I'm currently unemployed and have been offered a contract position. Do I need to incorporate myself? How do I do it?
In short - if you can't get the job without incorporating, then incorporate! Some clients will require you to be incorporated (which is why I did it 10 years ago).  Essentially, for them, it's a way of distancing themselves from you to ensure they are not responsible for any monies if you don't pay your taxes.  For you, there is also this idea of distancing company assets from your personal assets.  If they are not requiring you to incorporate, you can simply act as a sole proprietorship.  A good place to start reading up could be the sites below (for Canada/Ontario): Canada Business http://sbinfocanada.about.com/ http://sbinfocanada.about.com/od/incorporation/Incorporating_A_Business_In_Canada.htm http://sbinfocanada.about.com/cs/startup/a/incorporatadv.htm When I registered, I simply bought a book at Grand&Toy, with all the required forms for Ontario.  These forms would also be available at a local Government service centre. You walk in, give the government money, and shortly thereafter you are incorporated. There are a number of others things that are required (having a minutes book, writing resolutions, creating shares, setting up a bank account, etc) - all discussed in the guide For Ontario you can start here: http://www.ontario.ca/en/services_for_business/index.htm At a high level, there are some costs for being incorporated, and some tax savings.  At a minimum, costs would include: You may need the help of an account to help set things up, but it's quite easy to maintain all the records, etc that are required.   Some other minor things I enjoy are writing myself expense cheques so that I get money back immediately (and effectively only pay 60% of the cost after writing it off in the company). I can decide how much to pay myself and push income from year to year. Do you need to incorporate? This depends on whether the company prefers you to be incorporated.  If you are going through a recruiting company, some of them are willing to deal with non-incorporated people (Sole Proprietor) and withhold taxes from your cheques for you. If you do want to incorporate, you can do it yourself, go through a paralegal, or you can even do it online.  I did mine in Ontario for about $300 (no name search - i just have a numbered corporation like 123456 Ontario Inc.) through www.oncorp.com - there are other sites that do it as well. Things to consider - if you're contracting through a corporation you most likely need to: Talk to an accountant about these for clarification - most of them will give you an initial consultation for free. Generally speaking, accountant fees for corporate filing taxes averages about $1000-2000 a year. "I am co-owner of a business, and we incorporated federally.  (Mostly to limit liability.)  There is some excellent information above, and most of my wisdom I got from a trusted lawyer and accountant (find experts you trust in these two areas, they will prove invaluable in so many areas.)   The one point I would add is that if you decide to incorporate, you can do so federally or provincially.  We were all set to go provincially, when our lawyer asked ""Is there any chance you might move the business?  Any chance you might want to do work in other provinces?  What about next year?  Five years?""  If you are going through the expenses to set up a corporation, consider doing so federally, the extra costs were insignificant, but someday you might be glad you don't have to start from scratch.  In this day and age, many people end up moving out of province for work, family concerns, etc." "I know this is a little late but here is my answer. No. You do not ""need"" to incorporate. In fact, incorporating in your situation will cost you in legal fees, administrative headaches, and a fair bit in taxes. The CRA would probably look at your corporation as a personal services corporation and it would not be allowed to claim a number of tax reductions. The tax rate would end up being over the top range (unless you are in Quebec where it would be just under the top marginal range)." "My late answer is: Be aware of the difference of being a contractor and being an employee.  I am not sure of the laws in Canada, but in the United States lots of small companies like to hire people as ""contractors"" but make them work under rules that fall into employee.   The business is trying to avoid paying payroll taxes, which is fine, but make sure you know your rights and responsibilities as a contractor vs employee. You can check with your state's Bureau of Labor and Industry in the US, but I am sure wherever you are from there is a government agency to do the same thing."
"Your employment status is not 100% clear from the question.  Normally, consultants are sole-proprietors or LLC's and are paid with 1099's.  They take care of their own taxes, often with schedule C, and they sometimes can but generally do not use ""employer"" company 401(k).  If this is your situation, you can contact any provider you want and set up your own solo 401(k), which will have great investment options and no fees.  I do this, through Fidelity. If you are paid with a W2, you are not a consultant.  You are an employee and must use your employer's 401(k). Figure out what you are. If you are a consultant, open a solo 401(k) at the provider of your choice.  Make sure beforehand that they allow incoming rollovers.  Roll all of your previous 401(k)s and IRA's into it. When you have moved your 401(k) to a better provider, you won't be paying any extra fees, but you will not recoup any fees your original provider charged. I'm not sure why you mention a Roth IRA.  If you try to roll your 401(k) into a Roth instead of a traditional IRA or 401(k), be aware that you will be taxed on everything you roll. ---- Edit: a little info about IRA's in response to your comment ---- Tax advantaged retirement accounts come in two flavors: one is managed by your company and the money is taken out of your paycheck.  