Wednesday, February 22, 2012

Potential Trap If You're Deciding Between Working With A Company As An Independent Contractor Or An Employee

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Many people are faced with an important decision when contemplating an opportunity to do services for a company.  Should I accept the company's request to work as an independent contractor or should I insist on being an employee ... at the risk of losing the opportunity.

There are numerous pros and cons to each side of this question.  The decision is very unique to your situation and your long-term objectives.  I have helped many people navigate through this decision, helping them identify which option is best for them, and look forward to working with more.

Here's another aspect of this question you should absolutely consider:  Business licensing rules in your local jurisdiction.

If you decide to be an independent contractor, you are choosing to operate a business, even if it is one out of your home office without any interaction with your clients there.  Some jurisdictions either exempt such businesses from their licensing requirements, or have special provisions that make licensing very easy and inexpensive ... say $25 per year.  Others, well ... consider this example:

A friend of mine just closed her business because of the home office rules in her city.  She has full-time employment as a school teacher, where she is an employee.  She also operated a very small part-time business where she graded papers for another educational institution on a free lance basis, and maybe 3 or 4 times a year also travelled to their location to proctor exams for students on a weekend.  She worked with this institution as an independent contractor and received a 1099-MISC form for the payments she received from them for her services.  They were the only client of her business.

Since she received a 1099 form, she filed Schedule C on her federal and state income tax returns each year, reporting the income and claiming business deductions for the few expenses she had related to this activity.  This led her to be contacted by the business licensing department of her city, who wanted a $125 business license fee plus a $550 "engineering fee" to pay for someone to come out to her home and evaluate if her room, desk, computer, and files used to grade papers and keep her business records met the city's requirements.

There was no talking the city out of this on minimal size or general reasonableness grounds, so she determined this business was not worth that level of regulation and closed it down.  Fortunately, they did agree to waive fees for the period she had already been operating.  Others might not be so lucky.

This is just one more reminder that no matter how small your home business is, if you are an independent contractor you are indeed operating a business and need to learn what your local city, county, or other licensing requirements are as part of your decision making process.

Amazing, but true ...

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