5 Legal Issues That Consultants Should Know
1. Income and self employment taxes â—? The distinction between employee and independent contractor will affect the way you handle your taxes. As an employee, your employer is responsible for withholding income taxes from your paycheck. In addition, you and your employer each contributes half to Social Security payments. â—? If, however, you are an independent contractor, you are responsible for your own taxes because the organization that pays you generally will not withhold anything.
2. Sales tax on your fees? â—? Check with your state's department of revenue to see whether the fees you charge clients are subject to tax. â—? If they are, and you are not collecting and remitting such taxes, you could have a problem.
3. Intellectual property â—? In the course of your consulting work, you may create intellectual property for use by your clients. Such work might be entitled to copyright protection. In this case, be clear with your client about such copyright ownership. You do not want your work to be considered a "work made for hire." The copyright for such a work would reside with your client, even though you were the one to create the work. â—? The client has high hurdles to overcome to claim work made for hire status -- but be safe and avoid misunderstanding.
4. Professional liability vs. general liability insurance â—? You should consider at least two types of insurance: professional liability and general liability insurance. While both protect you from things you do or fail to do, the specific focus of each is different. Professional liability insurance protects you from the consequences of bad decisions and actions with respect to your consulting. â—? For example, if your improper systems implementation caused the client's business to shut down, resulting in loss of revenue, your professional liability policy might protect you from a client lawsuit.
5. Business organization option - the corporation â—? A corporation offers significantly more legal protection. If you are sued over acts of your corporation, generally only the assets of that corporation can be used in a judgment. Your own personal assets, if separate from the corporation, usually can't be used. â—? However, a corporation requires its own set of tax returns and typically requires formal meetings and documentation of those meetings.
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