A lot of retired and retiring Senior Military Officers and NCOs decide they want to try their hand at consulting. It can be an excellent choice. You control your hours, work with who you want to work with and it can be pretty lucrative. But, if you’re going to be a consultant, you’re starting a business. Here are 6 things you want to consider, if you go down this path.
1. Pick a Business Structure
Many who go into business decide on the LLC as a business structure. This can be a good choice. An LLC provides you liability protection and that can be useful. From a tax standpoint, an LLC doesn’t do anything. LLCs are considered a non-recognized entity by the IRS. This means there are no tax rules associated with them. As an LLC you will decide how you will be taxed. You can choose to be taxed as a sole proprietor or as a corporation (C or S). Be careful if you choose to be taxed as a S corporation (or organize as a S corporation). If you are taxed as an S corporation, you will pay yourself a salary. There are some out there that recommend paying yourself a small salary and taking your profits as a dividend distribution. This will save you Social Security taxes. But the IRS says your salary must be reasonable. If the company that hires you as a consultant pays you a certain amount, that amount is reasonable compensation for the work that you do and most likely should be paid as salary. If you have significant capital requirements or employees, then this may change.
You can also organize as a sole proprietor, but you will not have liability protection. You can also choose to organize as a corporation, but the administrative requirements are greater than with an LLC.
2. Figure Out License Requirements
You’re in business now. Your city or county is probably interested in that. They probably want you to have (more correctly, pay for) a business license. This will be in addition to any fees you pay to your state when you organize.
Working from home? If your neighborhood isn’t zoned for commercial use (it probably isn’t), you may need a variance from zoning. This is especially true if you see clients at home.
3. Check for Weird Taxes
You may have to pay different types of taxes that you’re not used to. In many counties in Virginia, you’ll pay property taxes on the equipment (like computers, monitors and desks) that your business owns. In Alabama, you’ll pay a privilege tax for the privilege of conducting business inside the state. DC charges a franchise tax on all businesses. Bottom Line? Check out your state and county/city rules.
4. Set Up Separate Accounts for Your Business
In order to keep your personal assets safe from creditors, you’ll need to keep your business money separate from your personal money. This means a separate checking account and credit card for your business
5. Establish an Accounting System (Or Hire a Bookkeeper)
If you don’t have a background in accounting, you might want to outsource your bookkeeping support. Quickbooks can be a good option, if you have a basic understanding of accounting. The bottom line is you’ll need to be tracking income and expenses from day one and be able to support the income and expenses you put on your tax returns.
6. Take a Hard Look at How Much You’ll Keep
This one catches a lot of people off-guard. It is likely that with all income-based taxes (Fed and State Income Tax and Self-Employment Tax) you’ll be paying between 37% and 45% in combined taxes, depending on your tax bracket and the state where you live. That is a big chunk and could change your mind on whether your really want to go down this path.
Working as a consultant can be a great gig. If you’d like some help getting out the door and integrating your business with your military benefits and accounting for both in your financial plan, give us a call.
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