Pros vs. cons of independent consulting

Succeeding as an independent consultant isn't as easy as one might think.

Ah...the American dream of self-employment. You're your own boss. You call your own shots. You control your own

life. You make a lot of money.

Maybe, but with those privileges come responsibilities -- like paying your own taxes and health insurance premiums. You also don't get paid vacations.

"When you're on your own, paychecks don't just show up like they do when you're an employee," said Andrea Michalek, president of Topular, LLC, a consultancy in Harleysville, Pa.

Certainly, there is a robust market out there for IT consultants, contractors and temporary workers, especially for those with higher-level skills. "It's a major part of many companies' strategies to maintain a certain percentage of temporary workers," said Patrick Cox, president of Professional Alternative Inc., a Boston-based IT staffing company.

Large corporations reach out when they find themselves short staffed, according to Gary Zander, president of Project One, a similar New York City-based company. "Because of the downsizing of the last two or three years," he explained, "they often need outside expertise they don't have within their own organizations when new initiatives and projects come along."

Consultants with "niche skills with broad appeal" have the best chance of succeeding as an independents, according to Michalek, who makes her living hiring herself out as interim CTO to startup companies. "Generalists often have a more difficult time finding work because it is harder for hiring companies to justify the need for the contractor," she explained.

IT professionals with industry-specific specialties are in the highest demand for consulting gigs, said Zander. In his experience, those with skills in investment trading applications and algorithmic work, IT architecture and business continuity and disaster recovery are most likely to succeed as self-employed IT consultants.

A lot of what differentiates the independent contractor is a lifestyle choice. "These are people who by nature want to move from challenge to challenge," said Mark Roberts, president of the National Association of Computer Consulting Businesses, a Washington-area industry group.

Curiosity is part of what drives programmer Steve Duerksen, president of Micro Choice, Inc. in Brewster, Mass. "It's tough to know what will be important next year," he said. So Duerksen seeks "on-the-job training" when working on an assignment to "get an angle on the next big thing."

But technical skills alone are no recipe for independent success. "You have to be a good proposal writer and be able to make all kinds of presentations," said Duerksen.

"It's important to have a balanced personality and not mind the people side of running a business," added Michalek. "Being a contractor is not necessarily a good choice for someone who just wants to be up to their elbows in the technology."

Consultants typically don't want to get caught up in office politics and infighting, Zander said.

Consultants "don't want to be reviewed by a boss and they enjoy giving objective opinions," added Cox. "A contractor can tell a client it's screwing up. An employee can lose his job if he says the same thing."

Independence also brings financial rewards. Independent contractor status maximizes the ability to take tax deductions for computer training, car leasing and retirement investing, among other things. On the other hand, independent contractors have to pay the one-half of FICA taxes otherwise paid by an employer.

"You have to be responsible for your own taxes," said Roberts. "You may have to retain an accountant if there is any complexity to your tax situation."

Peculiarities in IRS regulations mean that most IT consultants have to incorporate. That means extra paperwork, tax returns and filing fees, as well as maintaining the formalities of being a corporation, said Roberts. In addition, if the IRS reclassifies a contractor's status as a result of an audit, Zander cautioned, the client company will have to pay additional taxes, and many of the deductions taken by the independent contractor will also go down the tubes.

All of it is worth it, as far as Duerksen is concerned. "Some people don't want to learn the ropes of tax deductions, but in my experience, it's well worth your time," said Duerksen, who emerged relatively unscathed from a recent IRS examination.

For those who would rather not face that nightmare, companies like Cox's and Zander's offer a middle ground. They enter into employment relationships with consultants, deducting taxes and providing a W-2 to show the IRS. Cox's Professional Alternative also offers health insurance and 401(k) benefits.

Either way, independence allows consultants to buck the trends of the business cycle, in Cox's view. Even in today's anemic employment picture, "critical projects always get funded

This was first published in February 2004

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