Thomas Arrison will be writing a series of blogs for NEJS that will cover setting up a business while you are unemployed, required record keeping, and the tax implications of this business decision.
By Thomas Arrison, Certified Public Accountant
This is the start of a series of blogs on starting your own business. The focus will be on the newly unemployed person who needs to be self-employed while they search for a permanent position. It will not cover franchise opportunities. Nor does it pertain to those whose goal is to be self-employed rather than working for someone else.
The most common situation is someone who has been laid off and finds contract work in his or her chosen field of expertise. Often, this is an engineer who gets a contract in their profession. This blog would also apply to someone who has a small business on the side. If you work for a big company and make and sell furniture on the side, the tips here should be helpful.
This blog is not for the person going through a contract agency to be hired by a company. In other words, a company wants to hire you but does not want to put you on their payroll or pay you benefits. These companies will refer you to an outside agency that “hires” you and then “rents” you out to the company. Often, the contract agency will provide some benefits such as health insurance or 401(k), but you are an employee, not a contractor, so very little of these blogs will relate to you.
Let’s start with some definitions
In order to make sure we are on the same page I am going to define some of the key terms that will be used throughout this blog series.
Contract Agency – A company that hires individuals and then “rents” them out to other companies. A contract agency is often an employment agency or headhunter. They get a fee if the company they have placed you in hires you permanently. Many contract companies offer fringe benefits. If you work through a contract agency you will have taxes withheld from your pay.
Contractor – This is a person who is working for a company independently (not through an agency) and does not have any taxes withheld from their pay.
Corporation – A well-established form of business with shareholders, stock, and well-defined limits of liability and operating characteristics. It is a separate organization and must file its own tax return. You will probably not want to be a corporation if this blog is aimed at you.
Employee – This is someone who is on the payroll of the company where they work. They have taxes withheld from their pay and receive whatever benefits the company offers.
Homestead Exemption – A document you can file at the registry of deeds that protects you from being forced to sell your home to satisfy creditors. Consult a lawyer for more specifics.
Limited Liability Company (LLC) – A form of business that provides some protection from liability. An LLC may or may not file its own tax return. This form of business may be attractive to you.
Liability – In this context, liability is defined as having a business problem spill over into your personal life and assets.
Limiting Liability – This means keeping your personal assets safe from business problems. The idea is that if the business gets sued, you get to keep your house and checking account.
Self-Employed Individual – That would be you. This is a person who runs their own business and takes on the risks associated with it. Even if you have only one client (such as being on contract with your former employer) you are still self-employed. You must run the business, do the work, pay the bills, collect the money, and pay your own taxes.
About Thomas Arrison
Thomas has been a CPA for over 30 years. Since 1992 he has provided individual and business tax and accounting services at Arrison & Olden, PC in Littleton, MA. He also has his own blog, Thom’s Tax Talk, a compendium of tax tidbits and information.
Very informative posts and stories here. Much appreciated!