Author Topic: any IT contractors in the house?  (Read 794 times)

JLee

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any IT contractors in the house?
« on: October 23, 2020, 02:57:30 PM »
For context, I'm working a generally comfortable permanent/staff position with excellent benefits, 5 weeks PTO, but a relatively stagnant salary/title since I was hired just over five years ago.  We had a major reorganization this year which was supposed to be HR's opportunity to correct that, but turns out they didn't - I got a lateral title and a normal COL increase. I expressed my displeasure and was told they'd do what they could, but then covid happened and that all vanished.  I've been keeping an eye out on the job market, though not aggressively looking, and have had a few interesting recruiter contacts so far.

The most intriguing one so far is a contract position doing something I enjoy, at a $90/hr W2 rate or $100/hr 1099 rate.  I'm currently about $55/hr salaried + benefits, which I think (napkin math) puts me at an approximate W2 contract equivalent of $65-70/hr.

I am comfortable where I am but feel I am significantly undervalued (to the tune of $30-35k/yr), and the array of opportunities arising via recruiters appears to bolster that -- now clearly, I can only properly establish my true market value if I actually get an offer, but that's what I'm working towards now.  I am considering the merits of doing a series of contracts to boost my resume experience and salary expectations (though my state recently made it illegal for an employer to ask about salary history so my undervaluation shouldn't hurt me there), and then thought about doing an LLC and working via 1099 instead of W2.  If I understand correctly that would give me the opportunity to open a Solo 401k and contribute up to $57k/yr, though I would then be responsible for self employment taxes/etc.

Given that, I figured I'd see if anyone has been in a similar situation and could point me in a direction -- is it worth pursuing life as a 1099 contractor to maximize 401k revenue, or is the general safety net of a permanent staff position something I should place more value on? I have several years worth of living expenses in non-retirement accounts so I can sustain some volatility if necessary, though my goal would be to bank as much as I could out of a lucrative contract so I could ride out any unpaid periods without touching investment accounts.

Ideally my current employer would correct my title to match what I actually do, and adjust my pay scale to industry standard, but I'm not crossing my fingers on that (and given the current financial situation re: covid, I'd feel a bit awkward asking for more money - any advice/suggestions here would also be helpful).  If it's relevant, I am in a HCOL area (NJ / NYC metro).

reeshau

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Re: any IT contractors in the house?
« Reply #1 on: October 23, 2020, 04:42:14 PM »
Not sure what function / technical area you work in, but I worked over a long period of time with a number of contract pm's, as the owner of our IT project portfolio.  I would occasionally approach them with an offer to turn salaried, but almost all of them would turn me down, saying they couldn't take the pay cut.  Most of the time, though, they had a spouse, usually in healthcare, that had great insurance coverage foe their family.  So, if you go the 1099 route, make sure you take into account unsubsidized health insurance, and of course whatever rollercoaster the ACA will be in for in the next year and beyond.

It can be a good route.  Lots of people working in ERP seem to work this way, or job hop more often than others.  I expect It's the nature of the beast, with big rollouts / upgrades / consolidation projects for a few years, then some kind of steady state that only needs a smaller run team.  And call us when you have something else big to do.  Whether you are the ERP vendor, a big consulting firm, or an individual, that is a small world and there is a lot of work that comes through a professional network.  But then, you have to be comfortable with that style of a career.

bacchi

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Re: any IT contractors in the house?
« Reply #2 on: October 23, 2020, 05:08:09 PM »
I did this for years.

Yes, significant 401k contributions were a big bonus. You also have more control of your time, legally anyway. Some employers don't understand 1099 and you can either roll with it, explain it to them, or quit. There is a lot to be said for missing corporate meetings, even if you're getting paid to watch a rah-rah power point.

It's easier to make long trips in between contracts.

In this climate, you can and should be choosy. Responsibilities sound boring? Pass on that contract. There may be a time when you'll have to accept those crappy jobs but that time isn't now.

When I was traveling on contract, the client often paid. I could fly when I wanted and stay where I wanted (within reason, of course) without using the corporate travel agents and preferred vendors. If it was on my dime, I received a travel premium on the contract and stayed at cheap hotels (Comfort Inn, etc.) to save money. For one contract, I rented a room in a walkable neighborhood and would stay there when I flew into town.

