Contract Consulting Work? How did you structure it?

[rothwem]

I've been interviewing with a fairly new startup company and I'm halfway through a 4 interview series and its going really well.  They're in a highly regulated space that I'm very familiar with and I'm a good fit for what they're trying to do.  For a number of reasons though, I'm considering trying to arrange a contractor type setup instead of W2 so I can have a bit more input on the hours I work, and also hedge myself a bit in case the company I'm interviewing with goes under. 

Any thoughts on how to actually accomplish this though?  I've worked with a number of guys that have retired and come back as contract consultants, but they all used temp agencies that absolutely ripped them off and they all bailed after a couple years of paying a third of their before-tax hourly rate to Randstad and Addecco.  I guess the part I'm struggling with is how to do the invoicing and payroll type of work.  I'm thinking that I want to work 5-10 hours per week and if I spend 2 hours a week doing invoicing, that's almost as bad as paying Randstad to do it. 

So has anyone here done something similar?

[BiggerFishToFI]

In general, I would target a 3X hourly multiplier for what you would work a similar W2 job for.

[jeninco]

My consulting group (there are 3-5 of us working together under one umbrella at any time) submits invoices that include a second page that's a table of date, hours worked, and a brief task description. The front page is the invoicing information, total hours worked by project, rate, and the total we're owed. I assume there's a summary front page that goes on top of it all, so the accounting group at the client site only has to look over the top sheet to write us a check.  I keep all my work notes in a bound notebook (one of those black-and-white theme books is my personal preference) and also write a date and note my total hours in there, so it's easy to either update weekly (takes 10 minutes or so) or just do my invoicing monthly (maybe 1/2 hour)? Since both my work notes and my start/stop times are in there, it's quite straightforward.

Seconding the above message: make sure you set your rate at least 2X what your W2 salary would be. You'll likely also have to start doing your own withholding and possibly making quarterly IRS payments (if you're an LLC: If you're an S-Corp, you have to pay monthly is my understanding). You're also paying 100% for your own health insurance....

[AdrianC]

I use QuickBooks. I put my hours in a timesheet in QuickBooks. I create an invoice and the hours transfer automatically.
Create a PDF, email it to client. Takes a few minutes.

I only went to QuickBooks when things got complicated due to taking on a partner and employees. Back on my own now, thankfully. Before QuickBooks I just used an Excel template for invoicing. Again, only took a few minutes.

Agree with above: billing rate needs to be 2-3x what you'd be getting on a W2.

[GilesMM]

I signed a contract directly with a company - they provided the first draft.  I have a day rate and an hourly rate.  It is six months, then we can re-negotiate if needed.  They pay 100% of expenses.  I just track expenses and hours in Excel and submit to them.  Easy peasy.

[rothwem]

On the compensation--thanks.  I plan on targeting 2-3x my W2 rate.  I'm also not really sure if this matters for this discussion, but I'm planning on trying to keep my W2 job and do this one as a "side gig".  My current job is pretty easy and has great benefits, but zero pathway for advancement in role or compensation, that's what's driving my search outside the company. 

I use QuickBooks. I put my hours in a timesheet in QuickBooks. I create an invoice and the hours transfer automatically.
Create a PDF, email it to client. Takes a few minutes.

I only went to QuickBooks when things got complicated due to taking on a partner and employees. Back on my own now, thankfully. Before QuickBooks I just used an Excel template for invoicing. Again, only took a few minutes.

Agree with above: billing rate needs to be 2-3x what you'd be getting on a W2.

So, this is dumb, but I had no idea you could do that in QuickBooks.  I've considered buying QB to do my rental property expense stuff but have always just defaulted to a less-than-ideal Excel spreadsheet because I already have Excel. 

I signed a contract directly with a company - they provided the first draft.  I have a day rate and an hourly rate.  It is six months, then we can re-negotiate if needed.  They pay 100% of expenses.  I just track expenses and hours in Excel and submit to them.  Easy peasy.

Hm.  I'm thinking that if I'm proposing it, I should make it easy for them, basically allowing them to "buy" my time like they buy pens or any other office supply.  Putting that on them would probably be less than ideal. 

That does bring up a good point though...who makes the actual contract?  Did you guys consult with a Lawyer to draw one up? 

[bacchi]

That does bring up a good point though...who makes the actual contract?  Did you guys consult with a Lawyer to draw one up?

If the company has done this before, they'll have a standard SOW (Statement of Work) contract. Read it thoroughly, scratch out anything you don't like, tell them why, and return it. I only encountered a few places that didn't have a contract ready to go; in those situations, I used a PDF editor on a contract from a prior gig.

To reiterate the above, sending an invoice only took me a few minutes each week.

[jeninco]

That does bring up a good point though...who makes the actual contract?  Did you guys consult with a Lawyer to draw one up?

If the company has done this before, they'll have a standard SOW (Statement of Work) contract. Read it thoroughly, scratch out anything you don't like, tell them why, and return it. I only encountered a few places that didn't have a contract ready to go; in those situations, I used a PDF editor on a contract from a prior gig.

To reiterate the above, sending an invoice only took me a few minutes each week.

Seriously, READ IT. I discussed this experience elsewhere, but I tried to negotiate a contract with a friend's firm, and we couldn't come to an agreement because I found their standard contract abusive and overreaching. (Ex: there was no mention of my rates, but I was supposed to agree to unspecified fees and costs from a third party company. They wanted my fingerprints and the right to do drug testing on me. I'm a mathematician, I don't drive schoolbuses of children through war zones! There's no legitimate need for them to be collecting biometric data on me!)

[AdrianC]

So, this is dumb, but I had no idea you could do that in QuickBooks.  I've considered buying QB to do my rental property expense stuff but have always just defaulted to a less-than-ideal Excel spreadsheet because I already have Excel. 
...
That does bring up a good point though...who makes the actual contract?  Did you guys consult with a Lawyer to draw one up?

You have to get the version of QB that includes time tracking. I use a very old Pro Edition (2006 - runs ok in a Win 7 VM). Not sure what they call the different versions now.

In your case I'd just go with invoicing in Excel. I use a sub-contractor who does that when he bills me.

I work on a project basis. I send a quotation to the client, which includes scope of work, billing rate, and not to exceed amount. Client writes a purchase order for that amount. They usually paste my scope of work into their PO. By taking the job I am agreeing to their standard purchasing conditions.

[sonofsven]

This is not exactly what you're doing, but I've been self employed for a long time (in construction) and do the majority of my work billed hourly.

I keep it real simple. I keep track of my hours and materials cost and bill my clients monthly, even if it's a long term job that lasts many months, or years.

I have a simple invoice template in google docs that I modify for each client that shows address of the job, hours worked and rate, work period (month), work performed (as in: siding), material cost, and total due.

I email this to the client in the first week of the following month and get a check either mailed or, more often, presented in person at the job.

I don't include the time it takes to write up the invoice in the billable hours, but I do include all other hours: actually working, going to the supplier, researching and ordering online, and one way driving time to their job location.

Keep and note all your receipts. If you're a sole proprietor you don't need to do payroll. Save for your quarterlies. I don't actually pay quarterlies any more because, in my case, the penalties are laughably small, ymmv. I just pay when taxes are due yearly.

Make sure to research all the tax breaks that are available to a schedule C filer. I pay someone around $800 to file my taxes. They send me a worksheet that I fill with all of my info and they send me the completed tax return and efile it. Even my simple business structure creates a return of 40+ pages.

[jc77]

That does bring up a good point though...who makes the actual contract?  Did you guys consult with a Lawyer to draw one up?

If the company has done this before, they'll have a standard SOW (Statement of Work) contract. Read it thoroughly, scratch out anything you don't like, tell them why, and return it. I only encountered a few places that didn't have a contract ready to go; in those situations, I used a PDF editor on a contract from a prior gig.

