Percentage of Self-Employed IT Workers Increasing

dcblogs writes "The tech industry is seeing a shift toward a more independent, contingent IT workforce. About 18% of all IT workers today are self-employed, according to an analysis by Emergent Research, a firm focused on small businesses trends. This independent IT workforce is growing at the rate of about 7% per year, which is faster than the overall growth rate for independent workers generally, at 5.5%. A separate analysis by research firm Computer Economics finds a similar trend. This year, contract workers make up 15% of a typical large organization's IT staff at the median. This is up from a median of just 6% in 2011, said Longwell. The last time there was a similar increase in contract workers was in 1998, during the dot.com boom and the run-up to Y2K remediation efforts."

Well..

[Moheeheeko]

..Anybody who finds this suprising hasnt spent any time working IT for a company. Working IT in any company is a thankless job where every problem is your fault and must be fixed 2 hours ago.

Re:Mostly because companies are bastards.

[cayenne8]

Definitely look into incorporating yourself, and if you are just a "company of one", look into filing for Subchapter "S" Corporation for federal filings.

You avoid double taxation this way....you pay yourself a "reasonable salary" according to the IRS, and you only have to pay employment taxes (SS and medicare) on that portion of income, the rest falls through at EOY, and you don't have to play employment taxes on that, nice way to save your hard earned money.

Do get a CPA for this however.

I'm anxious to see what the individual mandate does to the self employed worker from Obamacare. I'm thinking I'll need to raise my bill rates next gig I do that is 1099 and not W2 to cover that.

Re:Mostly because companies are bastards.

[cayenne8]

I'd like to hear from anybody who's opted for S-corp tax status as a self employed IT contractor with no income beyond his/her labor rate. Because my understanding is that the IRS takes a pretty dim view of writing part of your labor rate as 'profit' because presumably whatever you are charging for your labor IS a reasonable salary. My understanding is that S-corp status only makes sense (IE isn't likely to result in an audit) if you operate a business that generates legitimate profits; IE you sell products/services at a markup, which pretty much excludes any one-man IT shop. Maybe if you contract in some crazy niche market where you can command $400/hr then you can get away with this but if you are charging normal market rates for your normal work then it seems like an invitation for an audit and penalties.

I do the S-Corp thing and know many others that do too, as one man band things.

It works this way, let's say you bill out for $100K. You pay yourself a "reasonable salary" as president of the company of $40K.

You only pay employment taxes (SS and medicare) on that $40K.

The remaining $60K, you deduct for expenses, etc....and out of what's left falls through to your personal taxes which you pay normal federal (and state taxes if you live in such a state) on that, but no employment taxes.

It is perfectly legitimate and legal. The trick is to not be too greedy with what you propose a "reasonable" salary is. There is no guideline, but if you figure about 40% of your bill rate, that seems to be reasonable for myself and others I've known that do this.

Again, get a good CPA to help advise you.

But many folks in the IT contracting market do just this type of setup because it is legal and works. Just keep good records, be legal and don't get greedy and you'll be just fine.

I personally have had a number of years experience with this.

Re:Mostly because companies are bastards.

[Keick]

I'm going to chime in here, as other have.

I'm an S-Corp as well, vs. a LLC for exactly those reasons. Namely I pay myself a standard rate, and bill out at a higher rate. There are several advantages, and caviets.

Let me jump in a say that MOST contract houses run at the 1.8 to 2.1 factor and for good reasons. For example, say I'm at a 2.0 factor. If I want my hourly rate to myself to be $40 I'll charge 2.0 times that to my customer, or $80.

The best reason to stay in that 1.8 to 2.1 range is that it is easy to account for in case of an audit. Most GSA have base * overhead * profit, where profit is supposed to be only 15%. However the overhead side of the equation is big, because it covers all the indirect employees; secretaries, accountants, IT staff, CEO's, etc. So on any given GSA contract, the billing rates will all end up in the 1.8 to 2.1 range.

1) The key here is the IRS knows GSA, so anything in that range is legit, so long story short stay at or ABOVE the 50% mark for your hourly rate vs billing rate if you want to stay off the IRS radar.
2) As much as you'd like to, don't ever write off part of your house on the S-Corp. Yes its legal, but since it is highly abused your more likely to be flagged for an audit.
3) Expense as much as your toys as you can, computers, routers, printers are all valid deductions of the S-Corp income.
4) Use quickbooks and its payroll add-ons. Yes there are other tools, but quickbooks is easy an worth the $300. Wait for a good sale in Feb of almost every year for $100 off.
5) Set everything up hourly, not salary. Set your billing rates, pay rates, vacation rates, even 401K or 408K per hour. This just is much easier to track and bill your clients, and pay yourself and your future employee's!