Not to earn it. A first fee needs a signed agreement and a W-9. On a $130,000 placement at 20% the fee is $26,000, and the number that bites is the 15.3% self-employment tax, about $4,000. An LLC changes little in year one. I would form it after the first check and buy insurance when a client asks.

LLC and insurance before the first recruiting fee

The question usually arrives at a specific moment: a client has said yes, or a marketplace has approved you, a search is about to start, and every guide you open begins with a checklist. Form an LLC. Get an EIN. Open a business bank account. Buy liability insurance. Then, and only then, take a client.

Most of the checklist is real. Its order is the problem. Two things gate a fee, and neither is on the list: someone who has agreed in writing to pay it, and a way for them to pay you that a bookkeeper can live with.

A signed agreement covers the first. A W-9 with your own name and Social Security number covers the second, because a sole proprietor is a legal way to be paid, and it costs nothing to become one.

The checklist has a price, and Paraform's 2024 write-up of agency start-up costs puts numbers on it: about $500 to incorporate, an EIN for free, general liability insurance averaging $1,057 a year, and around $2,000 to get registered and branded, plus $250 to 350 a month for legal, insurance and accounting. None of it is outrageous. All of it lands in the months when nothing is coming in.

The checklist puts the cost in the year with no income

The standard advice is to build the company before you do the work: entity, tax number, bank account, insurance, then clients. The reasons given are fair. An LLC separates your liability from your savings, a business account keeps the books clean, and insurance is what a serious vendor carries. Nobody is wrong to want any of the four.

Where I disagree is the timing, because the first independent year has a shape. Months pass between the first search and the first cleared fee, and the checklist front-loads about $2,000 and a monthly bill onto exactly those months. It buys protection against a lawsuit nobody has filed, from a client you do not have yet, and a professional look for an audience of nobody. The desk is empty either way. The checklist just makes it an expensive empty desk.

Here is the arithmetic that settles it. On a $130,000 placement at 20% the fee is $26,000. The self-employment tax to set aside from it, at 15.3%, is $3,978. A one-person LLC taxed the default way usually owes the same, because the IRS treats it as a sole proprietorship unless you elect otherwise, and whether an election is worth making is a question to ask an accountant.

The entity is for liability, not for the first tax bill. So the biggest cost on the first fee is the same with or without the checklist, and the checklist's own costs are the only ones you can move.

What has to exist before a fee can be paid to you

Four things, and one of them is a bank account you already have.

  • A signed fee agreement, with a client or with the platform that holds the client.
  • A W-9, which for a sole proprietor is your name and Social Security number, or a free EIN if you would rather not hand your number to a client.
  • An invoice, or the platform's statement if it invoices for you.
  • An account that can receive an ACH or a wire, and your personal one works for a first fee.

Chosen contracts with you as an independent contractor to Chosen HQ LLC, a California company, and expects sole proprietors: you sign as yourself and hand over a W-9, or a W-8 outside the US, before payment. Money arrives by ACH or wire with a statement, a 1099 follows where the law requires one, and a person handles settlement. You never invoice the client. Chosen gives no entity or tax advice, and neither does an engineer with a blog.

The list is short because the law already has a container for you. The moment a fee clears, you are a sole proprietor with income, and the paperwork that follows is mostly a tax return with a Schedule SE attached.

What the self-employment tax set-aside looks like on one fee

The IRS puts the self-employment tax rate at 15.3%: 12.4% for Social Security and 2.9% for Medicare, owed once your net earnings from self-employment reach $400 in a year. Your first fee clears that bar by $25,600. Nobody withholds it for you, which is the part a payslip never prepared you for.

Line Direct client at 20% Through a marketplace keeping 20%
Fee on a $130,000 base $26,000 $26,000
Your share $26,000 $20,800
Self-employment tax at 15.3% $3,978 $3,182
Left before income tax $22,022 $17,618

Two adjustments make the real bill a little smaller. Schedule SE trims the base before applying the rate, and the IRS lets you deduct the employer-equivalent half of the tax when figuring adjusted gross income. I would set aside the full 15.3% anyway. The difference is a cushion for the quarterly estimated payments the IRS expects from the self-employed, and income tax at your own bracket sits on top of all of it.

The rule I would follow: the day the money lands, move 15.3% of it into a second account you do not spend from, and add whatever an accountant tells you for income tax. That one habit does more for a first-year desk than the LLC, the logo and the business cards combined. It also costs nothing, which is the theme.

When insurance and a state license actually come up

Insurance comes up when a client's paperwork asks for it. Larger companies with a vendor process often want a certificate of insurance before the first submittal, and in my experience a startup with eight people almost never does. General liability averages $1,057 a year in Paraform's numbers, and professional liability is a second policy on top.

Both can be bound in days, which is exactly why they can wait for the client who requires them. Read the agreement you are signing for an insurance clause. Ours has none. It does have an indemnification clause, and whether a policy should stand behind that one is a question for a lawyer.

The one item that does come before the first fee is a state license, where your state has one. New York licenses employment agencies under its General Business Law, Article 11, and New York City's licensing checklist lists a $5,000 bond for most applicants and a two-year license at $500 to 700.

The same checklist says an agency that places only professional, executive, administrative and clerical applicants and never charges the candidate may not need the license, though the employer-paid parts of the law still apply. Whether a contingency desk placing engineers fits that exemption is a lawyer's question, and if you will be placing in New York it is step zero. Other states have their own rules, so check yours before the first search.

The LLC itself comes up at the second fee. That is when there is money worth separating, a client relationship worth insulating, and enough income to make the conversation with an accountant about tax elections worth having. Forming it earlier does not hurt. It just costs $500 and a monthly habit in the months you can least afford either.

The order I would do it in

  1. Sign the agreement, send the W-9, work the search. Cost so far: $0.
  2. The day the first fee lands, move 15.3% of it to a separate account, plus an income tax slice sized by an accountant.
  3. Then form the LLC, get the free EIN, open the business account, and route the second fee through it.
  4. Buy insurance the week a client's paperwork asks for it, and not before.
  5. If you place in New York or another state that licenses agencies, the license question moves to the top of the list.

The order has two exceptions. If the client you already have insists on an entity or a certificate before signing, the client wins, and you form and buy before the first fee because the fee depends on it. And an LLC is only as separate as you keep it; one account for the company and the groceries undoes much of what it is for, which is a question for a lawyer, not a blog.

Sign the agreement, send the W-9, and put 15.3% of the first fee somewhere you will not touch it.