Becoming Your Own Boss (BYOB, 3.6)

In the first and second articles of this series (BYOB, 1.0 and 1.1) you learned some of the facts related to the current employment picture and examined some of the choices that were available to you. In the third, fourth, and fifth articles of this series (BYOB, 2.0, 2.1, and 2.2) you answered some key question to find if starting as an independent contractor was a good idea for you.

This set of articles (BYOB, 3.x) covers a number of topics that will make it more likely that you will succeed as an independent contractor. The last article covered the personal appearance and demeanor you should try to present to your clients. It also described marketing and confrontation skills that you should master. This article covers a wide range of concluding topics including keeping records, part-time contracting, making things official, working through a temp agency, and working on-site at the client facility.

Keeping A Log Book

The concept of keeping a log book is mentioned in several places in this series of articles. It is very important that you adopt the habit of keeping this log book, and that you keep it up to date. Take notes on who, what, when, where, why, and how, including telephone calls. Also take notes on your auto odometer readings at the start and end of each business trip. Internal Revenue Service rules require an up-to-date log of mileage expenses in order for those expenses to be deductible. In the event of a tax audit, the mileage log will almost certainly be required to prove your deduction.

One method is to use a system that includes a small hand-entry notebook and a small tape recorder as the temporary record and a computer file as the permanent record. In this way, cryptic notes can be made as events occur during the day, then expand appropriately on the notes as they are entered into the computer at the end of the day.

It will be very useful if you include in the log notes on the attitudes, likes, and dislikes of clients and important client staff members. This will help you to maintain the proper constructive attitude at all times. In the event of confrontation, the log will help you to more effectively handle the situation. In the unfortunate event of a confrontation the objective of which is to establish responsibility for error, and the error was not yours, the log might lend credence to your contention. If the error was yours, you might be able to use the log in damage control. Clever use of the log might offer you a graceful way of acknowledging the error while appearing more professional in doing so.

Working As A Part-time Contractor

It is possible to work as a part-time contractor while you are still employed. If you can secure a contract with a client who is located nearby and who can allow lunch-time, after-hours, and weekend contacts, and there are no problems of conflict of interest or ethics, this is a practical method for testing the contracting waters and even for getting started as a contractor. Start-ups and small companies are often amenable to such contracts, although it is not uncommon for them to ask for a reduced hourly rate in return for the accommodation. Many contractors have gotten started using this method.

Obviously, part-time contracting requires that you work a total of more than forty hours per week, and it requires that you be able to work on more than one task at a time. However, these are conditions that occur often in the full-time contracting business anyway, so you might look upon the experience as practice. If you can perform satisfactorily on such a contract, there are two distinct advantages:

1. You will have created a satisfied client, and

2. You will have earned some extra money that you can use to prepare for full-time contracting.

When Do You Make It Official?

This is one of the more difficult questions in the process of becoming an independent contractor. Give notice to your employer that you are leaving only after you have accomplished all of the preparation steps and you are truly ready. In this regard, you must understand that the situation will never be perfect. There will always be some risk. Your task, through careful preparation, is to minimize that risk.

The readiness decision hinges on the following basic factors:

1. When you have completed the legal and financial steps required in setting up a business.

2. When you have secured a place to work and the equipment with which to work.

3. When you have set up the bookkeeping and accounting systems required to file your tax returns, to pay yourself and your expenses, and to know your financial state at all times.

4. When you have set up the business procedures required to operate successfully as an independent contractor in the long term.

5. When you have secured a reasonably long-term contract (three months or more).

NOTE: Actually, this fifth item is not an absolute requirement, but it certainly is preferable to jumping into the pool of self-employment without the life preserver of a certain amount of contracted income.

6. When you and your family are financially and psychologically prepared. Financial preparation is very important, but psychological preparation is equally important. You might succeed with not quite enough financial cushion, but you will not succeed if you, and your dependents, are not prepared psychologically.

The above steps were introduced in this set (BYOB 3.x) of articles. They are discussed in more detail in the remaining articles of this series.