This is usually a 401(k) or 403(b).  You can contribute up to $18K per year and your company can also contribute to it.  The other flavor is an IRA.  You can contribute $5,500 per year to this for you and $5,500 for your spouse.  These are outside of your company and you make the deposits yourself.  You choose your own provider, so competition has driven prices way down.  You can have both a 401(k) and an IRA and contribute the max to both (though at high incomes you lose the ability to deduct IRA contributions). These accounts are tax advantaged because you only pay taxes once.  With a regular brokerage account, you pay income tax in the year in which you earn money, then you pay tax every year on dividends and any capital gains that have been realized by selling.  There are two types of tax-advantaged accounts: Traditional IRA or Traditional 401(k).  You do not pay income tax on this money in the year you earn it, nor do you pay capital gains tax.  Instead you pay tax only in the year in which you take the money out (in retirement). Roth IRA or Roth 401(k).  You do pay income tax on money on this money in the year in which you earn it.  But then you don't pay tax on any gains or withdrawals ever again. When you leave your job (and sometimes at other times) you can move your money out of a 401(k) into your IRA, where you can do a better job managing it.  You can also move money from your IRA into a 401(k) if your 401(k) provider will allow you to. Whether traditional or Roth is better depends on your tax rate now and your tax rate at retirement.  However, if you choose to move money from a traditional account into a Roth account, you must pay tax on it in that year as if it was income because traditional and Roth accounts are taxed at different times.  For that reason, if you are just trying to move money out of your 401(k) to save on fees, the logical place to put it is in a traditional IRA. Moving money from a traditional to a Roth may make sense, for example, if your tax rate is temporarily low this year, but that would be a separate decision from the one you are looking at. You can always roll your traditional IRA into a Roth later if that does become the case.  Otherwise, there's no reason to think your traditional 401(k) should be rolled into a Roth IRA according to what you have described." I do NOT know the full answer but I know here are some important factors that you need to consider : Do you have a physical location in the United States? Are you working directly from Canada? With a office/business location in the United States your tax obligation to the US is much higher. Most likely you will owe some to the state in which your business is located in Payroll Tax : your employer will likely want to look into Payroll tax, because in most states the payroll tax threshold is very low, they will need to file payroll tax on their full-time, part-time employees, as well as contractor soon as the total amount in a fiscal year exceeds the threshold Related to No.1 do you have a social security number and are you legally entitled to working in the States as an individual. You will be receiving the appropriate forms and tax withholding info Related to No.3 if you don't have that already, you may want to look into how to obtain permissions to conduct business within the United States. Technically, you are a one person consulting service provider. You may need to register with a particular state to obtain the permit. The agency will also be able to provide you with ample tax documentations.  Chances are you will really need to piece together multiple information from various sources to resolve this one as the situation is specific. To start, look into consulting service / contractor work permit and tax info for the state your client is located in. Work from state level up to kick start your research then research federal level, which can be more complex as it is technically international business service for Canada-US To be honest I don't know how any of this work in the US so my answer will be of very limited value to yourself, I suspect, but when it comes to the UK if you're going to get the same pay gross either way than being independent makes very little sense.  Running your own business is hassle, is generally more risky (although possibly not in your case) and costs money. Some of the most obvious costs are the added NI, probably the need for an accountant, at around £1200 p/a for basic accountancy service, you are obliged by law to have liability insurance and you probably want professional indemnity insurance, this will be around £600 p/a minmum, and so on and so forth.  On top of that, oficially anyway, as a contractor, you really shouldn't be getting any benefits from the client, and so health insurance, company car, even parking are all meant to be arranged by, and paid by, your company, and can't (or rather - shouldn't) be charged to the client. So - I would say - if you're seriously thinking about setting up a consultancy company, and this client is first of many - set up a company, but take into account the sums you need to earn. If you're really thinking about employment - be an employee. Sounds you need to read up on S corp structures. I think this would benefit you if you generate income even after you physically stopped working which is incomes from membership fees, royalties % of customer revenue, middle man etc...  Under the Scorp, you as the sole member must earn a wage that fair and at current market value. You pay social security and Medicare on this wage. The interesting thing here is that an Scorp can pay out earning dividends  without having to pay payroll taxes but the catch is that you, as the sole employee must earn a fair wage.   As for paying the other member you may want to look into 1099 contract work plus a finders fee. The 1099 hourly wage does not require you to pay Medicare and SS.   The common fee I'm used to is 5% of gross invoice. Then you would pay her an hourly wage. The company then bills these hours multiplied by 2 or 3 (or whatever you think is fair) to the client. Deduct expenses from this and that's your profit.   Example. Contractor brings Client A which is estimated as a  100 hour project with $100 cost in supplies and requires 2 hours of your time @ $40/hr.   You quote 100 hours @ $50 to client, client agrees and gives you down payment.   You then present the contract work to your contractor, they complete the work in 100 hours and bill you at $25.   You pay your contractor 2500 plus the 5% ($250)  and your company earns $2070 (5000 - 2500 - 100-80)  And you'll earn $80 minus the payroll tax.   Then at the end of the quarter or year or however you want to do earning payouts your LLC- Scorp will write you a check for $2070 or whatever earning % you want to take. This is then taxed at your income tax bracket.   One thing to keep in mind is what is preventing this other person from becoming your competition? A partnership would be great motivation to try and bring in as much work under the LLC. But if you start shafting people then they'll just keep the work and cut you out. You're not physically present in the US, you're not a US citizen, you're not a green card holder, and you don't have a business that is registered in the US - US laws do not apply to you. You're not in any way under the US jurisdiction.  Effectively connected income is income effectively connected to your business in the US. You're not in the US, so there's nothing to effectively connect your income to. Quote from the link: You usually are considered to be engaged in a U.S. trade or business   when you perform personal services in the United States. You ask: If I form an LLC or C corp am I liable for this withholding tax? If you form a legal entity in a US jurisdiction - then that entity becomes subjected to that jurisdiction. If you're physically present in the US - then ECI may become an issue, and you also may become a resident based on the length of your stay. You'd have to file to be incorporated (in Canada at least). It's mostly done for tax purposes. You can't just go and call yourself an corporation without filing legal papers (and be approved) with the tax agency of your country. In my experience, it'd be with the CRA. The rules at least here, there's a bunch of leeway that mostly any business can be classed as an corporation if you see fit. Hope it helps! More than likely you have signed an NDA with your employer with a non-compete clause within it. From what I have seen this clause would be in place for two years following the date you left your firm. So, leaving your firm and consulting as a 1099 for your current client is more than likely a violation of your NDA for 2 years or some period of time. With that being said, there is nothing keeping you from going off on your own as an independent and finding work, so long as that work isn't from one of the current clients of your firm.   I am not a lawyer and everything above is what I have seen in my personal experience. First, determine the workload he will expect.  Will you have to quit your other work, either for time or for competition?  How much of your current business will be subsumed into his business, if any?  Make sure to understand what he wants from you.  If you make an agreement, set it in writing and set some clear expectations about what will happen to your business (e.g. it continues and is not part of your association with the client).  Because he was a client for your current business, it can blur the lines. Second, if you join him, make sure there is a business entity.  By working together for profit, you will have already formed a partnership for tax purposes.  Best to get an entity, both for the legal protection and also for the clarity of law and accounting.  LLCs are simplest for small ventures; C corps are useful if you have lots of early losses and owners that can't use them personally, or if you want to be properly formed for easy consumption by a strategic.  Most VCs and super-angels prefer everybody be a straight C.  Again, remember to define, as necessary, what you are contributing to be an owner and what you are retaining (your original business, which for simplicity may already be in an entity).  As part of this process, make sure he defines the cap table and any outstanding loans.  Auntie June and Cousin Steve might think their gifts to him were loans or equity purchases; best to clear this issue up early before there's any more money in it. Third, with regard to price, that is an intensely variable question.  It matters what the cap table looks like, how early you are, how much work he's already done, how much work remains to be done, and how much it will pay off.  Also, if you do it, expect to be diluted by other employees, angels, VCs, other investors, strategics, and so on.  Luckily, more investors usually indicates a growing pie, so the dilution may not be at all painful.  But it should still be on your horizon.  You also need to consider your faith in your prospective partner's ability to run the business and to be a trustworthy partner (so you don't get Zuckerberg'd), and to market the business and the product to customers and investors. If you don't like the prospects, then opt for cash.  If you like the business but want to hedge, ask for compensation plus equity.  