Input from IT consultant with their own LLC

[marcoi]

Hi All,

I wanted to pick the brains of the IT consultants who run their own company. I'm finally making the move from salary employee to IT consultant. I already setup my LLC and now working on getting the rest setup. I will have a pretty simple business. It will be just me, on one contact FT for one client.
I'm interested to see what others have done. I see two choices i can take.
1. keep it simple, just get a book keeper to help me with taxes and do pass-through with LLC income
2. Setup a S-corp, get an accountant and payroll service to figure out best way to do setup payroll for myself and pay taxes etc automatically.

Option 1 i need to be move involved, but its the cheapest option.
Option 2, i can be more hands off but it would cost me several thousands per year in services and fees between accountant and payroll services.

I dealing with getting business insurance as well, i went with techinsurance.com to get quotes based on a fellow co-consultant suggestion.

Any input or suggestion welcomed.

Thanks All

 

[T_Minus]

I'm not sure why you think #2 would be more hands off and #1 more hands on... #2, imho is an absolutely waste of money and time/hassle for a 1 person consulting business. Go with #1 and hire for what you don't want to do / can't do... it could be as simple as someone who does your end of year / quarterly stuff or someone who inputs all your receipts, categorizes it for you in addition to your tax stuff.

Either way as a 1 person IT consultant the whole business isn't going to have extreme complexities. Get someone who knows what they're doing in your field / someone who works from home, etc... and you'll very likely be fine and take a huge amnt of stress off you doing it all.

Maybe posting your location as some people may have referrals/suggestions too.

 

[marcoi]

@T_Minus thanks for the feedback. Sometimes when researching all this stuff and getting tips from others it gets confusing.
I'm leaning towards keeping it simple and just getting a book keeper /accountant to help ensure all the tax stuff is done correctly.

I'm located in Salem NH if anyone has referrals.

 

[IamSpartacus]

@T_Minus thanks for the feedback. Sometimes when researching all this stuff and getting tips from others it gets confusing.
I'm leaning towards keeping it simple and just getting a book keeper /accountant to help ensure all the tax stuff is done correctly.

I'm located in Salem NH if anyone has referrals.

I'm actually in the process of setting up my own LLC for consulting work that I do on the side. Have you gotten so far as to creating contract templates, etc. to provide to clients? That's the step I'm most concerned about as I want to ensure it's done very professionally both for the client as well as for myself to ensure I'm protected.

 

[T_Minus]

Pay a lawyer if you're concerned about contracts, terms, and the paper actually meaning something.
While it may not be something I suggest you can get very far without any contracts, fancy templates or lawyers.

In addition to the actual contracts and terms you want your clients to be aware of I urge you to practice discussing them with friends/family so you're not just blurting out all these rules and regulations for clients to follow... huge turn off when that stuff is represented improperly or thrown in a clients face, even if it's standard business practices they've dealt with for years.

FWIW getting started, on the cheap you can find legal templates to modify and use/go from in addition to actual statements of work templates, and other such documents you'll need. One of my favorite things to do when looking into new documents for a biz is to find what others are using... you can do some advanced google searches with operators looking at specific consulting firms and finding all files they have online that are .PDF / .DOC / .DOCX I've found many business documents that show you how your competitors are thinking/working this way.

 

[marcoi]

@IamSpartacus - I actually used Legal Zoom to setup my LLC last year. I believe they offer sample contracts templates depending on package you get with them but I haven't looked into it too deeply since I am only now moving into the consulting. Plus I will be on a sub-contractor agreement and working off task orders for my current consulting, so that mostly falls on the contracting company to provide me those documents.

 

[T_Minus]

That's one of the template companies I was thinking of!

 

[CreoleLakerFan]

LLC w/passthrough is easier and cheaper to manage, especially if you're doing Corp-to-Corp contracting with a single person.

 

[amalurk]

If you are creating any intellectual property that you might want to own rights to have right to reuse with other clients and/or they are adding in non-compete terms to your contract you definitely want a lawyer knowledgeable in those areas to look at the contract. You can really get screwed by a non-compete if you aren't careful.

 

[marcoi]

LLC w/passthrough is easier and cheaper to manage, especially if you're doing Corp-to-Corp contracting with a single person.

That is what I think as well. I'm thinking I should also get, at least for the first year, a book keeper or accountant?

one thing that keeps coming up in my research is setting an s-corp to save on taxes. Anyone have experience with that? Seem like as a pass-through i will pay all my taxes for the full amount.

 

[amalurk]

one thing that keeps coming up in my research is setting an s-corp to save on taxes. Anyone have experience with that? Seem like as a pass-through i will pay all my taxes for the full amount.

Here is an explanation How to Save Taxes with an S Corporation • Stephen L. Nelson CPA PLLC

 

[T_Minus]

IMHO a 1 person consulting gig does not warrant a book keeper or accountant regularly employed/contracted.

You're only available to do so much in one day, your contract and invoices will include the incoming numbers you need to keep track of, and keeping track of expenses for one person for a consulting business isn't a lot of paperwork.

A basic excel document to track incoming and outgoing cash is very likely all you'll need.'

Keep the real physical copies or scan/archive them for record keeping, keep the #s up to date monthly and your qrtly and year-end will be easy, and fast.

If your CPA / tax attorney isn't asking you a million questions about your 'home' business and gathering a bunch of non-business numbers regarding your home then you likely need to find someone new. Inidiv taxes + small biz taxes can be made stupid easy, and can cost you $500 but in my experience it's directly related to how much $$ you'll save.

 

[Blinky 42]

The decision to do file as a S Corp or C Corp is really what you are debating first, and I would really suggest finding a quality CPA locally that can go over with you what the trade-offs are after you lay out the details of your personal situation and the corporate situation in the immediate future and X years down the road. Same for a quality lawyer, easier to find someone now so you know who to call when things go pear-shaped and you need help. For lawyers and the like it is important that they know their area well and have the right contacts to direct you to others when it is outside their main area.
Remember that if you are going into business for yourself - pay others who know their shit for that knowledge and don't waste your time trying to figure it all out on your own or half-ass it and get screwed when a client drops you, or sues you for doing something wrong, or makes you the scapegoat for what they did wrong, or spills coffee on themselves that you gave them and other crazy but sadly happens in the USofA nonsense.

Things to consider
- Are you married/going to be? With S corps profit and loss flow through to you and your spouse and can skew a lot of things.
- Looking to get a loan anytime soon (mortgage/equipment/car) - forget about it or prepare for a different credit situation as going from F/T to "self-employed" in the eyes of the credit agencies sets you back and it takes a few years of the company operating well to get back to where you were before the jump
- Kids going to college / financial aid eligibility/ student loans for anyone for both of the above
- Health insurance, you mentioned looking @ one of the insurance pools that does some tricks to get a group plan going for individuals / small groups. What works is state-specific and yoru CPA and Insurance folks can explain the pros and cons of each. My current company has 2 F/T and we go a small group plan that actually is cheaper for me than if I was paying for coverage through my wife's company, but you have to run the #s to make sure.
- Where are you working - at home, at the one client's facility, in new dedicated space? How you write off varios business expenses and what you can consider as an expense varies with your situation. You can try and write off all sorts of stuff, but the CPAs that have worked for the IRS will tell you that a lot of the things people try and do will get them screwed if audited by the IRS.
- If working at home, set aside obviously dedicated space for just working so that you can use that sqft vs home sqft in calculations to write some things off
- Only 1 F/T client to start - is that for a short period of time or long term? Are you better off working for them directly and avoiding the extra expense of all the overhead, insurance, accounting etc?
- Do you ever want to expand - adding other W2 people or 1099 contractors into the mix so that you can take on larger projects?
- There are (were) limits on corporate losses that can be counted / rolled over from year to year depending on your tax filing. The discussion with the CPA will sort it out with the current rules for Federal and State.
- Are clients in the same state & country as you. NY, CA and others have extra nonsense you have to go through when you get $ from clients in those states. International is another beast.

Good luck! - It can be frustrating as hell but fun and liberating to be your own boss. But you have to do all the nonsense your previous bosses took care of as well.

 

[marcoi]

Thanks @Blinky 42 for the detailed response. I put some answers to your questions below.

The decision to do file as a S Corp or C Corp is really what you are debating first, and I would really suggest finding a quality CPA locally that can go over with you what the trade-offs are after you lay out the details of your personal situation and the corporate situation in the immediate future and X years down the road. Same for a quality lawyer, easier to find someone now so you know who to call when things go pear-shaped and you need help. For lawyers and the like it is important that they know their area well and have the right contacts to direct you to others when it is outside their main area.
Remember that if you are going into business for yourself - pay others who know their shit for that knowledge and don't waste your time trying to figure it all out on your own or half-ass it and get screwed when a client drops you, or sues you for doing something wrong, or makes you the scapegoat for what they did wrong, or spills coffee on themselves that you gave them and other crazy but sadly happens in the USofA nonsense.

Things to consider
- Are you married/going to be? With S corps profit and loss flow through to you and your spouse and can skew a lot of things. Yes married, wife has a part time piano teaching job so she been self-employeed a long time now. I'm leaning toward avoiding the s corp for now.
- Looking to get a loan anytime soon (mortgage/equipment/car) - forget about it or prepare for a different credit situation as going from F/T to "self-employed" in the eyes of the credit agencies sets you back and it takes a few years of the company operating well to get back to where you were before the jump
funny you mention this, I got my quarterly call from Quicken loans today, (i have my mortgage with them). so they asked about getting a new house any time within the next 12 months, which I said i am considering it. come to find out, as you mentioned, going to self employed killed any change to get a mortgage, they require 2 years of operation history. Didnt know that before making the jump. It doesnt affect us to much since we plan on renting another 2 years anyways.
- Kids going to college / financial aid eligibility/ student loans for anyone for both of the above
- Health insurance, you mentioned looking @ one of the insurance pools that does some tricks to get a group plan going for individuals / small groups. What works is state-specific and yoru CPA and Insurance folks can explain the pros and cons of each. My current company has 2 F/T and we go a small group plan that actually is cheaper for me than if I was paying for coverage through my wife's company, but you have to run the #s to make sure.
I decided to keep cobra with current company for health plan for me and the wife. The insurance was for business general liability and workers comp that i was getting quotes for.
- Where are you working - at home, at the one client's facility, in new dedicated space? How you write off varios business expenses and what you can consider as an expense varies with your situation. You can try and write off all sorts of stuff, but the CPAs that have worked for the IRS will tell you that a lot of the things people try and do will get them screwed if audited by the IRS.
I'm 100% remote at the moment so i work from home. I don't expect much traveling to client sites. I do need to figure out business expensive so thats where a CPA would help out.
- If working at home, set aside obviously dedicated space for just working so that you can use that sqft vs home sqft in calculations to write some things off
- Only 1 F/T client to start - is that for a short period of time or long term? Are you better off working for them directly and avoiding the extra expense of all the overhead, insurance, accounting etc?
The contract is going to be extended for the next year, so I'm good from april till july 2018 with the one F/T client. I expect the contract to renew for several years.
I cant work for them directly due to non-compete with my employer and the end client is a state agency which requires to be on a state contract. Funny thing is I will be sub contracting under my current FT employer, so i will be just changing my status (and pay) with my employer from FT to contractor, and doing the same job i been doing the last two years.
- Do you ever want to expand - adding other W2 people or 1099 contractors into the mix so that you can take on larger projects?
Not at the moment, i dont want the added burden of managing others.
- There are (were) limits on corporate losses that can be counted / rolled over from year to year depending on your tax filing. The discussion with the CPA will sort it out with the current rules for Federal and State.
- Are clients in the same state & country as you. NY, CA and others have extra nonsense you have to go through when you get $ from clients in those states. International is another beast.
Both my current employer/ future contractor and the end client are in a different state.

