you’ll get more than 9.3 million results. For a few hundred dollars you can incorporate yourself online in about an hour. Once the corporation has been set up it is now a legal entity capable of conducting business. This means that it will need to file taxes on a periodic basis, usually both quarterly and annually and follow prevailing business regulations pertaining to a corporation.
The Advantages of Incorporating
Meet Sheldon Johnson, recently the Manager of Safety for ABC Company. After a company layoff, Sheldon decided to incorporate as SJ Corporation (SJC) to offer his services as a safety expert. SJC will conduct safety audits and training for organizations, specializing in OSHA compliance.
As a result of incorporation, Sheldon has now become an employee of SJC. This strategy offers many benefits, including:
1. It’s inexpensive to incorporate and maintain a corporate entity. Today’s online do-it-yourself incorporation services cost a few hundred dollars to create a corporation, inclusive of forms and filing fees. Sheldon consults with a tax professional about which type of corporation is right for him, something a tax professional will often do in the hopes of landing a new client. After following the tax professional’s advice Sheldon decides to engage her to prepare and file his corporate taxes, a very wise move on his part.
2. The tax advantages can be enormous. The payroll tax taken from Sheldon’s paychecks to cover federal, state, and local taxes exceeded one-third of Sheldon’s income when he worked for ABC Company. It is out of this post-tax income Sheldon had been paying for numerous work-related expenses which he was not allowed to deduct on his tax return. When he incorporated, many of those same expenses became reimbursable with pre-tax dollars as necessary business expenses. As a corporation owner Sheldon can now be reimbursed for these and other qualified work-related expenses:
a. Daily commuting costs to and from where his work is performed, and all travel related to Sheldon performing work on behalf of SJC.
b. Advances in office technology have enabled the creation of fully functioning home offices. Sheldon took over a bedroom and adjacent study in his home for his SJC work area, office equipment, supplies, and files. These two rooms represent 16% of the square footage of his home’s living space. He now deducts 16% of expenses such as utilities, insurance, and maintenance costs for the home, following the guidance of his business accountant.
c. Costs for his telecommunications services (such as phone lines, smartphone and Internet service), office supplies, materials, business services, and a host of other legitimate business expenses used in the performance of SJC’s work.
d. Employee benefits provided to Sheldon by SJC, such as healthcare and retirement plans.
As a result, Sheldon netted a significantly greater portion of his SJC gross revenue than he ever did his gross pay while working for ABC, even after the costs of maintaining SJC are considered.
We recommend you consult a qualified professional to help you identify all eligible costs that comply with prevailing tax law and IRS regulations, and to help you establish sound business practices.
3. Engaging a corporation relieves an employer of any liability for improper employee/contractor classification and makes better economic sense for the employer. Sheldon contacted his old employer, ABC Company, about engaging SJC and doing contract work for them. By engaging SJC, ABC eliminates the risk of the IRS classifying Sheldon as an employee, which places a great burden on ABC than contacting a company’s services.
It’s also much less expensive for a business to contract with a corporation for specific areas of specialty than it is to recruit, hire, train, manage, and maintain an employee on staff, especially if the work needed to be performed is not of a full-time, continuous nature. In the case of ABC Company (above), the need for safety audits and periodic training is episodic to satisfy annual OSHA requirements.
4. Contracted specialists get paid more money for less time and effort than they did as employees. When Sheldon worked for ABC, his annual cost to them was $150,000, comprised of an $86,000 salary, plus benefits, occupancy costs, management resources, and the like. ABC contracted with SJC to have those services performed by Sheldon. SJC charges ABC $9,500 to perform the audit and annual compliance training, which takes Sheldon an estimated 100 hours per year. In addition, SJC will bill ABC $950 per month as a retainer for up to 8 hours per month for Sheldon to consult on safety issues. By performing the work through SJC, Sheldon can generate more income in less time, and on his schedule, than he ever could as an employee. With five other similar clients as ABC, Sheldon is netting significantly more than he did as an employee of ABC. And ABC gets the benefit of Sheldon’s safety expertise and work for a fraction of what they paid him as an employee.
5. Incorporation can continue even if later employed. Sheldon always has the opportunity to return to work as an employee should he desire. There is no reason for him to end the corporation if he accepts outside employment. In most states a corporation is considered active if it files required returns, with or without any income earned. By continuing the corporation during periods of employment, Sheldon can opt to perform assignments for SJC on the side if appropriate. He also enjoys continuous employment at SJC, improving his resume strength. And during periods of future unemployment he has a ready-made structure for generating income.
You can learn more about incorporating, the requirements of corporate entities, and running a corporation, in this excellent resource from Entrepreneur.com.
With the rise of freelancing, side gigs, and continued volatility in employment, an increasingly wise strategy for employees and independents alike is incorporation. The overwhelming benefits of incorporation seem to greatly outweigh the relatively costs of starting and maintaining a corporation.
This article is excerpted in part from the world’s most comprehensive book on job search, Get a Better Job Faster™.
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