Double Your Software Developer Income as a Consultant
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- Starting a software consulting business where you can earn twice as much working for yourself as an independent software consultant
- Be able to work as a software developer
Welcome to the course that will make you an independent software consultant! If you have been working as a software developer for a couple of years and wished you were earning more, you are ready to learn the power of owning a corporation. Switch off your employee mindset and start thinking as a business owner and consultant. I will guide you through each step and teach you how to take maximum advantage of having your own business and getting top consulting contracts.
- Software developers working as employees for someone else earning less than they could be
Welcome to the course that will make you an independent software consultant! I will guide you through each step and teach you how to take maximum advantage of having your own business and finding a good agent and top pay opportunities. In this video we will discuss the prerequisites for this course and the main differences between working as a software engineer employee and a software engineer consultant. You will also know what to expect out of this course.
2 years of work experience with a single programming language and/or framework
Risk-averse, should be OK with working on contracts as short as 3 months
Flexible, should be available to move to a different city for the best contract opportunities
Entrepreneurial mindset, you will learn this skill but you need to be open to having control over your own economy
What is a software consultant?
Works on the same project as other employees, but is placed in the company for a specific project that (usually) has a fixed timeline
Needs specialized skills to come in as a "hired gun" to fast track a project
Does not get benefits from the company he/she is temporarily working at, needs to manage own health insurance and pension savings
Responsible for filing company taxes and report self-employment income
Hybrid work situation between being an employee and running a startup
Banks look at you as self-employed, financials are scrutinized harder for mortgage lending
What to expect after completing this course:
Being ready and legally setup to work as an independent software consultant
Having your own business registered
Knowing how to find the right accountant
Understanding how to maximize the tax breaks for your business - keep more of what you earned!
Knowing how to work with a good employment agent that will find contracts for you
Be able to earn twice as much or more compared to what you would earn as an employee doing the same work!
I am a senior software engineer, born in Sweden and currently working as a consultant in Chicago. I have been working in the finance sector for the past three years at the same company, this has given me the stability of an employee while being able to take full advantage of tax breaks from running my own business. I don't get paid vacations, sick leave or health insurance from the company I work at, but since I am paid a higher hourly rate I can budget and plan for that myself.
I have worked as a software engineer in Sweden, Australia and the US, for startups, government agencies and large finance companies and have experienced a wide range of work environments. Working as an independent software consultant at a well established company in a big city has been the best decision I have made in my career.
For software consulting work, we are choosing a company structure called S-Corporation due to a number of reasons we will discuss here.
We are aiming to maximize business deductions and give you the flexibility to set your own salary working as an employee for your company. I want to emphasize that taking advantage of tax deductions will make a big difference in how much money you have left in your bank account at the end of the year, it is not just about how much money you make. Most people who have worked as employees their entire life don't fully understand this, and we will dig deeper into taxes in a later section of this course.
Let's look at the main differences between a S-Corporation and other business structures you can choose from.
Sole-proprietor (worst option)
You are the company, there is no distinction between you and the company structure
You are personally liable for any tax disputes or law suits, which means you could go into personal bankruptcy for business related issues
There are few tax deductions you can make, similar to being an employee
Limited Liability Company (LLC, not as good as S-Corp)
The business entity is separate from you as an individual
You are not personally liable for business related issues
You can't work as an employee for tax purposes, all owners are members.
You can't pay different taxes for employee income and business. This is how you maximize your tax deductions, so it makes the LLC a less optimal business structure for you.
No annual report needed to be filed
This structure is designed to suit large businesses that have many officers, directors and employees, but it can also easily be used by you
The business entity is separate from you as an individual
You are not personally liable for business related issues
You can work as an employee for tax purposes and set your income to a fraction of your total earnings, where the business earnings are kept separate
Your accountant can help you take full advantage of tax credits and tax deductions
You can also, with a majority co-founder, work for your own business while on a H1-B or E3 visa. How to get these types of visa as an independent consultant will be fully covered in a future section.
Registering your S-Corporation is a fairly easy and straight-forward process that you can do yourself. You can also have an accountant do it for you, for about twice the price it would cost you if you did it yourself. Every state has their own website for registering a company, I will use the Illinois website as an example but the process is very similar no matter where you live in the US.
In the state of Illinois, the cost is $175 ($25 franchise tax fee, $150 filing fee) for the routine service. There is a faster option that will take 24 hours for $275 as well, but that will probably not be necessary in this case. The regular submission will be reviewed within 10 business days.
Below is the Illinois business registration URL for those who live in this state:
This is the information you need to register your S-Corporation:
Name of your business, a check will be done to confirm that the name has not already be registered and it needs to end with Corporation, Company, Incorporated, Limited, Corp., Co., Inc. or Ltd.
Registered agent name and address, this is you and your address so that you are authorized to make changes to the business at any time.
Stock details, this defines how many pieces your company will be divided up into at the time of registration. It can be changed at any time later if you need to share the ownership.
Number of shares authorized, set to 1000 (pieces of your company)
Number of shares proposed, set to 1000
Consideration to be received therefor, this is the amount you put into the company as payment for the shares you created. No one outside the company will actually verify that you created a business account and added these funds, it is mainly used between co-founders of the company to share this amount and if they want to buy more shares later this is the initial value of them. Set it to $1000.