Good luck! - It can be frustrating as hell but fun and liberating to be your own boss. But you have to do all the nonsense your previous bosses took care of as well.
-thanks, i know in the long run it will be worth the effort and time spent now. but man what a pita our current way of doing business is.

 

[K D]

IMHO a 1 person consulting gig does not warrant a book keeper or accountant regularly employed/contracted.

You're only available to do so much in one day, your contract and invoices will include the incoming numbers you need to keep track of, and keeping track of expenses for one person for a consulting business isn't a lot of paperwork.

A basic excel document to track incoming and outgoing cash is very likely all you'll need.'

Keep the real physical copies or scan/archive them for record keeping, keep the #s up to date monthly and your qrtly and year-end will be easy, and fast.

If your CPA / tax attorney isn't asking you a million questions about your 'home' business and gathering a bunch of non-business numbers regarding your home then you likely need to find someone new. Inidiv taxes + small biz taxes can be made stupid easy, and can cost you $500 but in my experience it's directly related to how much $$ you'll save.

I don't have any personal experience in this but I have a cousin who is a trainer with her own company and managed for a few years with excel spreadsheets and word documents. I helped set her up with a simple document management system for her invoices and documents and NEAT Receipts for her receipts. Tax time became much easier after that. The thing I noticed that helped make things easier for her was getting into the practice of scanning and filing receipts immediately rather than deal with hundreds of bits of papers at the end of the year.

Now I got her setup with a free account at Wave Apps - Free Small Business Software - Invoicing Accounting Software from Wave plus Credit Card Processing and Payroll and she cant stop thanking me. I'd recommend taking a look at it.

 

[Diavuno]

I had started two businesses that FLOPPED.
I was working for another MSP when I was run over (motorcycle VS SUV) I ended up with a LOT of time...

Single member LLC is the best way.
Dont bother with insurance, just make sure EVERYTHING is done through the business.
Quickbooks online is a great starting point, most book keepers and CPAs will want you to use normal quickbooks desktop.
-Book keepers and CPAs also generally have low costs to setup your books with the right tax info.
Depending on what your doing you can tailer from there.

Are you going to be a strict consultant?
you should be networking last year!

Will you be an outsourced IT person?
GET A PSA/RMM Connectwise is the "standard" for MSP's but cost and setup is a pain in the rear! I recommend SolarwindsMSP recent name change they used to be max focus.

PM me with any questions.

 

[marcoi]

So i decided to go with pass-through for this year. I will meet with an accountant after a few pay periods to get an idea of what services they offer and costs involved since it will be free consultation anyways.
My situation isn't typical, I'm assuming many don't leave a company to become a consultant then their first contract is with the same company doing the same job.
Anyway my 2 week notice been giving and i signed the sub-contractor agreement, all that is left is getting the task order for work to be performed starting April 1st.

In the meantime, anyone using Quickbooks software now? How much of a pain is it to learn to use?

 

[Blinky 42]

QuickBooks is "ok" - if you do things the way it wants you too and don't stray from the QB view of the universe then it gets the job done. For you case with just tracking expenses / time and 1 or a few clients it should be more than enough and pretty easy to get up and running.
If you have ever used Quicken it is similar, and it is a pretty standard double-entry bookkeeping that you would get from any accounting software.

Stray out of the QB mode of doing things and only sadness and frustration result. Want to have a multi-page invoice that doesn't look like crap with a header on just the first page and total on the last? Nope.. so sorry.

I use the desktop one on a VM because I don't like putting more than I really need to in "the cloud" and would rather secure my corporate info myself than leave it to Intuit. That said a lot of folks I know use the web one and it has essentially the same functionality.