To reiterate the above, sending an invoice only took me a few minutes each week.

Seriously, READ IT. I discussed this experience elsewhere, but I tried to negotiate a contract with a friend's firm, and we couldn't come to an agreement because I found their standard contract abusive and overreaching. (Ex: there was no mention of my rates, but I was supposed to agree to unspecified fees and costs from a third party company. They wanted my fingerprints and the right to do drug testing on me. I'm a mathematician, I don't drive schoolbuses of children through war zones! There's no legitimate need for them to be collecting biometric data on me!)

Well done, there’s wisdom here.


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[Reynold]

If you are thinking of becoming a contractor, I suggest setting up a LLC for it.  The advantage is that assuming you have to pay your own health insurance premiums for an ACA policy of some kind, a LLC can deduct those from the business income of the LLC, as a normal private individual you can't do that. 

Given the expense of private health insurance these days, getting a 20-30% discount on the premiums because they are tax deductible is a nice bit of money saved. 

[sonofsven]

If you are thinking of becoming a contractor, I suggest setting up a LLC for it.  The advantage is that assuming you have to pay your own health insurance premiums for an ACA policy of some kind, a LLC can deduct those from the business income of the LLC, as a normal private individual you can't do that. 

Given the expense of private health insurance these days, getting a 20-30% discount on the premiums because they are tax deductible is a nice bit of money saved.

You don't need to be an LLC, you can be a sole proprietor and do this as well.

[Alternatepriorities]

The way I did mine was basically:

1) Create a LLC and open a business.
2) Get an EIN
3) Open business checking account
4) Draft a contract with company I want to do work for to pay periodic invoices to the LLC based on an agreed hourly rate for my time.

In some states having the EIN will allow them to contract with you without running afoul of the rules to prevent making people who should be employees contractors. It only came up with one client in 10 years. It also allowed me to create an i401k (there might be other routes) which i used to deferred some taxable income in years that were particularly profitable. Having the money paid to a separate checking account helps keep it clear which money is personal and which is business.

[AdrianC]

The way I did mine was basically:

1) Create a LLC and open a business.
2) Get an EIN
3) Open business checking account
4) Draft a contract with company I want to do work for to pay periodic invoices to the LLC based on an agreed hourly rate for my time.

In some states having the EIN will allow them to contract with you without running afoul of the rules to prevent making people who should be employees contractors. It only came up with one client in 10 years. It also allowed me to create an i401k (there might be other routes) which i used to deferred some taxable income in years that were particularly profitable. Having the money paid to a separate checking account helps keep it clear which money is personal and which is business.

All this 100%.

Only thing to add is you might need business insurance. One of my clients insists on it and being named as an "additional interest" on the policy.
I get mine through my local State Farm agent. At $250/year it's probably not worth the paper it's printed on, but client wants it.

I did look into errors and omissions insurance once. It was prohibitively expensive.

[jeninco]

The way I did mine was basically:

1) Create a LLC and open a business.
2) Get an EIN
3) Open business checking account
4) Draft a contract with company I want to do work for to pay periodic invoices to the LLC based on an agreed hourly rate for my time.

In some states having the EIN will allow them to contract with you without running afoul of the rules to prevent making people who should be employees contractors. It only came up with one client in 10 years. It also allowed me to create an i401k (there might be other routes) which i used to deferred some taxable income in years that were particularly profitable. Having the money paid to a separate checking account helps keep it clear which money is personal and which is business.

All this 100%.

Only thing to add is you might need business insurance. One of my clients insists on it and being named as an "additional interest" on the policy.
I get mine through my local State Farm agent. At $250/year it's probably not worth the paper it's printed on, but client wants it.

I did look into errors and omissions insurance once. It was prohibitively expensive.

Ha, one of our clients requires us all to have workman's comp insurance (they're a big company, it's part of their standard contract). So each person in our working group has workman's comp, in case our bunny slippers don't grip the floor well between our kitchens and our in-home offices. Whatever, it's a pass-through cost as far as we're concerned. (By which I mean it's made up for in our rates.)