One downside is, as reeshau mentioned, availability of health insurance. Another downside is missing out on those juicy RSUs that some tech companies pay out.

Sign up for the contract job boards at DeLoitte, Accenture and PwC.

starguru

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Re: any IT contractors in the house?
« Reply #3 on: October 23, 2020, 07:03:23 PM »
Depending on your w2 situation an w2 employee can put just as much in their retirement savings as a self employed person.  For me it always made sense to follow the dollars.  Getting more money earlier in life unlocks doors faster and provides more options later.  That said I lucked out and it made more sense to me to become a salaried employee than stay at my $150/hr rate, so that's where I am now. 

You mention you currently see positions you like for $90w2 or $100/1099 -- what are the w2 details?  Getting some time off and good health care is worth the $10/hr difference.  Hows the w2 401k?  Are those opportunities ongoing or short term?  One consequence of 1099 work is most companies will cut you loose after 12-24 months otherwise you start crossing the line to employee.   

JLee

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Re: any IT contractors in the house?
« Reply #4 on: October 23, 2020, 07:35:04 PM »
Depending on your w2 situation an w2 employee can put just as much in their retirement savings as a self employed person.  For me it always made sense to follow the dollars.  Getting more money earlier in life unlocks doors faster and provides more options later.  That said I lucked out and it made more sense to me to become a salaried employee than stay at my $150/hr rate, so that's where I am now. 

You mention you currently see positions you like for $90w2 or $100/1099 -- what are the w2 details?  Getting some time off and good health care is worth the $10/hr difference.  Hows the w2 401k?  Are those opportunities ongoing or short term?  One consequence of 1099 work is most companies will cut you loose after 12-24 months otherwise you start crossing the line to employee.

I don't have W2 details for this one - the previous one (which I'm still waiting to hear back on re: interview) offered neither health care nor 401k, though the contract agency apparently offered health care in some form.

I'll get some more details on this one if it moves forward at all; my gut instinct is $10/hr isn't enough to be worth doing 1099, as most of that difference would be eaten up by FICA taxes anyway; is that an accurate assessment?

starguru

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Re: any IT contractors in the house?
« Reply #5 on: October 23, 2020, 07:59:17 PM »
Depending on your w2 situation an w2 employee can put just as much in their retirement savings as a self employed person.  For me it always made sense to follow the dollars.  Getting more money earlier in life unlocks doors faster and provides more options later.  That said I lucked out and it made more sense to me to become a salaried employee than stay at my $150/hr rate, so that's where I am now. 

You mention you currently see positions you like for $90w2 or $100/1099 -- what are the w2 details?  Getting some time off and good health care is worth the $10/hr difference.  Hows the w2 401k?  Are those opportunities ongoing or short term?  One consequence of 1099 work is most companies will cut you loose after 12-24 months otherwise you start crossing the line to employee.

I don't have W2 details for this one - the previous one (which I'm still waiting to hear back on re: interview) offered neither health care nor 401k, though the contract agency apparently offered health care in some form.

I'll get some more details on this one if it moves forward at all; my gut instinct is $10/hr isn't enough to be worth doing 1099, as most of that difference would be eaten up by FICA taxes anyway; is that an accurate assessment?

Youíll pay the extra 8-9k for the employer half of the FICA, but 2000 hours at 10/hr is 20k.  Depends on other factors like Heath care and 401k benefits.

bacchi

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Re: any IT contractors in the house?
« Reply #6 on: October 25, 2020, 10:56:11 AM »
Depending on your w2 situation an w2 employee can put just as much in their retirement savings as a self employed person. 

You can put in ~$57k/year in a solo 401k. Are there agencies that will do that kind of matching? That's nearly a 200% match on every dollar.

ctuser1

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Re: any IT contractors in the house?
« Reply #7 on: October 25, 2020, 11:27:38 AM »
I'm eagerly following this thread!! I had seriously considered this in the past, but then abandoned the idea for the time being.

To the $50k+ 401k question, can you perhaps set up shop as your own corp, and then do your own matching/"profit sharing" whichever way you want? This would mean no W2 work, I think (not an expert) and only 1099.

