Help- fiance's employer wants him to switch to independent contractor

[snuggler]

My fiance and I will soon be moving for my new job, and my fiance will now be working remotely for the same company. His boss has told him he would like to have him work as an independent contractor instead of an employee because he will be working remotely.

We know that this will change his taxes significantly, but we are considering having him do it so we can stash away more in a solo 401K (he currently doesn't get any benefits, and thus gets no 401K or other retirement benefits through his employer).

However, we also know that the company will be saving certain costs if my fiance becomes an independent contractor for the same money ($60k/year). We know my fiance will have to pay more in SS and Medicare taxes, and will also likely have to pay taxes quarterly, which will likely involve getting the assistance of an accountant to make sure we are doing everything properly.

Accordingly, we think it is probably best to only accept independent contractor status if the company is willing to increase what he currently gets paid, to cover the extra taxes, accountant fee, and anything else that we are forgetting (I'm sure there is something else we aren't even aware of, since neither of us has done this before).

The problem is, we aren't sure how to estimate how much more he should ask for in exchange for becoming an independent contractor. Does anyone here have experience figuring these types of things out, and if so, could you help us figure this out? Thanks so much in advance for your help!

[ender]

Make sure to read this thread.

This one will also have some good reading.

[dandarc]

If he's not getting any benefits, then the only additional cost I'm aware that he would have to bear is the employer half of SS / Medicare.  That's 7.65% of the salary, or about $4500.  There may be some state or local taxes that come into play as well.  From personal experience, being an independent contractor in Florida is very straightforward - in another state, it might not be so easy.

You might have him ask for a bump to $65000.  Might even ask for 70 or 75 - most companies are much more willing to fire an independent contractor, so you're taking on more risk.  They might say no - he does not have to come in to the office, after all.  They might say yes because even without benefits there are additional costs with employing someone, and they might recognize the risk there as well.  So that all goes into the decision.

If you max out a Solo 401K, at 60K of self employment income, you could put about 28K into it, which if you're in the 25% bracket saves you 7K on taxes - that more than makes up for the additional FICA tax, assuming you have the money to max it out.

I personally don't find paying quarterly taxes all that daunting.  You're already aware of the big one - gotta cover both halves of FICA.  Given that you are still both single, this is a very straight-forward computation for him.  Once you're married (or if you are getting married this year) that complicates it a bit, but so long as between your withholding and his estimated taxes, you cover all of the taxes you owe you're more or less OK.  He may need to fill out the "annualized" income form for 2014 to avoid some penalties because of the mid-year change, but if you keep good records this is not that difficult.  I actually just paid the penalty of about $50 when I had a similar move - I had not kept good enough records and decided it wasn't worth the trouble.

Also keep in mind, that the idea that you have a choice here could change - might turn into a take-it or leave-it deal.  I'd personally make the switch, but ask for more money.  If they say no to more money, it still might be worth it if you can max the SoloK, but you'd have to weigh the pros and cons there and come to a decision.

[DocCyane]

You might want to confirm who pays for office supplies, postage, ink, computers, printers, a desk, a chair, Internet, data storage...

[Badass by 41]

You might want to confirm who pays for office supplies, postage, ink, computers, printers, a desk, a chair, Internet, data storage...

Yes, definitely discuss what are considered reimbursable expenses.  That said, your DH should keep good records of what is not reimbursed and itemize it. Also, you may be able to deduct part of your home and some living expenses (toilet paper, etc.) if he works remotely from your home.

Additionally, DH will want to check with HR about the total cost of his benefits.  It's a number HR should have readily available and "should" include things like FICA, retirement contributions, HSA contributions, and healthcare.  That last one is something I didn't see in your OP.  Healthcare is the one expense I would expect to drive the biggest increase in your 1099 salary.

His company could be spending upwards of $8-10k for his health benefits, which will be his responsibility once he's contracting.  That's not to say he'll actually have to use the addition money for a comparable plan, but that's your choice at that point and not the companies.

Here's another way to think about this.

At $60k/yr DH is making roughly $30/hr. Most contract agencies add on a placement fee of 10-20% of the base annual salary, on top of 20-30% markup in hourly rates. (this varies widely between agencies and industries).  Even at the bottom end of that spectrum, for DH's company to hire a replacement in the same contract role they are offering, it could cost them $7200 just to bring the candidate through the door, and $72k/yr to keep them on payroll.
And that doesn't even take into account the cost savings of not having to train the new candidate and have an unknown cultural fit.  DH is a known quantity and there is definite value there (if the company chooses to acknowledge it :-).

You might even go as far as to have DH talk with a contract agency in his industry and the companies location and see what they would charge for his kind of role.

Personally, I think $37.50-$40/hr sounds reasonable for a contract role at the salary range DH is in.  That would produce an additional $15-$20k/yr to cover taxes, healthcare, and operating expenses.

Just my $0.02, YMWV.

[stpetesean]

How are you coming up with $60k/year being equal to $60/hour?  Working an average of 2,000 hours per year in a full time job it's $30/hour.

