1099 Work - Part 1

For most Americans, there is only one way that income is earned. A typical forty (plus) hour work week at an employer who offers a salary, benefits, and various other perks. This type of job is what I call W-2 work. It is the job that I have Monday-Friday 8:30 AM-5:00PM. As a follow-up to some soapboxing (I can’t believe that is actually a word) for earning as much income as possible, I thought it would make sense to examine, in depth, the idea of working without a W-2.

Independent contracting (1099 work) is an interesting option for earning extra income. I am examining this from a purely secondary income view, since the world of traditional W-2 employment offers a lot of benefits that 1099 work does not. The aspects that I am covering can easily translate to any independent contract work. I would like to thank Tara, Odette, and David for their help with the remainder of this piece. That appreciation is the only payment they are going to receive for their assistance.

I recommend independent contracting for someone who does not require some of the benefits due a traditional employment situation, like a salary, health insurance, 401(k), etc. This applies to a spouse of someone who has these already, or someone who receives them through their “regular” job. This opportunity can be especially beneficial if you possess skills from previous or current experience, like bookkeeping, IT, or construction to name a few. If you are starting to field contract work, I recommend sticking to your current field, or something that you are VERY comfortable doing. Keep the following things in mind when you are negotiating deals for your “side work:”

1. Ask for more money than your hourly rate at your “regular” job. I think that 15-20% more is perfectly reasonable. You will be paying all of the taxes on this income, since it won’t be subsidized by an employer. Also, the time you spend on this “side work” will be time that you are typically spending with family and friends or doing something that you enjoy, so you will want to make it worth your while. You are not burning through dollars in benefits, so the actual cost to the firm or individual will be decreased as you perform work as a contractor.
2. Utilize your personal and work contacts to build your business. This second income can also lead to more work, so networking is very important. It can also build your resume, as you may be taking on work that you wouldn’t normally come across in your regular 9-5.
3. If you are going to take on jobs consistently or move the contracting to a more prominent position in your multiple streams of income, consider working as an “employee” of your own LLC, LLP, or S-Corp, earning dividends rather than a “paid as you earn” salary. This will help to protect your personal assets, as well as aid you when it comes to tax season.
4. Start a high-yield savings account to store 30% of your contracting income. You can not only separate and hold the money you need to pay your taxes with, but you can also earn interest on that money as it works for you, sitting in the bank.
5. Watch out for sketchy or shady firms that only want to take your work and never provide payment. Lots of people are taken advantage of in their contracting work, because they did not know or did not fully investigate a company thoroughly before getting involved with them.
6. Negotiate a contract that is mutually beneficial. Ensure that you will be given adequate notice prior to the end of your assignment. I would ensure at least 45 days notice, since you are going to want to have time to find another contract to replace one that is going away. You are also going to want to include clauses that will render a contract null and void, should certain issues arise. Make certain that you specify terms for payment once you submit an invoice. You should also spell out who will cover expenses, especially if your contract will require a significant amount of travel.

Now that I have written out some things to watch out for, I am going to continue with some of the awesome benefits in the second part.

Enjoy the weekend!