There are other tricks you could use to get out early, like forced redemption, but they probably wouldn't help either because it'd sour your relationship or the first VC or knowledgeable angel to come along will want you to relinquish that sort of right. It probably comes down to a basic question of your need for cash, his willingness to let you pursue outside work (hopefully high) and your appraisal of the business' prospects. You can and are supposed to report self-employment income on Schedule C (or C-EZ if eligible, which a programmer likely is) even when the payer isn't required to give you 1099-MISC (or 1099-K for a payment network now). From there, after deducting permitted expenses, it flows to 1040 (for income tax) and Schedule SE (for self-employment tax). See https://www.irs.gov/individuals/self-employed for some basics and lots of useful links. If this income is large enough your tax on it will be more than $1000, you may need to make quarterly estimated payments (OR if you also have a 'day job' have that employer increase your withholding) to avoid an underpayment penalty. But if this is the first year you have significant self-employment income (or other taxable but unwithheld income like realized capital gains) and your economic/tax situation is otherwise unchanged -- i.e. you have the same (or more) payroll income with the same (or more) withholding -- then there is a 'safe harbor': if your withholding plus estimated payments this year is too low to pay this year's tax but it is enough to pay last year's tax you escape the penalty. (You still need to pay the tax due, of course, so keep the funds available for that.) At the end of the first year when you prepare your return you will see how the numbers work out and can more easily do a good estimate for the following year(s). A single-member LLC or 'S' corp is usually disregarded for tax purposes, although you can elect otherwise, while a (traditional) 'C' corp is more complicated and AIUI out-of-scope for this Stack; see https://www.irs.gov/businesses/small-businesses-self-employed/business-structures for more. You can't do what you would like to do, unless your business has another, unrelated investor or is willing to invest an equal amount of funds + .01 into a corporation which will employ you.  You will then need to set up a self-directed IRA. Additionally, you will need a trustee to account for all the disbursements from your IRA. I am surprised no one has mentioned the two biggest things (in my opinion).  Or I should say, the two biggest things to me.  First, 1099 have to file quarterly self employment taxes.  I do not know for certain but I have heard that often times you will end up paying more this way then even a W-2 employees.  Second, an LLC allows you to deduct business expenses off the top prior to determining what you pay in taxes as pass-through income.  With 1099 you pay the same taxes regardless of your business expenses unless they are specifically allowed as a 1099 contractor (which most are not I believe).  So what you should really do is figure out the expense you incur as a result of doing your business and check with an accountant to see if those expenses would be deductible in an LLC and if it offsets a decent amount of your income to see if it would be worth it.  But I have read a lot of books and listened to a lot of interviews about wealthy people and most deal in companies not contracts.  Most would open a new business and add clients rather than dealing in 1099 contracts.  Just my two cents... Good luck and much prosperity. "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:" "You probably don't need S-Corp. There's no difference between what you can deduct on your Schedule C and what you can deduct on 1120S, it will just cost you more money. Since you're gambling yourself, you don't need to worry about liability - but if you do, you should probably go LLC route, much cheaper and simpler. The ""reasonable salary"" trick to avoid FICA won't work. Don't even try. Schedule C for professional gamblers is a very accepted thing, nothing extraordinary about it." Welcome to the wonderful but oft confusing world of self-employment. Your regular job will withhold income for you and give you a W2, which tells you and the government how much is withheld.  At the end of the year uber will give you and the government a 1099-misc, which will tell you how much they paid you, but nothing will be withheld, which means you will owe the government some taxes. When it comes to taxes, you will file a 1040 (the big one, not a 1040EZ nor 1040A).  In addition you will file a schedule C (self-employed income), where you will report the gross paid to you, deduct your expenses, and come up with your profit, which will be taxable.  That profit goes into a line in the 1040.   You need to file schedule SE.  This says how much self-employment tax you will pay on your 1099 income, and it will be more than you expect.  Self employment tax is SS/Medicare.  There's a line for this on the 1040 as well.  You can also deduct half of your self-employment tax on the 1040, there's a line for it. Now, you can pay quarterly taxes on your 1099 income by filing 1040-ES.  That avoids a penalty (which usually isn't that large) for not withholding enough.  As an alternative, you can have your regular W2 job withhold extra.  As long as you don't owe a bunch at tax time, you won't be a fined. When you are self-employed your taxes aren't as simple.  Sorry.  You can either spend some time becoming an expert by studying the instructions for the 1040, pay for the expensive version of tax programs, or hire someone to do it for you. Self-employed taxes are painful, but take advantage of the upsides as well.  You can start a solo 401(k) or SEP IRA, for example.  Make sure you are careful to deduct every relevant business expense and keep good records in case you get audited. Firstly if you've formed a limited company you don't need to register as self-employed.  You're an employee and shareholder of the company and your taxes will be handled that way. Registering as self-employed is only necessary if you're operating as a sole trader (i.e. without a company). Secondly you absolutely do want to get set-up correctly with HMRC as soon as possible, whether you're a company or a sole trader.  Ignoring the legal question your worry about paying taxes when you have no income is groundless - if you're not making any money there won't be any tax to pay.  Furthermore it seems likely that the business is currently losing money.  Those losses, if correctly recorded, can be carried forward and offset against future profits so not only do you not have to pay tax now, but you can reduce the tax you pay later when the money does start rolling in.