Part 7 of a 10-part series entitled, “10 Traits of the Best Contract Recruiters“
Should a Contract Recruiter Incorporate?
In the course of managing our business since 1999, we have interviewed and hired a number of highly successful professional contract recruiters. We intend to keep doing that and have worked to identify some of the traits we have seen in our best performers over the last 18 years.
Today’s blog is the seventh in a series of 10 that identifies the traits of our most successful senior recruiters. We hope this perspective will provide guidance to those new to contract recruiting, offer some insight to experienced recruiters who are always looking to improve, and give TA/HR leaders some ideas on what should be expected of a contract recruiter. We also hope that this will stimulate ideas and conversation to provide additional insight from readers of this blog.
Two Types of Contract Recruiters
There are generally two types of contract recruiters: those who look for a temporary role and hope to convert to full-time with a client and those who decide they enjoy their independence and intend to make a career as a contractor. This blog will focus on the latter.
Career contract recruiters have decided they love their independence while still enjoying their role as a contributing member of a team. They don’t want to climb any corporate ladder, they are focused on recruiting and don’t have much interest in the other expectations and obligations associated with being an employee. They enjoy the learning experience and diversity that comes with working for multiple companies. They are okay with the risk of time off between contracts, but the best recruiters always have options coming their way. Many welcome that time off and see it as one of the benefits of contracting, despite the downside of not getting a paycheck for those days.
LLC, S-Corp, C-Corp
We have found that many of the best contract recruiters have decided to incorporate as an LLC, S Corp or C Corp. They can make more money, there are tax advantages and it can be advantageous for their clients. However, there will be some additional obligations that go along with the extra income including the initial company setup, bookkeeping, payroll (for one person), liability insurance and a separate corporate tax return. It’s not as complex or time consuming as it may seem, but it does require diligence and attention to details. It is vital to understand that there needs to be a payroll and there needs to be a payroll tax return.
Okay, back to the concept of making more money. The additional revenue may come from having multiple clients. It may also be derived by explaining your status as a corporation to your client and they can save by directly contracting with your company. They don’t need to put you on their own payroll or through a payroll service. A payroll service will charge the client roughly 20% or more above the hourly rate to administer payroll. If the recruiter normally works for $50/hour as a W-2 contractor, the cost to the client company for the payroll service will be $50 + $10 (20%) = $60/hour. The incorporated recruiter might be able to negotiate for a rate close to $60, but likely not more than that. Companies generally don’t want to add vendors unless it makes economic sense. One additional selling point is that all hours worked are billed at the same rate, even if you work 50 hours per week. Client companies are more likely to let recruiters work more hours if they are not paying a premium rate for those hours. Making 10%, 20%, or sometimes 30% more on a contract is possible if incorporated.
Both the Contract Recruiter and Client Company can Benefit.
Companies should try to avoid hiring 1099 contractors that work off their own social security number. If you are an employer using 1099 independent contractors, it’s important to understand the rules, risks, and potential liabilities. There is plenty of educational information on IRS and state government sites on this topic. If a company is audited by a State agency or the IRS, these government entities will assume that 1099 relationships are improper and the employer must prove otherwise. These audits can generate significant revenue for the government in the form of back taxes, penalties and interest from employers that have inappropriately hired individuals as 1099 contractors instead of hiring these individuals as employees. When I say employees, I mean somebody’s employee, either the client company, a payroll service or ideally the company formed by the recruiter.
By incorporating, the recruiter is setting up a legitimate business, creating one layer of protection from any legal action and removing much of the risk for the client that normally comes with a 1099 contractor. Both the contract recruiter and client company can benefit. The recruiter can use this information to their advantage to support the argument to contract directly with them.
**Disclaimer: Williams & Sewell does not provide legal advice.This blog is not intended to provide any legal or tax accounting advice to anyone. Recruiters setting up their own business should consult with a business attorney and CPA.
10 Traits of the Best Contract Recruiters
Part 1: Pursue Contract that Leverage Your Strengths
Part 2: Client Relationship, Not an Employer
Part 3: Professional Curiosity and Pursuit of Knowledge
Part 4: Stay Organized and Communicate Efforts
Part 5: Respect the Dynamics of Being a Virtual Recruiter
Part 6: Factors in Determining Hourly Rate
Part 7: Should a Contract Recruiter Incorporate?
Part 8: Building a Business Case for Contract Recruiters
Part 9: The Added Value a Good Contract Recruiter Brings