Moonlighting as a software developer: employee or independent contractor w/ LLC?
"I've been in a similar situation before. While contracting, sometimes the recruiting agency would allow me to choose between being a W2 employee or invoicing them via Corp-2-Corp. I already had a company set up (S-Corp) but the considerations are similar. Typically the C2C rate was higher than the W2 rate, to account for the extra 7.65% FICA taxes and insurance. But there were a few times where the rate offered was identical, and I still choose C2C because it enabled me to deduct many of my business expenses that I wouldn't have otherwise been able to deduct. In my case the deductions turned out to be greater than the FICA savings. Your case is slightly different than mine though in that I already had the company set up so my company related costs were ""sunk"" as far as my decision was concerned. For you though, the yearly costs associated with running the business must be factored in. For example, suppose the following: Due to these expenses you need to make up $3413 in tax deductions due to the LLC. If your effective tax rate on the extra income is 30%, then your break even point is approximately $8K in deductions (.3*(x+3413)=3413 => x = $7963) So with those made up numbers, if you have at least $8K in legitimate additional business expenses then it would make sense to form an LLC. Otherwise you'd be better off as a W2. Other considerations:"
Yes. I have personally signed such contracts (fixed budget software development) and lost money every single time. And yes, it is quite possible for you to get paid under minimum wage if you take too long. Scope creep is the primary culprit for these kinds of contracts, so make sure you put together iron-clad explanations of what is and is not covered by the contract (and pad the asking price for good measure). "Yea. Almost every form I fill out wants to know ""Employer Name"". They don't even bother checking ""Are you Self Employed"". Of course, I end up writing ""Self Employed"" in employer name field anyway.   In the United States, it is even harder because EVERY state has their own labor and employment laws. You are a freelancer but what if you need to travel to a client site in a different state. Bam, you gotta file taxes for that state as well even if you made like a few hundred bucks.   Too much red tape and it is really hard to change." Software Contractors are not employees of the company that is procuring the software. Software Contractors necessarily work for another legal business entity. There is a business to business relationship between the procurer of the software and the entity producing the software. Therefore, the company procuring the software is not required to pay a minimum wage, or adhere to any other employment law. When any individual or company orders a software product and agrees to pay for it, that is a fixed priced contract. This happens millions of times a day. The amount of time taken to produce the software has no direct bearing on price. For instance, there is no minimum price for Microsoft Word based on the number of hours taken to produce it. Generally a Software Contractor will be a director and shareholder of a limited liability corporation. Directors are exempt from the standard protection offered under employment law. If the company producing the software was employing non-directors to produce the software, rather than sub-contracting to another business then employment law would apply. If the firm treats you as an employee then they are treated as having a place of business in the UK and therefore are obliged to operate PAYE on your behalf - this rule has applied to EU States since 2010 and the non-EU EEA members, including Switzerland, since 2012. If you are not an employee then your main options are: An umbrella company would basically bill the client on your behalf and pay you net of taxes and NI.  You potentially take home a bit less than you would being 100% independent but it's a lot less hassle and potentially makes sense for a small contract. "I made a throwaway for this...   I work in IT for the government. I was tasked with finding a vendor that provided a particular kind of software. My bosses expected it would take me 4-6 months to source out companies, go through all the paperwork and process to work with them, try to get them to understand what we need, and them aid them in implementing their software on our stack.   Well, that seemed like an enormous waste of time (and ridiculously boring), so instead I wrote the software on my own time over the course of 4 months, built a subscription model around it, and incorporated a company. I've since sold the subscription based model to a number of other government bodies and clients. The government body I work for has around 250 employees, and I recently sold a subscription to a peer government body with over 1500 employees.   I built a free subscription tier that my current company uses so that i'm not taking any payment from them, to avoid any conflicts of interest, and built the entire project on my own time and resources.   