Hello!

I am considering performing either contract or part-time employment with an employer in a different state (KY). I currently work full-time, remotely, in FL.

I believe because my residence is in FL that contracting will be my only option (due to employer rules on hiring out of state).

To contract, I believe I’d have to be a sole proprietor (I think) and submit a bid, etc.

I don’t need to do this financially - and am going to move to KY in the next year (making part time employment possible instead of contracting). In other words, I could just… wait or not do this at all. My main goal here is just to make some extra money - but if taxes or something was going to make me miserable then I can just not do this.

Questions:

  • What effect would contracting in a different state have on my taxes?
  • Should I just wait til I move to KY and try to go the part-time employment option instead of dealing with the sole proprietorship?
  • Any other advice / thoughts you have?
  • lemmyman@lemmy.worldEnglish
    0·
    1 month ago

    I’m a full-time contractor. One of my clients is based in CA but also has an office in my state. Some random thoughts:

    • Dhork’s post looks accurate to me regarding state income tax stuff. As a contractor, I haven’t done anything at all in CA - I just get paid by my client and count it as normal revenue that I earn where I live. If you go the contract route, I expect it to be similarly simple for you.
    • Tax-wise, a person who makes money from work other than employment is by definition a sole proprietor. There is nothing to set up, it’s just the word used for that the type of entity that earns contracting income that isn’t set up as a corporation or LLC. Even if you made an LLC, unless you elect s corp or c corp status, that LLC is a “disregarded entity” as far as the IRS is concerned and tax treatment would be the same as for a sole proprietor.
    • people get worked up about self-employment taxes, but in my case I actually come out ahead because I can dump way more into an individual 401k than I ever could as an employee (employer contribution can be around 18.5% of your profit as a sole prop, on top of the employee deferral). I also run as an s-corp and my state has a PTE tax, both of which let me avoid a bit of federal taxes. But s corp is only relevant if you make like $80k+ from self employment and don’t have much other w2 income.
    • submitting bids is a function of your relationship with the client and the norms in your industry. I have two clients where I just have an open-ended contracting agreement (both clients had their own standard agreements and I negotiated small changes in one case) and I bill for however many hours i worked every month on projects that are constantly evolving. My standard though is to submit time-and-materials bids for fixed-scope projects. I keep an eye open for fixed-bid opportunities too but I haven’t submitted any fixed bids yet.
    • contracting is not that big of an administrative hassle so don’t let that deter you. But do estimate the tax impact and do either make estimated payments or adjust your withholdings at your w2 job to cover them (this one is easier IMO).
    • contractors get a higher hourly rate than employees. Don’t undervalue yourself. If you don’t have a good benchmark, do some research. I am in engineering services where big companies regularly charge $170-200/hr for my level - I charge a bit below that normally, with a further discount on my long-term open-ended contracts. But the most I’ve ever made as a w2 was about half that amount, after taking all the tax and benefits stuff into account. I’ve never fully understood why clients are willing to pay that much, but they are.
    • dhork@lemmy.worldEnglish
      0·
      1 month ago

      But the most I’ve ever made as a w2 was about half that amount, after taking all the tax and benefits stuff into account. I’ve never fully understood why clients are willing to pay that much, but they are.

      Three reasons: First, as you know, contractors pay the “employer” portions of a lot of benefits themselves. Payroll taxes, insurance, etc. Part of the reason why the self-employment retirement contribution limits are so high is that they also on the hook for the “employer” contribution to their retirement. So right there that justifies at least a 33% premium (probably more)

      Second, it’s a lot easier to bring on a consultant part-time for a specific task, if they don’t have enough work to justify a full-time hire to perform that same task. You know this, also, because I doubt any of your contracts are intended to occupy all of your time on a full-time basis. Yet, if your clients had enough work to justify that full time position, they would hire for that and dump you. You charge a premium because even with that you save them money over having to hire that position full-time.

      Which leads to rhe third, which is that contractors are much easier to get rid of than full-time people. That requires documentation and a paper trail, to make sure that the company complies with employment law. But the terms to cancel a contract are normally written right into the contract, and are simple. In effect, you are charging a premium in order to be easier to get rid of.

      I’ve looked into consulting myself, but was fortunate enough to always find full-time employment so never took the jump…

      • lemmyman@lemmy.worldEnglish
        0·
        1 month ago

        Those are all true, and I’ll add one more: many times contractors have specific expertise that warrants higher pay.

        The part I can’t reconcile basically relates to long-term contracts. I have one client who has been paying me for as much time as I can give them for about four years. On an hourly basis, I probably cost them 80% more than the fully-burdened labor cost of an equivalent W2 hire (including taxes and benefits and overhead). Or in other words, for the ~20-25 hours/week I do work for them, they could have someone working 40 hours a week instead. In this case, your second and third points aren’t really a factor, so I’m banking the extra as a “risk premium.” They seem happy to pay it.

        In a rational and efficient market (myths, I know), they would have hired a full-time W2 person to do the work I’ve been doing, long ago. And I don’t really get why they haven’t.