I know someone who claims to do the above, although he has mentioned to me that such corp-to-corp opportunities are now drying up for whatever reason, and that big employers now-a-days tend to prefer W2 at least in the NYC region.

bacchi

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Re: any IT contractors in the house?
« Reply #8 on: October 25, 2020, 11:39:14 AM »
I'm eagerly following this thread!! I had seriously considered this in the past, but then abandoned the idea for the time being.

To the $50k+ 401k question, can you perhaps set up shop as your own corp, and then do your own matching/"profit sharing" whichever way you want? This would mean no W2 work, I think (not an expert) and only 1099.

I know someone who claims to do the above, although he has mentioned to me that such corp-to-corp opportunities are now drying up for whatever reason, and that big employers now-a-days tend to prefer W2 at least in the NYC region.

Right, a $50k 401k can be done through a 1099 or your own Corp. Starguru wrote that it can be done as a W2 employee, which is technically possible but I've never seen it unless it's your own C-Corp. MBO or similar might allow it but they have shitty health insurance and charge a lot for the privilege.

C2C does seem to be more rare for some reason. Not sure why since it's not like the IRS has the funding to investigate misclassifications.

Another good reason to use 1099: The 20% QBI deduction.

dandarc

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Re: any IT contractors in the house?
« Reply #9 on: October 25, 2020, 11:47:36 AM »
Depending on your w2 situation an w2 employee can put just as much in their retirement savings as a self employed person. 

You can put in ~$57k/year in a solo 401k. Are there agencies that will do that kind of matching? That's nearly a 200% match on every dollar.

It is called a mega backdoor Roth IRA. But a company that is only wanting $10 less for a W-2 deal? Probably has a shitty 401K if at all.

OP - without details on the benefits for W-2, analysis is not really possible.

dandarc

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Re: any IT contractors in the house?
« Reply #10 on: October 25, 2020, 11:48:39 AM »
And the "mega" part is after tax, which when you're making $200k / year isn't as appealing.

starguru

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Re: any IT contractors in the house?
« Reply #11 on: October 25, 2020, 12:59:10 PM »
Depending on your w2 situation an w2 employee can put just as much in their retirement savings as a self employed person. 

You can put in ~$57k/year in a solo 401k. Are there agencies that will do that kind of matching? That's nearly a 200% match on every dollar.

The combined employer/employee contribution limit is $57k.  Employee limit is 19500.  Your employer has to be generous to get you there, but it is possible.  For example my megacorp employer matches 6%, allows me 10% after tax contributions with backdoor Roth conversion.  On my $230k salary I get most of the way there.

You would probably be right to argue this isn't as good as self employed options and you'd probably be right, however this is close enough for me at least to be happy as an employee, especially considering other benefits of being salaried (PTO, family leave, RSUs, ESPPs, etc).

JLee

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Re: any IT contractors in the house?
« Reply #12 on: October 25, 2020, 02:13:27 PM »
Depending on your w2 situation an w2 employee can put just as much in their retirement savings as a self employed person. 

You can put in ~$57k/year in a solo 401k. Are there agencies that will do that kind of matching? That's nearly a 200% match on every dollar.

The combined employer/employee contribution limit is $57k.  Employee limit is 19500.  Your employer has to be generous to get you there, but it is possible.  For example my megacorp employer matches 6%, allows me 10% after tax contributions with backdoor Roth conversion.  On my $230k salary I get most of the way there.

You would probably be right to argue this isn't as good as self employed options and you'd probably be right, however this is close enough for me at least to be happy as an employee, especially considering other benefits of being salaried (PTO, family leave, RSUs, ESPPs, etc).

For comparison though, $150k in 1099 income would get you all the way there.

If I was making $230k I wouldn't be having this question, lol.

starguru

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Re: any IT contractors in the house?
« Reply #13 on: October 25, 2020, 04:02:27 PM »
Depending on your w2 situation an w2 employee can put just as much in their retirement savings as a self employed person. 

You can put in ~$57k/year in a solo 401k. Are there agencies that will do that kind of matching? That's nearly a 200% match on every dollar.

