Hey this is Drew with Hourslogger and welcome to our consulting crash course. In this video we're going to cover what are consultants, some pros and cons of consulting, the differences between contractors and employees, and a few keys to getting started. So what are consultants? The definition online is a person who provides expert advice professionally.
My definition is a person who sells their skills in time for money. So let's look at some pros and cons of consulting. First the pros, you can make more money and quickly advance your career, meaning it's easier to jump from $50 an hour to $80 an hour in consulting than it is through traditional employment. You have more time and flexibility over your schedule, you can choose who you work with, you can work from home or client offices, and you get to control the marketing and branding. Now the cons.
Work and pay is less stable, and that's in quotes because that's technically not true if you're running a successful consulting business. You have to pay all your own taxes, healthcare, and benefits. You'll have to work non-billable hours.
There's a pressure to perform and always be productive, and work frequently changes. Now let's look at an independent contractor because this term is similar to consulting but not quite the same thing. An independent contractor is a person, business, or corporation that provides services under a contract. Unlike employees, independent contractors do not work regularly for an employer but work as required. Independent contractors are usually paid on a freelance basis and work through a limited company that they own themselves.
Contractors don't have income taxes withheld like regular employees. You can read more at Wikipedia. For this course, we're going to assume that you're starting or running your own consulting business. and will be referred to as an independent contractor by your clients.
However, a consultant doesn't necessarily have to be an independent contractor. You could be an employee of a larger consulting firm and still act as a consultant for the company's clients. Likewise, an independent contractor doesn't necessarily have to be a consultant.
Independent contractor is just a legal term that means you're providing services but aren't an employee of the company. Going forward, the term contractor will refer to independent contractor. So let's look at the differences between contractors and employees because they're different from a legal standpoint. First, employees.
You agree to a salary and a pay period. The company has full control of your time. You normally get benefits through the company like health care, vision, dental, retirement, etc.
You're covered by a number of employment and labor laws. Your employer withholds money for taxes. That's your income, Social Security, and Medicare tax.
and you fill out an I-9 tax form for employers and you receive a W-2 from them at the end of the year to file your taxes. Now contractors, you set your rates and sign contracts, you have ultimate control over your time, you pay for your own benefits, you're not covered by labor laws, you have to set aside money for your own taxes, you have to provide your own tools and equipment, and you fill out a W-9 tax form for clients. and receive a 1099 from them at the end of the year to file your taxes.
Now it's very important to make sure you're actually classified as an independent contractor by the IRS in your state. If you only have one client all year and you work for them 40 hours a week and they control when you work, you're not an independent contractor, you're an employee. Now if you're just starting off and you only have one client that's fine.
The point is you should eventually serve more than one client act like an independent contractor or you're in danger of being a misclassified employee. So some things that help prove you're operating as an independent contractor. You work with multiple clients.
This is really important. You have control over your time and when you work for your client. Again this is very important.
You sign contracts stating that you're an independent contractor. This is helpful but not necessarily decisive. You have an LLC or other business structure set up and you own and provide your own tools and equipment.
Again, these things are helpful but not necessarily decisive. The laws on independent contractors can vary from state to state. Search independent contractors your state to find the rules that pertain to your local area. The IRS is one of the best resources to read up on the differences in tax obligations of independent contractors and employees. Here are a few links where you can read more.
So here's just a quick slide on a few common consulting industries. You've got business, software, finance, HR. risk and compliance, and a lot more. All types of industries have consultants. So a few keys to getting started. Making money is the most important goal when you're getting started.
If you don't have any clients and you don't have any money coming in, you're not going to be doing business for very long. You literally want to set a deadline for when you expect your first check to come in. Next, set up the business right from the beginning. This is referring to your bookkeeping, accounting, and legal structure.
Your success depends on your ability to create trust and sell yourself. The best consultants are not necessarily the ones that are the best in their craft, but they're the ones that are the best at creating relationships and selling their services. You want to be a problem solver. It's your job to always take notes and be prepared. Ideally, you should have three to six months worth of monthly expenses and savings or available credit.
It may be smart to start your consulting business before leaving your main source of income. This allows you to see if you enjoy it and try to drum up some business before leaving your day job. All right, that's all I've got for this video. In the next video, we're going to talk about how to actually start your consulting business.
Thanks for watching and see you there.