Transition to contract work- what do I need to prepare?

[Shrinkydink8]

Hi everyone-

Well, what I dreaded finally happened.  My grant-funded position at a university ended, and I'm now looking at taking contract work for the short-term, possibly long-term.  I will definitely do this in the immediate term as I need income flow right now.

I'm a therapist, so contract work typically entails keeping a % of my own billings, with another % going to the practice owner.  No paid time off, benefits, holidays, etc.

I know I'll need to save money for taxes later, and will need to pay for my own liability insurance.  I'm maintaining half-time status at the university, which thankfully qualifies me to continue benefits.

I've never worked like this, always had a steady paycheck, so what I need to do to prepare?  I'm not quite sure yet the how much I'll make per hour, so I'll have to wait and see how much I get reimbursed, then figure out how many hours I need to schedule.

Anything else I should anticipate?  This transition has me very nervous.  I haven't stopped looking for full-time positions, and will likely continue to do so unless the contract thing proves promising.

[OtherJen]

I'm assuming that you're in the USA because of the comment about benefits. That's awesome that you can keep those!

You will need to pay estimated taxes quarterly, beginning with the 2019 tax year (it's late enough in 2018 that you're in the 4th quarter for IRS purposes). These will need to go to both the IRS and the state (if your state collects income tax). You will also be responsible for both the employee and employer shares of FICA. Currently, I set aside a third of each check in a separate account for tax payments. It's a bit overkill, but I've been burned before by not setting enough aside because I made more than projected in a year. If I don't use all the money for taxes, then it's extra savings.

If you're contracting with established organizations, they will likely already have paperwork for their contractors that specifies all the terms of the agreement. Check these over very carefully—I've had to renegotiate various points on mine before, including a non-compete clause from one organization that would have required me to terminate my best client. Make sure that your fees, the process of invoicing, and the conditions of contract termination on both sides are agreed upon before you sign anything.

In the very short-term (at least through the end of 2018), you will probably want to remain a sole proprietor for tax purposes, as this is simplest. Because you'll be dealing with liability insurance and possibly other overhead, it would be a good idea to talk to an accountant about your tax-status options if this turns into something longer term.

It seems like a lot, especially if you've always had W-2 employment. But I love the freedom of contracting. I hope you also have a good experience!

[Shrinkydink8]

Yikes!  You've given me a lot to think about.  I have never had to think about all this before.  Ugh, adulting.

Yeah, I know to be wary of non-compete clauses, I plan to avoid those if at all possible.  The practice owner really wants my area of expertise, so I think I could probably negotiate not to sign one of those.  I'm in a small geographic area so I don't want to limit my employment options. 

[OtherJen]

It seems like a lot, but right now the most important things are setting your rate, screening anything you sign, and setting tax money aside. You don’t need to worry about filing taxes until the standard filing period after the new year, and by then you’ll have a better idea of your situation. If you’re working around other contractors, they can probably give you more field- and location-specific information (e.g., how they file taxes and what to expect).

You can do this. I promise that it gets easier and less scary as you go.