Your official company titles, since you will probably register the company alone, you can give yourself the titles of President, Director and Secretary. I recommend you use the title of Founder on business cards or LinkedIn etc. The titles only matter when there are multiple people in the company as Directors have voting rights and can decide who will be President among other things.
If you are interested in learning more about the business registration process it can be found here (but it is not required reading):
With a S-Corporation registered, it is time to learn how to take full advantage of it when it comes to keeping your money in the bank and paying the least amount of taxes on them.
When you first start earning income as a consultant, you will see higher paychecks than you are used to. This is great and is part of the goal to double your employee paychecks from previous jobs, but the money you have earned are not truly yours until after you paid the employee and business income taxes at the end of the year.
There are two types of income you will pay taxes on, employee and business income. Employee taxes will have a low number of possible deductions that you can make, mostly related to your family situation such as the number of dependents you support. The most effective way you can lower the employee taxes is by lowering your employee income. As the only director of the company, you also have full control over the business income so that you can freely spend it as you wish. Even though you can choose to show any amount as your employee income, it is important to find a balance between your employee income and the business income when you file taxes.
Setting the right employee income
The employee income that you will take for yourself will be a smaller percent of your total earnings, since this is where a lot of taxes will be paid such as income tax, social security tax, federal tax and state tax.
You need to take a reasonable employee income of some kind to show that the money you spend throughout the year are for you alone and does not belong to the business. Even if you are the only person in the company, there is a distinction between employee income and business income in the eyes of the IRS and you want to handle the business finances properly and not get audited down the line.
The percent of employee income that was recommended to me by my accountant is 30-35% of your total earnings. This means that if you earned $100,000 for the year, you will file employee income showing about $30,000 to $35,000 for the year.
This will be an acceptable amount as your business is still small at that point and the rest of the funds can be used for business growth and investments. Since you are working as a consultant, you are the business still at this point and you will just take all of the earnings after taxes as your own income no matter how it is categorized during tax filing.
Tax deductions for your business income
The remaining amount of your total earnings counts as business income. This is where you will get to really maximize the potential of the tax savings you can do with your S-Corporation. You will have around 70% as business income at this point.
At the end of the year, your credit card companies will put out end-of-year summaries that you want to download. Most of the time they are showing your spending divided up in categories that will be helpful when deciding what you can count as business spending. The business spending is tax deductible so this total amount between your credit cards will be subtracted from your business income.
For example, if you have $70,000 as business income and you have spending in these categories:
Fees and subscriptions - any online services and subscriptions that help you doing your work as a consultant can be argued to be for the business. Are you listening to Spotify while you work?
Marketing, advertising, and promotion - if you have are doing some project work for fun after your main contract work is done for the day, you can deduct any marketing expenses from your business income.
Training and continuing education (such as this course!) - anything that gives you training that will help you run the business is tax deductible.
Insurances - any insurances that you pay for renting or owning your home, life insurance etc. is all important to make sure your business can operate which makes it tax deductible. Starting to see a pattern here?
Office equipment - anything you buy that will help you working as a consultant can be used as office equipment and is tax deductible. This means your new laptop, airpods, TV to watch your online training course videos etc.
Your accountant will be able to take this spending and straight up deduct it from the $70,000 remaining, so that you may end up with a much lower amount. You will only pay business taxes on the remaining amount.
Before I made the change from working as an employee to working as an independent consultant, I was introduced to the agent my friend was working with. The agent wanted to understand what I was looking for and that it was their job to negotiate my rate and get me the interview.
Reducing risk for the clients
Companies expect to go to an agent they trust and ask for people that can fill a specific position where certain skills are required. The agent has been checked by the company for stability and that any liability or insurance issues with contractors will be handled properly.
If you were to apply as an independent contractor, you would need to convince the management to do a separate investigation into your company and check that you have sufficient insurance for them. This may not always be easy, but I have seen it be done.
Getting contract work without effort
The main benefit of working with an agent is that they will make sure you always have contract work. You won't have to send out resumes and hope to get interviews, your agent will always be working for you and have interviews lined up if they are doing their job right.
Your agent will negotiate a top rate for you, which can be tricky to do on your own. All you have to do is to show up for the interview and get the contract work. If you want to change company at any time for any reason, you can ask your agent to line up a new interview within short notice. The network that the agent has built up is invaluable to you as a consultant and it is your security.
Your agent will take a cut of your hourly rate for their services for as long as you work under the contract, which is usually pretty easy to accept since you will be happy with the rate you get to keep. It is not common that you actually find out the exact amount that your agent keeps or the total rate they negotiated.
If you have completed this course and have a couple of years of experience working as a software engineer, send me your resume and I will introduce you to my agent. You will need to move to Chicago to start working with them, but it will be worth the effort.
If you are moving to Chicago, I can also refer you to my accountant that many consultants here use and they will be able to handle your employee and business income taxes and get you the best tax rate possible.
Join our Facebook group here to ask me questions about software consulting and talk to other consultants: