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Doug Nebeker ("Doug")
Helping a friend out, I was coming up with a list of expenses that a programmer working from home (possibly as a contractor) might have that a normal employee wouldn't. I tried to Bing search for it, but most of the results were tax write off related.
Here's my list, can anyone add any other items?
As a contractor I supply my own:
+ Office space and equipment like, desks, chairs, phones, and coffee :) .
+ Equipment like computers, printers, backup batteries, data backup drives, web cams, paper, pens, lightbulbs, etc
+ Electrical, internet access, offsite backup services, heating, and cooling.
+ Office insurance which includes a lot of equipment coverage.
+ A fair amount of the software I use daily
What I don't recieve that a normal employee would:
+ Benefits like medical and dental
+ Stock Options
+ Vacation Time
+ Job Security
+ School reimbursement
+ Perks like lunches and parties
+ Pretty much everything but the paycheck.
These will be looked at very closely in audits, it's top on lists of questionable expenses. It is allowed, but you have to do it right. It is best if you can honestly answer that the stuff you bought is NEVER used for personal use. It is also best that there is a specific section of the house that is the home office, and it's only a home office, it's not say a place where you also lift weights or watch TV on weekends.
In my case it was a large separate detached garage that was expanded and converted into an insulated enclosed separate office space, with a separate key from the house.
It did share the electric line and there is no easy way to establish how much is used, so electricity was never deductible.
Costs of installing ethernet cable and outlets though in the office was a business expense, as were the office chairs, desks and so forth.
Also be aware that in some states if you do this then you have pay an annual state excise tax on all property used by the business. So if you have that chair, desk and computer as part of the business, you pay yearly property tax on it.
Oh wait, reading your reply again you are specifically NOT interested in the deductible business expense issue.
Also, if you have employees on site, it's almost guaranteed your homeowners insurance is going to have an exemption for their injury, so you must carry separate employer liability insurance. Homeowners sometimes covers injuries to the guy who comes once a week to mow the lawn, but not someone coming every day to work on a business you own at your house.
No, no, and no. I wasn't talking about tax write off stuff.
This is a list of expenses that someone working at home might have, that an in house employee would not.
In other words: Why a contractor might get paid more than an employee.
In even more other words: Things to justify to your client why a contractor should be paid more than an in-house employee.
You left out payroll taxes, not insignificant:
"Employers hiring independent contractors should know: You don’t have to pay payroll taxes. This is a huge savings. FICA (Social Security and Medicare) is 7.65%, and then there’s federal and state unemployment. In round numbers, 10% might be a reasonable estimate of the payroll tax savings. That’s significant, not to mention that without employees there is no need to make payroll tax deposits, file quarterly payroll taxes and file W-2s at the end of the year."
See the whole table on that page.
Mike, what's the situation with the friend, who are we convincing? I'm not sure if the problem is that you think he's not charging enough because he's only charging wage rates, or if the problem is he has a client who only wants to pay wage rates while not paying benefits or overhead - which typically equals the salary, making payroll cost double the base salaries.
This: "...has a client who only wants to pay wage rates while not paying benefits or overhead..."
OK, that's probably the easier situation.
I am not sure that going into great detail to justify or explain it makes sense.
"Yes, this is the contract rate. Yes, it's per hour. Yes, it's all inclusive."
Part of the advantage of hiring him as a contractor is he sets a fixed hourly rate that's all inclusive and that covers overhead.
Once they want a breakdown of how much you pay each month for air conditioning, they might as well just hire someone at the going rate and going benefits and do all that stuff themselves.
If your justification as to why a contractor might (should?) get paid more than an employee is running costs, then your primary competitive advantage is something that anyone can compete against you with: price. This is probably the last place you want to position yourself. The next step is for your friend's clients critiquing his expenses and he having to justify them.
Had your friend considered, rather than focusing of costs, to focus on value in ways client could not achieve with their permanent staff. This could include domain knowledge, experience, independence, third-party perspective, speed, quality, technical skills etc.
At the other end of the equation, perhaps also highlight not costs your friend incurs, but savings they make. I currently freelance at a large bank and have been told it costs close to £30,000 GBP per staff member in overheads. This covers everything from rent to office equipment, hardware, software, toilet facilities, insurance, OHS compliance etc. By removing himself from their office, your friend has just increased the clients annualised P&L by the respective amount in their area.
All the best -
This topic I started went horribly wrong. Right into the ditch. Crash and burn.
I simply wanted a list of costs to give him, not advice on taxes, itemizing expenses, or negotiating for business.
I can't really go into details on the how and why.
Anyway, thanks for trying to help.
Monday, February 11, 2013
- Accounting costs (ongoing and at tax time).
- Banking costs for separate business account.
- Business licenses and registration.
- Fax service (optional).
- Invoicing service fees (optional).
- Payment processing / wire transfer fees.
- Transportation to / from client.
Plus there is the risk of non-paying customers.
My own contribution to the crash and burn is that I gave you the wrong link by mistake. Sorry. My original intent was, I think, exactly in line with what you asked and had I given the right link maybe you would have thought so, too. My apologies.
The link is this one: http://smallbizsource.org/?page_id=174
And the expense from working as an independent contractor as opposed to an employee, which was not on your list, is this:
"You must pay self-employment tax. This tax is 15.3% of the profit. It is in addition to income tax. Whereas an employee pays 7.65% FICA,, and the employer pays 7.65% FICA, an independent contractor has to pay both halves, called self-employment tax. It gets added to your income tax on your federal return, so your quarterly estimated tax payments need to be large enough to cover it."
That page also lists Workman's Comp as another expense as well.
I don't AT ALL get it why you should justify the costs. The costs is this, they like it or they don't. If a client is hiring you to do work for them they only care where you are charging me amount that is good to me. All that maters is what they get from you, not what are your costs.
If I like someone's work and it makes me money, I'd be happy to pay them well and won't give a shit if they use the free computer at a library. On the other hand, if the work is crap, I don't care how much $$$ they spent on their latest Alienware and six monitors.
Monday, February 11, 2013
"why you should justify the costs"
As long as you don't put concrete numbers down, it is a sales tool. Let the customer decide what values to assign to each cost, but don't pass up the opportunity to point out all of the ways you add value. And in the B2B world, it cuts down the haggling that goes on whenever you try to implement a price increase. Same rule applies, let the customer assign monetary values. In the B2G(overnment) world, it helps to sidestep accusations of price-fixing.
> I simply wanted a list of costs to give him, not advice on taxes, itemizing expenses, or negotiating for business.
> I can't really go into details on the how and why.
OK, then perhaps don't waste our time then?
Sometimes I get a customer that says things like "I need an option to make the background to this window blue, in particular #D8E3EE."
That's not a useful option though, so I ask "Why do you want that?"
When he says, "It's none of your business! I just want you to add that option!" then the answer is "Well I'm not your monkey."
He could have said, "I want to have #D8E3EE because I want to add a screen shot of that window to my website, and the default template has a background of #D8E3EE so I want the window to match and I don't understand HTML or CSS or Photoshop." But he doesn't want to admit he doesn't know what he is doing. So he says "Why won't you add that feature! You are so mean!"
In addition to direct costs, there is unbillable time. He has to keep up his skills, acquire clients, handle billing, etc. He probably can't bill 40 hours/week unless he's working 60-80 hours/week.
Tuesday, February 26, 2013
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