W2 Umbrella Companies

In between working through a recruiter and going out entirely on your own with an incorporated entity, there's a middle ground that umbrella companies can fill. An umbrella company, also known as a pass through service, allows you to be a W2-employee as far as the IRS is concerned, but otherwise behave like an independent consultant.

The advantages of using an umbrella service include:

  • Not having to incorporate.
  • Having corporate insurance (sometimes required by the company hiring consultants).
  • Simplifying your taxes vs. what you'd need to do if incorporated.
  • Allowing you to expense things as if you were incorporated.

The disadvantages are few, but do exist:

  • You're not truly independent.
  • Even though low, umbrella companies charge a fee for their services usually based as a percentage of your hourly rate. This percentage various but is in the low single digits.

Early in my consulting career, I used two umbrella companies. One, RMP Consulting Partners, provides you with the most flexibility at the cost of a little extra effort on your part and allows you to potentially have the largest take home pay. The other, Independent Professional Services, keeps things very simple requiring very little effort from you. There are others, but without first-hand experience with them, it wouldn't be fair for me to comment. I will say that PACE looks very promising though.

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