Linking with banks is hit-or-miss, and really depends on the bank how well it works. Same for credit cards etc. Just remember to aggressively do the quickbooks backups and copy them off to somewhere safe in addition to your normal backups. When starting out if you do something wrong setting things up it is often easier to just roll back to before your mistake and go the other way and reenter the last day or so of data as it is unforgiving in terms of undo.
Also be careful when it sets up auto rules/renaming/etc trying to be helpful, especially on the Bank Feeds - it can guess wrong and months later you notice it did the wrong thing and it can take hours to wade through old transactions and fix everything.

 

[marcoi]

Does QB estimate your taxes so you can submit quarterly tax estimates? I can guess what i would owe based on tax bracket and go that way, but i rather have something a little more accurate so i don't over/under pay taxes.

For now, all expenses are tracked in excel. I still haven't invoiced/ collect fund yet but i plan to put that in excel as well for now.

PS - I did the same setup (QB on a VM) for my old employer back when i was in the office. It wasn't my role to do IT support but i was better at it then anyone else and it was nice to take breaks from doing client projects all the time.

 

[T_Minus]

Depending on your expenses, and what you're doing estimating based on brackets can be very far off. Disclaimer, not a cpa tax lawyer, etc, just sharing my opinions.

Also, not sure if you're aware or not but you do not have to pay quarterly estimated taxes actually every quarter. As long as you get your payment in before the last quarterly is due you're fine, and owe $0 in fees. For a first year saving xx% then paying a big chunk at the end based on entire year makes a lot of sense vs. estimating quarterly and losing access to cash you may not need to pay and not getting it for months/year sucks. I started saving 25% of gross and then adjusted.

Honestly, I don't suggest trying to guess and estimate payments because a good tax lawyer/cpa will reduce your taxable income a huge amount for things you probably are not thinking of and/or don't have any idea how to estimate their deduction value, etc... when you start doing business taxes and not just employer based you're open to a lot more business deductions, especially doing it as a consultant from your home, with your own vehicle, etc... % home expenses not just % for office, % cell phone, % car, and those are the easy/obvious ones.

My suggestion... track expenses and income in excel, save 20-25% of gross income and then figure out your "1st tax year" late Dec. early Jan. and send in your 'close' to accurate payment then based on your year. If you 'owe' taxes (you will unless you're expenses are huge) need to make sure you don't under pay your last quarterly or there may be a small fee. Depends who you talk to, sometimes we pay the fee when we file in April, and pay then but most often we pay before it's 'late', file extension in April and then wrap them up 2 weeks before they're do in fall.

We went through 3 or so local people before finally driving 2hrs+ to the bay area to meet with a new company that's MUCH MORE "in tune" with technology based businesses, and didn't go to college to get their CPA certification/degrees and then 'get a job' but instead started a business, and grew a tax business, worked for the IRS, etc... sure they cost $300+/hr and a couple grand every year but it pays for itself. Like I said we've gone through a # of local people and businesses before landing with this one for many years now, and it's AMAZING how much time a legit person will take asking you questions, getting ALL your information not only for your business but your HOME regarding the business, your families HEALTH, and all the other 'gotcha' discounts the gov. throws around.

At any one time I usually have 4-8 active clients and I never did renew quick books, or find billing software to save time/effort/hassle. They all added to the work load. I actually started specing/organizing my own billing / support / note / etc type software to help me scale but nowdays all these 'cloud providers' have you covered if you don't mind molding to THEIR VIEW, and paying recurring monthly fees I got very very selective for my client-service business so I have no goals or needs to scale it anymore, and set in my ways now of Excel and end of year shuffling to figure it out as well as using PDF docs for invoices. I average about 4 invoices per-month delivered via e-mail, and ALL are paid via check in the mail, screw losing another 2-3% to CC processors, etc... then again when I was growing and larger in years past I did accept CC because when your'e dealing with middle sized+ businesses it's MUCH easier (in my experience) to get someone to whip out a CC and make a payment vs. going to accounting, filing the invoice, getting a paper check, mailing it, etc...

Sorry to ramble things just popped in my head as I went