These are high times for free agents, right?

You’re your own boss, you pick and choose clients, maybe you even work in a smoking jacket. Who needs the business-plan-du-jour frenzy of the dotcom world? Who wants those 100-hour work weeks? Why fuss with those 50,000 options in a stock that could spike to 160 in next month’s IPO?

Well, OK, when it comes to equity maybe you are a bit jealous of your inside-the-corporation cohorts. Let’s talk about how consultants can get a piece of the action – and what to look out for when you take your paycheck to the racetrack.

Dennis Salguero has been offered equity by a couple of clients. "I’m a young guy and work out of my house, so I can gamble," says Salguero, president of Beridney Computer Services, a small database and Internet application consulting firm in Washington, D.C.

So when an Internet startup offered him substantial equity in exchange for his services, Salguero was intrigued. But the small, pre-IPO company wanted to pay his fee in stock and stock alone. That was too much for Salguero to handle (and too little for him to take home every month), so he asked the startup to pay him half in cash, half in stock at $1 per share. The deal was done, and Salguero is working with the company as it heads to a projected September, 2000 IPO.

James Reagan has also done the equity-payment dance with potential customers. A healthcare startup wanted to pay stock as the fee for Reagan’s services, which he offers as principal consultant at eVision Inc., a Michigan City, Indiana-based consulting firm that specializes in e-commerce and business-to-business application development.

But the startup "didn’t want to talk much about their marketing and business plans," says Reagan. So he backed off, because in an equity deal, "you’re absorbing the risk, so you’ve got to know what the risks are."

Reagan’s negotiations with another healthcare startup proved more fruitful. "These guys have been open," says Reagan. "I know their marketing and business plans and funding sources. They want me to have a stake because they want me to be motivated to build value for their company."

An equity windfall is great – until you have to hand over a huge chunk of it to Uncle Sam. Has Reagan considered this end of the deal? "It has crossed my mind," he says. "How does this look on the books? I haven’t addressed those issues yet."

What will happen if you hold thousands of shares in a client company that actually has a successful IPO? "You would end up paying a capital gain on the entire thing," says James Jenkins, a CPA and president of Jenkins & Company Tax Research Services, which also operates TaxAnswersOnline.com.

The news is worse if you’re compensated with stock options rather than shares. If you eventually exercise the options, rather than paying the 20 percent capital gains tax, "you’ve got to pay taxes on ordinary income on the gain, which is much higher, about 41 percent in the top bracket," says Jenkins, whose firm is in Southfield, Michigan.

On the other hand, whereas options usually have no value when they’re originally granted to you, stock is worth something from the start, so you’ve got to pay income tax on fees paid to you in stock -- in the year you originally receive them. "It’s like ordinary, taxable income. The company is supposed to place a value on those shares," explains Jenkins. "If [the consultants] are doing this correctly, they’re out of pocket because they’re paying tax on money they haven’t received."

Do consultants Salguero and Reagan ever expect to be able to cash in their shares and take home a fortune? "None of these [equity arrangements] have come to fruition yet," says Salguero. "Time will tell," concludes Reagan.