The funny thing is, the software product I built easily beat out all the competitors in blind tests, and no one that I work for could ever imagine that I am capable of even being employed by such a company, forget building the whole stack and founding the company. In fact, all of upper management has been impressed with the software I ""found"", and how well it has worked... there has been a ton of positive feedback on it since it was launched.   I'm basically just sitting on this project (that is mostly self sustaining), until I can just cash out - which should be quite soon.   **Edit** to the people warning me what i'm doing is illegal, a few key points    - 1) The public sector can't legally profit from anything, my job is to limit cost, not make a profit... which leads to...    - 2) I'm not charging the government body I work for, it's a free implementation devoid of contract. I also ensured I do all the work on my own time, not company time. I live somewhere where most government employees work multiple jobs, so this isn't uncommon. In fact, my government body actually does often hire contractors who are also employed. So not only did I create the service on my own time, I gave it to my employer for free (other companies pay, of course)    - 3) I don't live in the US, things are different where I am. It is certainly not illegal, and I would even argue that (given this is the public sector) it is even somewhat ethical. My work saved my employer (the tax payer) a significant amount of money, which is a net positive. The service is of high quality, and I did not break any employment agreements or laws in the process.     - 4) I hired a lawyer to double check everything.     - 5) I absolutely am not in any way using any proprietary information for profit. I'm not even using my contacts through work as leverage for sales - everything so far has been cold calls and positive references from other clients. This was a key part of the project." "An unmarried person with a total U.S.-sourced earned income under $ 37,000 during the year 2016 is likely to owe: If the original poster is not an ""independent contractor"", and is not ""billing corp-to-corp"" then: In summary: References:" The reality is that for labor is cheap for software startups. A couple of founders can usually take a prototype to the point where they can get the seed capital to hire labor at market rates, so why would they give up significant equity to employees? Plus, if they need cheap employees, there are always contractors and naive new grads who will gladly take below-market salary for 0.1% of the company. (in options, vested over four years, of course) "Your comment to James is telling and can help us lead you in the right direction: My work and lifestyle will be the same either way, as I said.   This is all about how it goes ""on the books.""    [emphasis mine] As an independent consultant myself, when I hear something like ""the work will be the same either way"", I think: ""Here thar be dragons!"".  Let me explain: If you go the independent contractor route, then you better act like one.  The IRS (and the CRA, for Canadians) doesn't take lightly to people claiming to be independent contractors when they operate in fact like employees. Since you're not going to be behaving any different whether you are an employee or a contractor, (and assuming you'll be acting more like an employee, i.e. exclusive, etc.), then the IRS may later make a determination that you are in fact an employee, even if you choose to go ""on the books"" as an independent contractor. If that happens, then you may find yourself retroactively denied many tax benefits you'd have claimed; and owe penalties and interest too.  Furthermore, your employer may be liable for additional withholding taxes, benefits, etc. after such a finding. So for those reasons, you should consider being an employee.  You will avoid the potential headache I outlined above, as well as the additional paperwork etc. of being a contractor. If on the other hand you had said you wanted to maintain some flexibility to moonlight with other clients, build your own product on the side, choose what projects you work on (or don't), maybe hire subcontractors, etc. then I'd have supported the independent contractor idea.  But, just on the basis of the tax characteristics only I'd say forget about it. On the financial side, I can tell you that I wouldn't have become a consultant if not for the ability to make more money in gross terms (i.e. before tax and expenses.)  That is: your top line revenues ought to be higher in order to be able to offset many of the additional expenses you'd incur as an independent.  IMHO, the tax benefits alone  wouldn't make up for the difference. One final thing to look at is Form SS-8 mentioned at the IRS link below.  If you're not sure what status to choose, the IRS can actually help you.  But be prepared to wait... and wait...  :-/ Additional Resources:" It makes no difference for tax purposes. If you are 1099, you will pay the same amount of taxes as if you formed a corporation and then paid yourself (essentially you are doing this as a 1099 contractor, just not formally). Legally, I don't know the answer.  