Umbrellas and PassThroughs are companies that group consultants together in a single entity or "package" with which clients and brokers can more comfortably do business due to tax, legal, insurance, or similar considerations. They were created especially to deal with §1706 but they are also helpful in meeting the other concerns that clients and brokers may have, especially working with a one-person business. The consultants may be strangers to each other and be working on completely different projects for different clients and even through different brokers (if any). The consultants join these umbrellas strictly to provide them with this interface through which to work with their clients and/or brokers. The consultants typically run their own Profit Centers or Divisions within the umbrella so that they are unaffected by the other consultants. The umbrella charges an administrative fee for keeping track of and accounting for the divisions and their income and deductible expenses. The umbrella may also offer other services for additional fees.
Strictly speaking, PassThroughs include the overall category, and many of these only provide the minimum required functions, acting as an intermediary which the money will pass through on its way to the consultant, withholding taxes as applicable and perhaps offering insurance and some benefits. In addition to these services, the best Umbrellas also pass through as many allowable tax deductions as possible so that their consultants can realize more of the benefits of being Independent Contractors without having to set up their own business. The term Umbrella is used in most of this page, but many of the PassThroughs listed below do not quite fit the true Umbrella category.
Most large umbrellas are corporations and hire the contractors as their W-2 employees, thus providing Employer of Record service, which is the most well-known and effective way that clients believe that their concerns about §1706 can be met. Some of them also provide umbrella services for those independent contractors which meet the umbrella's own comfort level regarding §1706. There are also other ways of providing an umbrella structure for consultants. Whatever arrangement is used, the umbrella and its consultants remain independent contractors with respect to clients and brokers. The umbrella saves the consultant the hassle of setting up and incorporating a business and most of the work of running it, and can also simplify tax planning.
Umbrellas also typically utilize their economies of scale to afford business insurance such as General Liability, and in some cases Professional Liability (Errors and Omissions), as a benefit to clients; and health insurance, retirement plans, and other benefits to their consultants (especially W-2 employees). Some of them also provide factoring of accounts receivable for an additional fee, paying their consultants regularly regardless of when or if they get paid by the clients. Regardless of other services performed, umbrellas handle the invoicing and collections. They generally do not provide any sales, marketing, recruiting, job matching, or similar functions, leaving these to the consultants and their brokers. This allows consultants and clients to use separate matching services or marketing brokers to find each other, and to use umbrellas for some or all of the other functions. This in turn allows the services to be unbundled (separately priced) so that they can be compared and can compete fairly in a free market. This should help break the stranglehold many brokers still enjoy (courtesy of §1706) over consultants and clients alike.
Some of the W-2 PassThroughs also handle H1 or other visa issues. This can provide a stable visa-holding employer through which a contractor can work contracts for many clients, with or without brokers, increasing the contractor's flexibility and marketability, and ultimately helping to reduce the rate disparities.
Here are some Frequently Asked Questions about umbrellas, as well as some interesting discussions from Janet Ruhl's famous RealRates BBS.
Below are sample rates from other PassThroughs and Umbrellas we've heard about. Sample fees below are approximate and based on each umbrella's web site and/or other information available, are for the most typical plan(s) offered by each umbrella, and are not guaranteed; they are provided only to facilitate comparing umbrellas - but remember, many criteria are more important than price. Most umbrellas quote their fees excluding applicable payroll taxes (mostly Social Security and unemployment), so we have normalized the price below to show the umbrella's cut (off the top), including applicable Social Security and Federal unemployment taxes (both employer and employee halves). To keep this chart simple, rate caps, state taxes, optional benefits, and expense deductions are not included, amounts are rounded to the nearest whole $ or %, and monthly rates charged by some umbrellas are converted to hourly rates.
13% + $4/hr. Another umbrella
26% + $0/hr. Another umbrella
14% + $0/hr. Without umbrella - if you're 1099 (self-employed)
15% + $0/hr. Without umbrella - if you're W-2 or incorporated
15% + $0/hr. RMP Consulting Partners LLC assuming no bonuses
14% + $0/hr. RMP Consulting Partners LLC special 2003 promotion for our benefit package
This already shows our competitive pricing, costing you only about 0-1%, but since our overhead is so low, here's a projection of what our fees (including the taxes as above) could be with just 15 billing consultants:
10% + $0/hr. RMP Consulting Partners LLC
As you can see, our services could cost you less than not using an umbrella at all! The fee reductions would be implemented in effect by the bonuses we can pay when we get more billing consultants. The sooner you join and start billing through us, the sooner you start accumulating Bonus Points.
Out of all the umbrellas, only RMP Consulting Partners LLC can handle net losses, as would happen if you have a long stretch between contracts (not unusual in today's market) or lots of travel expenses. Other umbrellas typically limit your expense deductions to a fraction of your income, and you must find your next contract before you can join them. You can join us while you're still looking for your next contract (or even before) and start deducting legitimate expenses through us right away, as long as you're serious about being an Independent Contractor and planning to work your next contract through us when you do find it. Our umbrella fee for processing your deductible expenses (when they exceed your income through us) is only 15%, which is less than your 28-40% tax brackets, so with our help, you'll save on taxes all year!
Although our built-in umbrella structure is somewhat similar to those above, it's structured differently and was conceived and developed before we ever heard of umbrellas. Also, unlike a pure umbrella, we're actually a consulting firm and our members get referral commissions for finding contracts for each other. This makes us like an umbrella with optional marketing broker services available for members. We also do real projects as a consulting firm. We have a SIMPLE plan and an optional full corporate benefit package, and we do pass along as much as possible all available self-employed tax deductions. Because of our innovative structure, we have a unique tax benefit that individual consultants cannot get as either a sole proprietor or a typical umbrella employee. As you can see from the list above, this unique tax benefit could more than pay for your cost, so you could actually come out ahead by inserting us into whatever contract deal you find! Please see our Frequently Asked Questions and feel free to contact us for more information.