Working Through A Temporary Agency/Job Shop

Although working through a temporary agency or job shop is not within the definition of independent contractor, it offers certain similarities and connections that are worthy of discussion in this book. Thus, even though it does not fit well at this point in the flow of the process of deciding upon and becoming an independent contractor, it does fit into the decision process, so it is included here.

Working through a temporary services agency, often called a job shop, is one way to get your feet wet as a kind of non-employee. You might think of it as a sort of half-way house. While it is true that a temporary or job-shop worker is technically an employee of the agency or shop (which is required to handle the tax withholding, reporting, and other incidental tasks), there are few of the benefits of regular employment. Thus, such employment is a way to sample the general environment of contracting. It offers somewhat more money than a regular salary and somewhat less money than contractor rates, but it offers somewhat more security than simply launching on your own, and the job shop takes care of your tax reporting for you.

Many people prefer the job-shop arrangement, even on a long-term basis. To be sure, some job shops are less than ideal in employee relations. Some offer cause for questions of ethics and honesty. There is also uncertainty about continuous employment, but the income for a job-shopper who works year-round is greater than it would be for that same person as a regular employee. And the job-shopper need not be concerned with marketing, or an office, or any of the other facets of being in business. But there is still the challenge and excitement of frequent new jobs and new associations. You can't call it being in business for yourself, but it does work for many people.

Working On-Site At Your Client's Facility

This is another subject that does not truly fit well in the process of deciding upon and becoming an independent contractor. However, it is an important subject and it is necessary to cover it. This is probably as good a place as any.

In some instances, the client will suggest, and indeed it might be necessary to the success of the project, that you work in the client's facility. If so, it must be done very carefully, under controlled conditions. You should perform at least some, if not most, of the work in your own office and on your own equipment. You must maintain your office and its facilities, and you must always be available to do work for others, even if only on a part-time basis. You must continue to market your services to others. You must guard your independent contractor status very carefully.

The principal danger in working in the client's facility on the client's equipment is that the Internal Revenue Service might decide that you are an employee of the client for the subject contract. Such a decision would endanger your future status as an independent contractor. The IRS would then watch your operations very carefully, perhaps for years to come - not an enticing prospect.

But the real danger is to the client. If you are determined by the IRS to be an employee of the client, the client is responsible for all of the employee taxes that would have been paid from the beginning of your contract, plus significant penalties. As you can well imagine, this would be disastrous for your relationship with the client. Oddly enough, one of the few clients that seem to be able get away with this kind of situation is the U.S. government itself. Go figure.

In summary, if you pay attention to, and play by, the rules of the IRS game, working in the client's facility is sometimes permissible for a short-term contract, but the risks to the client are very great for a long-term contract.

Obviously, if you are incorporated, the rules are different. As an employee of the corporation, which you naturally are, the danger of your being determined to be an employee of the client are lessened. However, the key word here is "lessened". The danger is merely decreased; it is not eliminated. It is conceivable that the IRS could still rule that you are an employee during the subject contract, even though you are an employee of your own corporation and are paying all appropriate taxes. Extreme care on this issue is still required.

In negotiations on this subject, you can use the IRS rules as a sales tool in promoting your work in your own office. After all, weren't the ideas of working in your own office, at your own pace, and at times of your choosing, some of the main reasons for deciding to become an independent contractor. Also, you should keep in mind that, if you work in the client's facility and on the client's equipment, the client can logically ask for a reduced hourly rate.

In that connection, if you do agree to a reduced hourly rate, include that fact in your contract with the client. Then, specify in the contract the amount of rent that you are effectively paying the client through the reduced rate for use of the client's facility and equipment.

NOTE: Although clients might object to your modifying the contract, you should point out that it is in their best interests to accept your changes if they want to avoid questions from the IRS about your status as a contractor instead of their employee.

The next set of articles in this series, "Establishing Your Business" (BYOB, 4.x) covers the many details associated with establishing and maintaining an independent contracting business.

To read the rest of the series click here