I would assume you have some legal protections by forming an LLC but practically I think this won't make any difference if you get sued. Are you talking about domicile? An LLC is treated differently than a corporation in the terms of citizenship of the law. An LLC is a citizen of whichever state it's members (shareholders) are citizens.  I would recommend you just spend the money on a business attorney to ensure that all the t's are crossed correctly so it doesn't end up costing you more later on. I had an internship and they hired me afterwards. Honestly sounded like a good way to break in. I also learned a whole new language for the internship and wanted to continue using it instead of any of the languages taught in school.  Not sure if the company would be considered good or bad. I ended up being solo for a long time but also building three applications ground up. I felt like I was improving a lot, especially on projects they gave me lots of leeway on because they were low priority (they just wanted features, no emergency bug tickets, etc). But no peers for most of my work and all the software was privately made and privately licensed/sold.  I also had difficulties leaving because I'm an idiot. With no backup me leaving basically meant they would be fucked, and they were my only reference. I was fine taking that salary because I had zero experience (no job. Ever. Not even volunteering. My mother wouldn't let me because of snobbiness), however once I was more valuable to this company and they even praised me for it in the assessments -- they gave out 2% raises. Later my bonuses decreased as my hours and responsibilities increased, too.  I asked to be taken off the stressful project, thinking I could salvage this, and they hired a replacement for me to train 3 months later. I got the high leeway project again for 6 months and my job satisfaction was phenomenal by comparison so i stayed. However, then my replacement was fired... So they asked me as a favour to work on the stressful project again and said they would replace me in a month and a half. They didn't. I worked on it for 8 months, I kept asking about it too. Their job posting was also terrible and they roped me in on it  at the end and I gained the responsibility of recruiting and vetting (yay for that one actually...). We hired another replacement for me, I trained them too, and left immediately.  Actually I regret staying there as long as I did. They gaslit me and I shouldn't have tried to make up for their incompetence. They actually made me a contractor at the end so I was getting paid half of what I originally was. Before I left I asked for a competitive raise and the company owner basically lied about details and tried to tell me what a fuss I was trying to talk about my happiness and what I want once a year... It was surreal but they agreed to bump my pay in the end. However, I was furious by their treatment and reply (which BTW came after I 'suddenly did not show up' despite bolding and clearly stating I would cease work with them and informing the people I worked with on the last day that I heard nothing back from the owner about a new/extended contract), so I said no.  I don't know how to negotiate. I am too humble. Selling oneself or seeing someone sell themselves makes me physically uncomfortable. It is completely unnatural, and sets off my bullshit alarms. Actually I seem to have some PTSD from that job, now, too... "You are confusing entirely unrelated things. First the ""profit distribution"" issue with Bob's S-Corp which is in fact tax evasion and will probably trigger a very nasty audit. Generally, if you're the sole employee of your own S-Corp, and the whole S-Corp income is from your own personal services, as defined by the IRS - there's no profit there. All the net income from such a S-Corp is subject to SE tax, either through payroll or through your K-1. Claiming anything else would be lying and IRS is notorious for going after people doing that. Second - the reclassification issue. The reason employers classify employees as contractors is to avoid payroll taxes (which the IRS gets through Bob's S-Corp, so it doesn't care) and providing benefits (that is Bob's problem, not the IRS). So in the scenario above, the IRS wouldn't care whose employee Bob is since Bob's S-Corp would have to pay all the same payroll taxes. The reclassification is an issue when employees are abused. See examples of Fedex drivers, where they're classified as contractors and are not getting any benefits, spend their own money on the truck and maintenance, etc. The employees are the ones who sued for reclassification, but in this case the IRS would be interested as well since a huge chunk of payroll taxes was not paid (driver's net is after car maintenance and payments, not before as it would be if he was salaried). So in your scenario reclassification is not as much a concern to Bob as his tax evasion scheme claiming earnings from performing personal services as ""profits from S-Corp"". A precedent to look at, as I mentioned elsewhere, would be the Watson v Commissioner case." "Am I on crack, or do the perceived tax savings via S-Corp   distributions really not matter at a certain level of business income? You're not on crack. Generally, if all the income is generated by your own personal services - this is the outcome. The benefit of S-Corp is when you have employees who generate your income, and you distribute to yourself profits that come out of other's personal services. In this case your distributions are exempt from FICA since it is not in fact a self-employment income. You'd still have to pay yourself a reasonable salary for your position (as a manager/officer), but it wouldn't have to cover all of the available profits. So if the IRS takes a position against you it would be that your salary should be to include the whole profits, since it is the compensation to you for the personal services that produced the income to the corporation (you). In many cases they might agree that a salary at the SS maximum limit would be reasonable - but that's only a speculation of mine. In that case you might gain some portion of the medicare tax (with the recent law changes at the levels you're talking about you'll pay some medicare anyway). There are a lot of accountants who take more aggressive position saying that not all of the distributions are liable for SE taxes, even if you're the sole employee of the corporation. These cases often end up in the Tax Court, and whatever the outcome, your legal fees become higher than the FICA savings. What is probably missing in your picture is the SS limit of (currently $112K) above which you don't pay social security tax, so whether you get it as a salary or as a distribution - that limit is the same. That is why you don't see a significant difference. I know there are a lot of accountants who'd disagree, but I would argue that for a sole employee of your company, S-Corp doesn't provide significant benefits over the disregarded LLC taxation, but has some additional overhead that adds to your expenses. Here's a link to a lawyer's blog where he suggests (and says many accountants follow) 60/40 division between salary and distributions. I.e.: his take, similarly to mine, is that most of the earnings have to be treated as salary. In your case, when the total is about 300K - you indeed will not get any FICA savings with such a division other than some of the medicare.  Unusually low wages when compared to distributions can draw unwanted   IRS scrutiny and an audit. An unfavorable audit will likely result in   some portion of the distributions being reclassified as earned income   for federal income tax purposes, which results in a deficiency   assessment (i.e., a tax bill), interest on those unpaid taxes, and IRS   penalties. The article also talks about the Watson case (one of the Tax Court cases I referred to), which can be used as the guidelines for determining the ""reasonable"" compensation. Talk to your tax adviser. I'm neither a tax adviser nor a tax professional. For a tax advice contact a CPA/EA licensed in your state. This is not a tax advice, just my personal opinion." They believe that it reduces the risk that Revenue Canada will deem you to be an employee and make them pay a whole pile of tax, EI, CPP and so on that should have been paid if you had been hired as an employee. It's my recollection that the employer gets dinged for both the employee and employer share of those withholdings (and generally the employer's share is larger than yours) so they really want to prevent it. There's a Revenue Canada publication about whether you're an employee or not. There's nothing on it about being incorporated, but still employers feel more protected when their contracts are incorporated.  We did work as a sole proprietorship at the very beginning, so that we could deduct our losses against employment income earned earlier in the year, before we started the business. You can find clients who will take you on. We incorporated once the losses were over with (basically we had bought the equipment and office supplies we needed to get started.) It's a simple and relatively inexpensive thing to do, and gives clients a sense of protection. It won't protect you from your own poor decisions since you'll be a director of the firm. As a nonresident sole proprietor or partnership You are not a sole proprietor or a member of a legal partnership. You are an employee for a corporation.  Does the nature of your work require you to be present in New York regularly? If you are in New York for personal reasons, you are simply telecommuting. You must pay taxes personally for your W-2 income, but your business entity never moved from Wyoming. If this were not true, companies would have to pay corporate income tax to every state in which they have a telecommuter. For example, I live in Florida but telecommute to a company in Michigan. Does my employer pay Florida business tax? Of course not. Your business would only owe New York if the nature of the business requires a consistent and regular business presence in New York, such as maintaining an office for a portion of every year so clients could see you.