Some pieces of this content have been in other posts by me. I’m going to put it all in one post so I can just send recruiters here rather than have the same conversation for the 32,767th time.
Why 1099 instead of W-2 or Corp-Corp?
I started in IT consulting well before we had the infamous 20 questions. I believe it was even before we had the sub-chapter S corporation as well. The options available at the time for creating a legitimate company with an EIN (Employer Identification Number) were Sole Proprietor, Partnership, LLC and full blown corporation. Each entry in that list had higher and higher paperwork requirements to be performed at specific intervals. Each of the other entities required that I go into business with someone else which I didn’t want to do. I grew up on a farm. Was highly independent and wanted to be my own boss. I also wanted to have the freedom to veer off from IT from time to time to write and publish my own books.
Around the time of the infamous 20 questions we got the S-Corp option but it still had burdensome requirements. I looked into it when it came out by my tax man at the time said it wasn’t a good deal for me. Whether or not the requirement exists today, you had to pay yourself a salary even when you weren’t billable for a client. Taking 6-18 months off to write a book meant the business had to take out loans to pay a salary to me instead of me living off my personal savings and investment income. Not a good option. Some of you may remember I put out my first book via a publisher in 1995. There was an awful lot of unpaid time creating that labor of love. I was on the bench for a year writing this book.
Retirement Accounts
Back in the day we had rather draconian options for retirement accounts. Everyone could have an IRA which had a $2000 annual contribution limit. (Might have even been only $1000 when it first came out.) There weren’t a wide range of companies offering 401K type retirement plans for tiny companies. When you found one it also had draconian limits along with mountains of paperwork to set up. A self employed person, i.e. a Sole Proprietor, could create a KEOGH. There were many choices for these and they allowed you to put up to 25% of your net business income in with a cap of $25,000. Too bad all early versions of these were mutual fund investments only. The various market crashes over the years wiped out huge amounts of retirement savings for people. As I recall there was something like a $5,000 cap for 401K contributions so if you had a great year you couldn’t put yourself any closer to retirement. After 20 years of contributions you would have only put in $100,000 and been wiped out by the market crashes or horrible mutual fund choices.
Travel Expenses
There are only a token few pimps/consulting firms which offer any kind of per diem for travel/mileage. Even when they do it certainly doesn’t cover much and you _really_ take a beating on the billing rate.
The most important part of this discussion is generally overlooked by most people. The IRS used to publish per diem rates for various locations, now the GSA does. If you travel for business and if you have some form of hotel or other receipt proving you stayed for a certain length of time, you get to deduct the per diem rate as a business expense.
Why is that the most important? Because that is the “thanks for traveling” present from the IRS. If you manage to find really cheap accommodations, you still get to take the amount. Remember what I said about Keogh earlier? If you take this “free money” (the difference between what you actually pay and the allowed per diem) the IRS gives you for suffering the perils of travel to remain working and put it into your Keogh you have just achieved a 100% return. How? Because you get to take the Keogh deduction too, up to annual contribution limits.
Word of caution 1: It is nearly impossible to get actual corporate housing in major markets like Chicago, L. A., etc. below the per diem rate. The corporate housing companies in major markets wait for the publication to be released then total up both lodging and food and set their price to that amount. This is one of the reasons Craigslist and AirBnb became so popular.
Word of caution 2: Most of the time people are trying to “rent out a spare room” when they list it on there. It is _never_ going to be a super hot twenty-something who needs you to scratch an itch for her so she can remain focused on her career. Usually it is the 400+lb hairy dude who either walks around nude all the time or, worse, in 2 sizes too small red bikini underwear letting the back hair and fat rolls hide the underwear band.
(Kind of a tough visual to get out of your head, eh? Try seeing it every morning.)
The other group you tend to run into is the older married couple who themselves cannot really afford to travel so they expect you to tell them all about where you are from and what you do every evening. They also expect you to be gone in a week so they can enjoy meeting someone new.
I’m pointing this out because in many markets the “cheap” solutions aren’t solutions. Few people travel out of state for “just a week.” Most contracts will be a minimum of 3 months and 8 months later you might finally get to go home. Personally, I _always_ hotel it for the first two weeks in case the client doesn’t like me or I don’t like them. Most legitimate corporate housing operations will want you to commit to paying them for at least a couple of months.
No, unless you are planning to become the next Craigslist killer or Ted Bundy, you cannot make those low end extended stay studios work. Most of them don’t have an oven these days and the trunk of your car has about as much room. The higher end ones which cost way more than the IRS per diem might allow you to make it 5-6 months.
Vehicles
If you work W-2 you don’t get to deduct cars. Some people who set up a sub-chapter S try to have company owned cars but everyone I’ve ever heard of who tried that got audited and left the room unable to stand up straight.
Why?
Because it’s really tricky, especially if you only own one vehicle. You have to document well north of 50% business usage and generally you need the fuel receipts to back it up. Yes, there is some “mileage” number you can use, but then you don’t get depreciation, etc.
The biggest mistake you can make is owning only one vehicle.
The second biggest mistake you can make is liking to drive your company car more than your personal vehicle.
As of right now I own 4 vehicles. My company car, beater Jeep, bucket truck and 24′ Ryder truck. No matter what, I always keep a beater Jeep around the farm. They start out old and become beaters. My last beater Jeep was 10 years old when I got it and qualified for antique plates when I dumped it. My current old Jeep is a long way from beater, but it is 15 years old.
When I’m back on my family farm I make it a point to always drive my Jeep. I’ve had the thing just over a year. It had somewhere between 120-130K on it when I bought it. Now it has 155K. When State Farm sends the mileage questionnaire for my company car they tend to be shocked when I respond I expect to drive the car less than 4K miles this year.
The point is, you can deduct the business use portion of insurance, depreciation, fuel and maintenance under 1099, but, not so much under most other situations. The second point is don’t try to do this unless you have a second vehicle or you never drive to any place other than a client site.
Word of caution 3: Nobody, and I mean nobody, uses an ordinary vehicle for 100% business use. A customized delivery/service van, maybe. A gigantic diesel truck of some kind, very possible. Not a regular vehicle. You go out to lunch. You stop for a bottle of wine on the way home. Hundreds of other things you don’t even think about will come up as questions during the audit you will ask for by trying to claim 100% business use on that head turning “special car.”
Word of caution 4: I don’t know what they are, primarily because I don’t buy new cars anymore, but there are limits to the amount of depreciation you can claim. You really need a tax specialist. If you think you are going to depreciate out that $60+K ride, think again.
Vehicle leasing became popular as a way to get around this hard limit, but that has its own pitfalls. The biggest pitfall is the extremely small number of miles you are allowed to drive your leased ride each year. When you bring it back at the end of the lease and are 30K miles over the lease amount. MM MM MM it sucks to be you!
The other pitfall with leasing or a car loan is that you are always paying, even when you are not working. Saw a lot of consultants lease that Mercedes or BMW when work was plentiful, then came right-sizing or some industry downturn and the car got repoed.
Most of today’s cars, if the first owner changes the oil on time and does some other minor maintenance, will last for 300,000 or more. Shop around and you can find nice high end vehicles with just under 120,000 on them for $10K or less. You can pay cash for it and be set for close to 200,000 miles.
Honestly, with all of the repairs I’ve done, I am way farther into my $6K beater Jeep than my company car. The previous owner of my beater Jeep kept it looking nice but really screwed it up.
Some people shouldn’t be allowed to buy a Jeep.
