Life As a Contract Worker

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What to Do

After two years of an early retirement, I have been asked to do a 4-6 mo. project for the place where I was previously employed (policy and procedure manuals) I was wondering if there is anything I should watch for contract-wise, tax-wise or anything else-wise. Are there any particular sites you know of that are good for this kind of info?
Sue B.

My Experiance

I have also done a stint of contract work for a previous employer. Contracting can have many advantages; with a bit of planning, one of them is the money.

The first step is to establish a fair rate for your services. The easiest way to do this is to contact a few contract employment agencies in your area and ask them what they'd *charge* for the work you'd be doing. Some large companies, when they hire former employees as contractors, will try to set the contact wages by some function of the final salary rather than market wages, so beware.

Second, clarify with your company how they will pay you if they will pay you directly, or ask you to sign on with a contracting agency. Companies often prefer to hire contractors through agencies to limit their liability on "statutory employees". This liability can also be limited by working with a "pass-through" business; the company pays the pass-through business, which keeps $5 - $10 per paycheck and pays the rest to the employee. For more information, check with a good accountant.

The third area to watch is taxes. As a contractor, you will need to pay estimated tax in order to avoid penalties. In its simplest form, estimated tax involves taking the amount of your previous year's taxes, subtracting any withholdinds for this year, dividing the result by four, and making four estimated tax payments in that amout. At tax time, you will need to file schedules C and SE. You'll probably get away with filling out the simplified section these forms, which is fairly painless. You shouldn't need to pay someone for tax preparation, unless you're doing so already.

Finally, one of the beauties of contracting is the myriad of things that can become tax-deductible business expenses! Keep a careful record of any money you spend on office supplies, phone calls, generally any money you spend in order to do your job. Also keep log of miles that you travel in your car to get to your contracting job, as this can be another qualifying expense. Another qualifying deduction is half of the cost of your health insurance; check the tax documents for more information.

Good luck, and have fun! One of the great non-monetary perks of being a contractor is, once you're paid by the hour, it's no longer so painful to sit through meetings!
Melissa C.

Advice from An Employer

I work in a company that hires, and I have myself hired contract writers and editors. Here are some hints

  1. Work on an hourly basis. Some companies like to get the contractor to estimate cost and then submit a fixed-price bid. unless you know EXACTLY what number of work hours might be required (which might be so in the case of Sue who is going back to a company she worked for before), you will undoubtedly work more than your bid and not be able to renegotiate your bid. Therefore, you'll be working on the project for FREE to do that extra work required to finish the project.
  2. Even if you work on an hourly fee basis you will need to estimate the work and submit a plan for the number of hours/$$ you think are required. IF you find that the project is larger in scope than you were informed of, contact the company immediately and seek to renegotiate your estimate.

  3. Set up a company for yourself. It's easy to set up a sole proprietorship to which you can charge expenses such as travel, meals, and office supplies.

  4. ALWAYS have some sort of WRITTEN contract including the scope of work and the cost.

  5. Remember that you are a contractor and therefore get no health or insurance benefits. This is your "overhead" as a contract worker. Research, as best you can, the going hourly rate for contractors doing the same sort of work in your area, and then add on about 25-30% to cover your "benefits" costs. Do not sell yourself short. Once you do this with a company, they will dig in their heels if you need to raise your rate because of your overhead. Unless your hourly rate is totally outrageous and not in line with contract rates in your area, the company will gladly pay it. (In Sue's case her ramp-up time will be considerably shorter than that any other contractor because she knows the company and the policies and the procedures. Her company will really get a good "deal" because of this.)


Remember, You're Independent

Just remember that you'll be an "independent contractor" instead of an "employee, and there's a much larger percentage of your pay that will be paid in taxes. I think that most employees pay about 28% in taxes, and and independent contractor pays around 40%. Also, there are more tax forms that will be fill out at tax time, and you'll have to pay your accountant extra for each additional page. Not to mention the hassle of keeping track of your mileage, expenses, etc. Remember that you're doing the company a favor by being a consultant, because they don't have to pay social security for you anymore.

So... when it comes time to let them know your fee, be sure to ask for more money per hour than you were making before! And remember that THEY WANT YOU because of your expertise, so don't be bashful.
L. C.

Resources to Use

Here are a few sources of help (all free or lowcost!)

  1. Many localities have offices which foster small businesses run out of the county/city. The one where we used to live had tons of literature, free workshops, and a great mentor program.

  2. Find a home-based business networking group. Many technical and business writers work out of their homes and you probably could get good info on local rates to charge, tax advisors, etc.

  3. Ask your local reference librarian. My favorite author is Herman Holtz. He's a very prolific writer in the area of contracting, especially in the area of writing.


Avoid Pitfalls

You're smart to be concerned because there could be many pitfalls. First, are you really a contract worker or an employee? There are many "tests" for this but if you work on their premises during hours set by them ( e.g., at least four hours each day or whatever) and use their equipment (computer, copier, etc.), you're an employee and should be paid as such (they pick up the employer's share of payroll taxes). Also, don;t overlook the "hidden" costs of working transportation, clothing, meals, gifts, etc.

If it's a true contract (requires a written document) and you can work at home any time you wish as long as deadlines are met, etc., you are self- employed and will pay hefty taxes on your wages. For instance, you'll pay FICA and Medicare taxes, income tax, and probably state tax unless you live in a state with no income tax. That can be as much as 40% in taxes and you need to remember this when negotiating for your rate of pay. As a self-employed person you can deduct necessary and ordinary business expenses (supplies, mileage other than commuting, long distance, etc.).

You said you took early retirement so I assume you're not drawing social security yet. Additional earned income, whether as an employee or self- employed, can ultimately cost you money if you're drawing social security benefits.

The Internal Revenue Service has an excellent website ( and offers online information or printed publications on subjects such as Business Expenses and Tax Guide for Small Business. Their toll-free number 800-829-1040 is now available 24-hours a day, seven days a week. As an Enrolled Agent, I recommend the services of a tax professional.
Sharon in Virginia

Check Out SBA

The small business administration provides information on taxes, as the government will consider you self employed. Typically the rate for contract work is double that for an employee because there are no benefits (vacation, social security, medical, unemployment insurance) .
Richard M.

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