The combined employer/employee contribution limit is $57k.  Employee limit is 19500.  Your employer has to be generous to get you there, but it is possible.  For example my megacorp employer matches 6%, allows me 10% after tax contributions with backdoor Roth conversion.  On my $230k salary I get most of the way there.

You would probably be right to argue this isn't as good as self employed options and you'd probably be right, however this is close enough for me at least to be happy as an employee, especially considering other benefits of being salaried (PTO, family leave, RSUs, ESPPs, etc).

For comparison though, $150k in 1099 income would get you all the way there.

If I was making $230k I wouldn't be having this question, lol.

I only ever did a SEP IRA, which was 25% IIRC.  Not sure how you can get to 57k off 150k but there might be a way with some fancy S-Corp shenanigans.

Either way you want to lay all the benefits you can get from a w2 position against the 10/hr increase of the 1099 rate.

JLee

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Re: any IT contractors in the house?
« Reply #14 on: October 25, 2020, 04:15:49 PM »
Depending on your w2 situation an w2 employee can put just as much in their retirement savings as a self employed person. 

You can put in ~$57k/year in a solo 401k. Are there agencies that will do that kind of matching? That's nearly a 200% match on every dollar.

The combined employer/employee contribution limit is $57k.  Employee limit is 19500.  Your employer has to be generous to get you there, but it is possible.  For example my megacorp employer matches 6%, allows me 10% after tax contributions with backdoor Roth conversion.  On my $230k salary I get most of the way there.

You would probably be right to argue this isn't as good as self employed options and you'd probably be right, however this is close enough for me at least to be happy as an employee, especially considering other benefits of being salaried (PTO, family leave, RSUs, ESPPs, etc).

For comparison though, $150k in 1099 income would get you all the way there.

If I was making $230k I wouldn't be having this question, lol.

I only ever did a SEP IRA, which was 25% IIRC.  Not sure how you can get to 57k off 150k but there might be a way with some fancy S-Corp shenanigans.

Either way you want to lay all the benefits you can get from a w2 position against the 10/hr increase of the 1099 rate.

From my (admittedly loose) understanding, employer contributions can be up to 25% and employee up to $19.5k. 25% of 150k is $37.5k, and another $19.5k employee contribution puts you at $57k.

starguru

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Re: any IT contractors in the house?
« Reply #15 on: October 25, 2020, 05:13:32 PM »

From my (admittedly loose) understanding, employer contributions can be up to 25% and employee up to $19.5k. 25% of 150k is $37.5k, and another $19.5k employee contribution puts you at $57k.

I donít think thatís how it works.  I would think that if the employee contributes 19.5k the Corp canít contribute the same 19.5k.  But I could be wrong.

JLee

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Re: any IT contractors in the house?
« Reply #16 on: October 25, 2020, 05:17:23 PM »

From my (admittedly loose) understanding, employer contributions can be up to 25% and employee up to $19.5k. 25% of 150k is $37.5k, and another $19.5k employee contribution puts you at $57k.

I donít think thatís how it works.  I would think that if the employee contributes 19.5k the Corp canít contribute the same 19.5k.  But I could be wrong.

I was going by this-

https://www.irs.gov/retirement-plans/one-participant-401k-plans

Quote
Contribution limits in a one-participant 401(k) plan
The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:

Elective deferrals up to 100% of compensation (ďearned incomeĒ in the case of a self-employed individual) up to the annual contribution limit:
$19,500 in 2020, or $26,000 in 2020 if age 50 or over ($19,000 in 2019, or $25,000 in 2019 if age 50 or over); plus
Employer nonelective contributions up to:
25% of compensation as defined by the plan, or
for self-employed individuals, see discussion below
If youíve exceeded the limit for elective deferrals in your 401(k) plan, find out how to correct this mistake.

Total contributions to a participantís account, not counting catch-up contributions for those age 50 and over, cannot exceed $57,000 (for 2020; $56,000 for 2019).

Example: Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2019. He deferred $19,000 in regular elective deferrals plus $6,000 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2019 were $37,500. This is the maximum that can be contributed to the plan for Ben for 2019.

A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan. He must consider the limit for all elective deferrals he makes during a year.