[Badass by 41]

How are you coming up with $60k/year being equal to $60/hour?  Working an average of 2,000 hours per year in a full time job it's $30/hour.

Yup, good catch. My quick math was off. (DOH!)

50wks/yr @ 40hrs/wk = 2000hrs/yr.
$60k/yrs by 2000hrs/yr = $30/hr

Sorry for the confusion.  I'll update the numbers in the OC, but here a summary.

At $60k/yr DH makes roughly $30/hr.  I think an additional $15-$20k/yr is a reasonable ask which would be roughly $37.50-$40/hr

[mm1970]

I checked one of the links above.

Don't forget to consider vacation - if he currently gets paid vacation, that's a benefit.

For example, I earn 34 days a year of PTO (sick + holiday + vacation).

That's 272 hours of work that I am paid for where I am not working.

[Bateaux]

Get him a new job.  His salary is pretty average and replaceable with a better one.  Dump the old one unless he wants to start a company.

[MustachianAccountant]

Also worth noting that an employer can't just switch employees to 1099/Independent Contractors because they want to. The IRS has a series of tests to determine if an employee is truly an independent contractor, or really just an employee. These tests are for the employee's protection:
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee
http://www.legalzoom.com/everyday-law/workplace/employee-vs-independent-contractor-differences

One of the key questions here is: Will the relationship continue and is the work performed a key aspect of the business? In other words, is there a definite end to the contract, and is what your fiance does the core service of the business as a whole?

I know this wasn't your original question, but I thought I'd chime in. Just because your fiance is teleworking, that doesn't make him self employed. And it's not something that the employer can just choose to do.

[gbmp]

You should definitely be able to negotiate an increased rate as a contractor if he is willing to work as a contractor (it will be more hassle in a number of ways), simply approach it from the employee cost for the employer, you said he does not have a 401k/match currently, so determine right now what they're paying for in terms of:

Gross Salary = 60,000
Healthcare = if provided (total cost reported on W2, subtract out the premiums he pays to get the amount they contributed)
FICA =7.65% of gross (currently he pays 7.65 and they also pay 7.65 for him)
Federal Unemployment tax = 6.2% of first $7000 or $434/year but can be effectively less I think depending on what state the company is in
transportation/parking = ?/year
equipment depreciation = amortize cost of business computers/devices over the useful lifetime at your company, i.e. if they buy him a $2000 laptop every 5 years, figure $400/year

Use the total employee cost to them right now to determine the rate as a contractor, then effectively he will cost the company the same amount, but very possibly would effectively get a raise out of the bargain due to the various tax considerations (of note, only 92.35% of net business income is taxed for FICA purposes meaning that 15.3% applies to a smaller chunk of income than it would as an employee)

I would think it should be very hard for them to argue with paying the exact same amount to him as a contractor that they currently pay for him as an employee.

[huadpe]

Others here have covered a lot of good ground, but as someone who gets paid as an independent contractor for piecemeal work, let me give this piece of advice.

Set aside at least 25% (I do 30%) of every dollar of gross income that comes in for taxes.  Set it aside in a boring savings account.  Pay your quarterly estimates from that savings account, and pay any extra you owe at the end of the year from it too.  Whatever is left is your "refund" to invest with.  But don't play games with trying to invest with your tax money or just withhold the bare minimum, it's much less stress to keep a good chunk of money aside. 

As far as what to set the estimates at, you won't be penalized for doing 100% of your prior year's taxes in 4 equal chunks.  That's income + fica + medicare mind you.  If he gets a pay bump, he'll owe tax at the end of the year, but if he equaled his prior year tax in estimates, there won't be penalties.*

*Above a certain threshold they ask for 110%, but I think that's like 150k.

[snuggler]

Thanks for all the input thus far- keep it coming! I am devouring the info. and so grateful for everyone's input.

A couple of clarifications.

My SO does not get any benefits except what is required by law. So, there is no health care, no vacation days, no paid sick days, no retirement, no disability, no life insurance, etc.- nothing except employer-paid FICA taxes (and probably a few things we're unaware of- maybe liability insurance, unemployment insurance, etc.). He has a high-deductible healthcare plan that he purchases individually.

So the costs are probably: extra taxes, equipment/supplies, equipment depreciation, utilities that are used for home office that wouldn't otherwise be used, and any state taxes or insurance requirements.

Getting a new job is not an option- we are moving cross-country for a job I got, but that job only lasts one year and is non-renewable, and we plan to move back. So it just doesn't make a lot of sense for him to find a new job.

He is not concerned about the risk of the company cutting off his contract.

He does not need any of the money to live off of.

Is $17,500 + 0.2 * 60,000 (or whatever the final amount is) = the max he can put away in a solo 401K? I am trying to read the IRS rules, but I've never been great at understanding the IRS' website.

It sounds like even if he gets no additional pay, the ability to do a $28k solo 401K and reduce his taxable income still likely outweighs the costs of having to pay the extra FICA taxes. Is that correct?

It also looks like he could deduct his health insurance premiums, as well as any non-reimbursed expenses relating to the business services he provides for the company. Is that correct?

Other thoughts, given these clarifications?