If you’re considering getting into consulting as a contractor, you obviously have to be prepared to get new contracts. Depending on the length of the projects you’re on, you may look for new contracts from one to three times a year on average. Unless you’ve built your own client base, you’re going to, most likely, make yourself available for projects through a firm that specializes in finding engagements that require people with your background.
Below are a few different scenarios to consider:
- Consulting firm that hires consultants as FTEs of their firm as well as contractors on an as-needed basis
- Contracting firms that will pay a salary, hourly, benefits to W-2 employee or set up a subcontractor (Corp-to-Corp) relationship
- Contracting firms that pay hourly or subcontractor (Corp-to-Corp) without providing benefits
- Situations to avoid
Consulting Firm That Hires FTEs as Well as Contractors
As I’ve described in other posts, there are consulting firms that hire their own employees as their primary method of filling their client engagements. However, these firms will find that, from time to time, one of their clients may have a need for which they don’t have an available employee. Or there may be a situation in which a client needs a type of skill set for which they typically don’t get requests. In both scenarios, these firms may look to hire the services of an independent contractor for a particular engagement with both parties understanding that once it’s complete, neither the consulting firm nor the contractor will have any obligation to each other.
Contracting Firms That Will Pay a Salary, Hourly, Benefits or Set Up a Subcontractor (Corp-to-Corp) Relationship
This type of firm is set up to work with individuals on a contract basis. They have assignments and look for individuals who can perform the task. They will work with you to find a new engagement, but they typically won’t pay for bench time (time in between engagements). As a result, you should expect to earn a higher level of compensation than if you were a full-time employee of a firm through which bench time is provided. These firms will pay benefits as a part of your compensation plan and they may, or may not, pay salary during the contract, should you prefer a predictable form of compensation during the length of your engagement. In general, these firms offer more variety in terms of how they compensate when compared to following example.
Contracting Firms That Pay Hourly or Subcontractor (Corp-to-Corp) Without Providing Benefits
This group is not much different from the previous group, except that such firms do not offer the option of salary or benefits. This is the case only because the firm prefers to pay hourly as the work is being performed, as opposed to averaging out the compensation over the course of the contract. Since benefits are not offered, these firms tend to attract contractors who already have their benefits in place.
Situations to Avoid:
You get paid when they get paid. This occurs when the company or person offering you the contract doesn’t have the money to pay you. Typically, these are independent contractors with their own corporations. They are at a client site and become aware of a client’s need. They know that you can do the work, and since they already have an agreement with the organization, they think it would be great to bring you in as their employee and make a couple of bucks. More often than not, this scenario will work out just fine. But here are a few things to take into consideration before signing up for this type of situation.
The problems you’ll face:
The client does not pay on time. This is an issue if you require money within a certain timeframe. So, if you don’t get paid until the independent contractor gets paid, even if the contract calls for them to be paid in 30 days, you’ll have an issue if their payment is delayed. I can tell you with 100% accuracy that 40% of clients will not pay an invoice within the timeframe stated in the contract. So, you have to be prepared to deal with this.
Next, what if the client is unhappy with the work provided and decides they’re not going to pay for some or all of the work you performed? If you’re working through a company that pays you on a regular basis, this won’t be an issue for you, as the company takes all the risk. But under “you get paid when we get paid” terms, this becomes your risk. Is this something with which you want to be concerned?
They want to classify you as a 1099 when you don’t have your own corporation. 1099 is for an independent contractor. Let me explain what a true independent contractor would be:
A company needs 200 order sets built. They have the specifications in place. You go on-site one time to meet with everyone and make sure there is a clear understanding of what’s expected of you. You determine how long it will take you to do what they need. You provide a flat rate to do the work, along with a payment schedule. You also establish a date when you’ll have completed and delivered the work. You leave and work at your own location to complete the job.
Once a client decides to . . .
- pay you on an hourly basis as they do some employees
- require you to be at certain locations on a regular basis as they do employees
- pay you whether or not you completed the work for which you were hired
. . . then you are no longer considered an independent contractor.
So why do these organizations want to classify you that way? They won’t have to meet payroll tax on you, which they would if you were their employee. As a 1099, you’re responsible for the payroll tax. Typically, this occurs because these companies don’t have the proper infrastructure to perform a regular payroll. This, in itself, should be a concern.
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