[Alternatepriorities]

The way I did mine was basically:

1) Create a LLC and open a business.
2) Get an EIN
3) Open business checking account
4) Draft a contract with company I want to do work for to pay periodic invoices to the LLC based on an agreed hourly rate for my time.

In some states having the EIN will allow them to contract with you without running afoul of the rules to prevent making people who should be employees contractors. It only came up with one client in 10 years. It also allowed me to create an i401k (there might be other routes) which i used to deferred some taxable income in years that were particularly profitable. Having the money paid to a separate checking account helps keep it clear which money is personal and which is business.

All this 100%.

Only thing to add is you might need business insurance. One of my clients insists on it and being named as an "additional interest" on the policy.
I get mine through my local State Farm agent. At $250/year it's probably not worth the paper it's printed on, but client wants it.

I did look into errors and omissions insurance once. It was prohibitively expensive.

Ha, one of our clients requires us all to have workman's comp insurance (they're a big company, it's part of their standard contract). So each person in our working group has workman's comp, in case our bunny slippers don't grip the floor well between our kitchens and our in-home offices. Whatever, it's a pass-through cost as far as we're concerned. (By which I mean it's made up for in our rates.)

I've never run into anyone wanting insurance but the vast majority of my clients are small to medium size businesses. I still do some occasional work post FIRE if it sounds interesting.

[JuneApple]

I use GnuCash for all of my accounting, including invoicing. It's free and open source. I also use it to track my personal spending. I track my time in the free version of Toggl Track.

[BlueHouse]

I set up as an S-Corp, but would do something simpler if I had to do it over. 
I only use "Time & Materials contracts" because any other type allows government to open my books and inspect them.  With T&M, the only thing they get to see is a timesheet.  I record hours in Excel spreadsheet, and then once a month slip the hours into the spreadsheet template and pdf it over to my client.  It takes about 5 minutes.  When I have expenses, I bill them as materials (no markup). 

For payroll, when I first started, I just used the small business payroll options through my bank, but because I only billed monthly, I kept having to re-learn what I was doing every month.  After a few months, I also wanted to set up a 401K, and I used Paychex to do that, and for about $1200 year, they also did all my paycheck stuff including withholding, tax forms for fed and state, and my form 5500 (for when the 401k gets big enough).  I still did all the timesheets and invoicing in Excel. 

I did have a client demand worker's comp insurance once, and after paying for it for one year, in the second year, I told them I wasn't doing it anymore, showed them that it wasn't required for one-person companies (I can't sue myself) and they accepted it.  I worked government contracts as a subcontractor, so my clients were used to the paperwork.  But they were always surprised when I crossed things out or added things to their "standard contracts"  haha.  Always remember, a contract is simply an agreement between two parties.  There's nothing "standard" that you cannot change. 

I bought quickbooks when I first started contracting, and found it was overkill for what I wanted/needed.  Excel worked just fine for me. 

[Alternatepriorities]

I'd second BlueHouse on the T&M contracts with no markup on materials. Also just recording hours in Excel. I do the same but didn't think to mention it. I've done all my accounting even estimated taxes in Excel but it really is a very simple business model so that helps.

[TimCFJ40]

My wife works as a consultant in the medical field doing case reviews as a 1099 contractor.  Her contract includes a per case rate for cases reviewed, and an hourly rate for other tasks.  She keeps a simple spreadsheet of cases and hours as she works, and bills them at the end of each month. 

You didn't mention the type of consulting, but the nature of the work and the expenses involved in performing the work will dictate how complex things need to be. 

[Cassie]

I have been consulting for 8 years in human services and I can only bill for time spent on the case doing actual work so I don’t get to bill for invoices. However, this is a very small company. Years ago as a social worker the billing was complex as we had 3 different forms to fill out for each case so they allowed us to bill 30 minutes every 2 weeks to accomplish this but it was a much bigger company.