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Working For Yourself: Law and Taxes for Independent Contractors, Freelancers, and Consultants
By Stephen Fishman
Working For Yourself is a solid introduction to the basic taxes and laws that consultants and feelancers need to understand. The book doesn't cover inventory accounting, cogs, and other accounting/tax topics related to running a product-based business.
Working For Yourself discusses basic business structure, including sole proprietorships, LLCs, and corporations. Fishman points out that S-corporations offer an advantage over LLCs and sole proprietorships, if the consultant wants to save some money in self-employment taxes. This is because all net earnings from LLCs and sole proprietorships (up to a wage base of about $85,000) are subject to self-employment taxation. An S-corporation allows part of this money to be paid out as dividends, which aren't subject to employment taxes.
Fishman says corporations don't offer consultants and freelancers as much liability protection as is commonly believed, because the individual is also the one rendering the personal service. And, most lenders to a small corporation will want a personal guarantee that debt will be paid (unless the corporation is well-financed).
Professionals rendering certain services can form business structures unique to professional businesses, such as the RLLP, or registered limited liability partnerships. Clients can always sue certain professionals for malpractice, regardless of their business structure. But, a professional working with a partner shouldn't be unduly subject to suits against the partner for malpractice. These business structures are mentioned, but not covered in detail.
Working For Yourself covers these topics very well:
Incidentally, Fishman says sole proprietors are one of the most heavily audited business structures. He says this happens because many people claim to operate businesses to get tax deductions, even if they aren't really trying to make money.
Fishman discusses the "hobby loss" rule and how unprofitable businesses can be denied deductions after three consecutive years of losses. However, Fishman points out that if you can show that you really are trying to make money, losses in excess of the typical three years can be allowed.
For example, Fishman discusses Donald, a "golf pro," who the IRS challenged was engaging in a hobby. Donald had lots of deductible net losses. The tax court decided that even though Donald had many years of losses, he really was trying his best to win tournaments and make money. He just sucked at it. And, the losses were allowed.
Other topics are covered more superficially, but the reader is introduced to the basic concepts. Intellectual capital, such as patents, copyrights, and trademarks are touched upon. Also, hiring employees is very briefly discussed. (Fishman is also the author of a book about copyright that sounds really good.)
One section discusses naming your company and the importance of a good name. We're told the French company that decided to market their soft drink Pischitt in the U.S. had to rename it.
Working For Yourself has a great discussion showing how much various expenses reduce your income taxes (basically, multiply the expense by your incremental income tax bracket). The book also does a good job showing the kinds of logs you need to keep if you use an item for business and for pleasure.
But, I found one piece of advice that seems a bit silly. Fishman writes: "To avoid having to keep such records, try to use items either only for business or only for personal use. For example, if you can afford it, purchase two computers and use one solely for your business and one for playing games and other personal uses."
It seems you'd be better off just buying one computer and not claiming any deductions for it at all, rather than buying an extra computer you don't need. Suppose a computer costs $1,000. That's how much you spend to purchase your personal PC. If you purchase a business PC for $1,000 also and you're in a net 30% incremental income tax bracket, you save $300 in taxes. Your total cost for both computers, after the business deduction, is $1,700, which is still more than $1,000 for the single PC, if no deductions are claimed. This seems a bit akin to people who don't want to pay off their mortgage because they want to get the tax deduction. Sure, you save some money in taxes, but you pay a larger amount overall in interest.
Working For Yourself also includes a good discussion about car expense deductions and travel and entertainment deductions, which many consultants have.
Overall, Working For Yourself is a great book for freelancers and independent consultants who want to learn about the basic recordkeeping, taxation, and legal issues of running such a company.