Hey, Meagen, I want to start working again. But I have a big gap in my resume due to [enter life changing event here: children, divorce, homelessness, illness, incarceration, etc]! I’ve put my resume out there, but am not getting any calls. How do I get back in the game? You are a consultant: how did you get started?
Being a “consultant,” “contractor” or “independent X professional” can be a great way to stay in the job market while having some flexibility and control about when and where you work. It also allows you to get credit for the “side jobs” that most people already do. But fair warning: it isn’t for everyone.
Please note that this process only applies in the United States. I’m not sure how it works in other countries.
Three ways to be a Consultant:
- Odd Jobs: Many people work “under the table” for a little pay without reporting anything to the government. This is legal as long as you make less than $600 per year per job. Unfortunately, work “off the books” also means future potential employers can’t always verify you were working. So if you’re interesting in contracting to get back into the traditional workforce, consider moving to options 2 or 3.
- Sole proprietor: If you work regularly as a musician, hair stylist, nanny, photographer, artist, landscaper, or any other number of “non-traditional” jobs for different clients, you can make it official by reporting it on your annual personal income tax. More details below.
- Limited Liability Company: This is what I have done for the past six years. This option allows you to register your business and create accounts that are separate from your personal accounts and assets.
How to Become a Sole Proprietor
Keep detailed written records of all your business expenses (internet, phone, tools, meals with potential clients, travel expenses, even clothes and haircuts can count if it’s specifically for a gig). Also keep invoices or receipts that include the date, amount paid, client name and address for each job you perform. Save them in digital or manila folders, for example: “Expenses 2014,” and “Income 2014.”
Sound scary to keep track? Don’t worry. There are lots of people and resources who can help you do the math. Adding up your business income and expenses is the only way you can figure out whether or not you are making a profit. If you make more money than you spend, everything else is your income.
When you start your business, and also once a year at tax time, there are three ways you can get help:
- SCORE: This volunteer organization provides free support for small businesses. They can help you file all the right paperwork.
- Free Tax Preparation by Volunteers: If you are low income or over 50 years old, you can connect with a local volunteer to help prepare your taxes between January and April. Get an appointment early!
- Hire a Tax Professional: If you have some cash saved to start your business, it is usually worth the money to file everything correctly and save hundreds or thousands of dollars on your taxes at the end of the year.
I highly recommend finding an independent professional (like yourself!) in your neighborhood instead of walking in to Liberty Tax or WalMart. Just look for signs for a CPA or Tax Agent, not flashy costumes or flyers. They are more likely to do it right, and also the money you pay them will stay in your community instead of disappear into some corporate headquarters.
Benefits of becoming a Sole Proprietor:
- Figure out how much money you make, and how you can save costs to increase your income.
- Many sole proprietors will get money back after filing their federal income taxes.
- Work that can be verified will make it easier to land a job if you want to get hired at some point.
- Your local and state taxes pay for the roads, schools, and firefighters that you depend on.
Become a Limited Liability Company
The LLC in Farrell Ink LLC stands for Limited Liability Company. “Inc.” or “Co.” at the end of business also means they are registered as a corporation. Registering as a business requires some paperwork, but that allows you to separate your personal and business accounts.
Here’s why I chose to create an LLC:
Growing up, my neighbors owned a shop in a nearby storefront. The family ran the business well for many years, but during an economic slump they had to close. In the process the bank also foreclosed on their house because they had not separated their personal and business accounts. They were personally liable for what happened to their business.
Registering as a corporation allows you to separate personal and business accounts so that can’t happen to you. Here are the steps I took:
- Register with the state. I sent in a two-page registration form (called the Articles of Incorporation) with a check to my state (Ohio) to become a Limited Liability Company. The cost differs by state. You have to list a physical mailing address, not a P.O. Box. If you move, you have to pay again to change the address on the registration.
- Request a tax identification number. I got a letter from the Secretary of State acknowledging my corporation. It was a spelled wrong, so I requested an update. I sent a copy of the correct letter to the IRS to request a Federal Employer Identification Number (FEIN). You can use the FEIN as your business tax identification number, instead of using your personal Social Security Number.
- Set up a bank account. Within six week of registering my corporation, I had my first side job as a consultant, providing training for a local non-profit on how to run an adult literacy program. The check wasn’t big, but I took it to the bank to set up a checking account so it would be separate from my personal accounts. I didn’t put any of my personal funds into my business account.
After Farrell Ink LLC was official, I had to make some important choices as a new small business owner. After six years, here are my recommendations for others who want to be successful as a Consultant:
- Set reasonable expectations. It took me two years until I could pay myself a “living wage.” Especially part-time, I can take time to develop a client base and a good reputation.
- Get help on taxes. I use Quickbooks Pro, but I made some mistakes on my taxes. To do it over, I would still use Quickbooks to enter my expenses and invoices, but hire a CPA to do my payroll, taxes, and reconcile my accounts. It also helps to choose a lawyer because you never know when you’ll need one.
- Get certified. My best business investment was to: 1) join professional organizations in my field (adult literacy), and 2) pay for a work-related certification (through online courses). I learned skills that helped my clients right away, and I believe it helped me recently get a job when I decided to go back to full-time work. A recent and relevant certification helps your resume stand out, and can make up for employment gaps for personal reasons.
- Say no (sometimes). For me, the whole point of being a part-time Consultant was to be available for my young kids, while still having an income and adult conversations. There were a few times I had lucrative last minute offers that would have required a lot of work, travel, or child care. As long as you can cover all your business expenses, it’s okay not to chase every dollar. “Some money ain’t no money.”
- Pay yourself as an employee. Over the years, having pay stubs turned out to be really important. I decided it would be simplest to pay myself once each month on salary. Even though I had dozens of different clients, I had one employer–Farrell Ink LLC–with a consistent monthly income. A regular monthly pay stub helps a TON if you need to apply for a personal loan, government benefits, and more.
- Save for retirement. Stay-at-home parents, single parents, and small entrepreneurs often end up in poverty as they get older. You can NOT depend on Social Security or a spouse’s employer to provide enough for you to live comfortably as a senior, especially one of you gets really sick over 50 years old. You can pay into an IRA or long-term CD with a high interest rate.
- Scale up, or get out? After a while, you might need to make a choice: do you want to become an employee for someone else, or do you want to employ other people? Things change quickly. You always need two backup plans: 1) what to do if you’re really successful and in high demand, and 2) what to do if business gets bad and you need to close down. Your professional network can be a huge help in either situation.