Author Topic: Independent Contractor or W2 Employee?  (Read 3403 times)

Theresa Wiggin

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Independent Contractor or W2 Employee?
« on: May 05, 2015, 09:06:56 AM »
My husband is a home inspector - it's a new-ish field for him, though he's doing well, working for a great company at which he is the primary inspector and the owner does more complicated consulting (203Ks I think they are called?).

He is currently compensated as a W2 employee.

I'm looking at the expenses associated with his work - primarily gas/car insurance/vehicle maintenance and I'm wondering if it would be in our interest to negotiate to have him paid as an independent contractor. I understand there are some rules governing this (he should provide his own tools for instance) - so I'm happy to hear about that, though it's not my main question.

The question is: what are all the factors I need to consider to determine which means of compensation would be beneficial? We've owned a sole-proprietorship in the past, and boy did I love those tax deductions - enough to offset the double hit of SS & Medicare (I think?).

I feel like I have this very murky understanding of how to evaluate the two options - here's what comes to mind:

Advantages of being a W2 employee:
company pays the employer side of SS & Medicare (6.2% + 1.45%)

Advantages of being an independent contractor:
write off all mileage (not just the miles from the first appt of the day to the last appt of the day)
write off depreciation of vehicle (not much, we bought a $1,300 van for cash - were a single car family before he got this job)
write off health insurance costs (right?)
write off home office costs (utilities, etc)
possible SEP (is that what it's called?) retirement account tax advantage

What am I missing? Is it a simple question of "if what you spend on mileage to first appt and from last appt is more than 7.65% of you income, it would be better to be a independent contractor"?

I don't quite know where to start. I understand there are tax advantages to self-employment, but I don't feel like I've got a good grip on what those are/how to calculate against the benefits of being a wage employee.

Thanks in advance for sharing the know-how! :)

JLee

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Re: Independent Contractor or W2 Employee?
« Reply #1 on: May 05, 2015, 09:32:23 AM »
I am interested as well - some contract work I am looking at is W2, but I may have the possibility of independent contractor.

Cheddar Stacker

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Re: Independent Contractor or W2 Employee?
« Reply #2 on: May 05, 2015, 09:41:01 AM »
As a W-2 you can deduct all of that stuff as well, except the health insurance and SEP. However, you have to itemize (Sch A) and these deductions are subject to a 2% floor. So if your AGI is 100K, and you have $3,500 in work expenses, you can only deduct $1,500 of them (3,500-($100K*2%)).

If you are not getting reimbursed for any of these costs you might be better off with a 1099 (independent contractor). However, if you plan to make this jump you will want to demand a higher hourly (or per job) rate than you are currently receiving for many reasons.

1) Payroll taxes. As you mention, you are responsible for both the ER and the EE side of the SE taxes, so 15.3% vs. 7.65%.
2) Insurance. Not just health, but general liability, workers comp, etc. The employer would no longer need to cover any of this, and it would be up to you to decide whether or not you want to carry any of it.
3) Any other benefits. Unemployment compensation, disability coverage, 401K match, etc.

I would try to negotiate a 25% raise to make it worth your while if you plan to make the jump.

Exflyboy

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Re: Independent Contractor or W2 Employee?
« Reply #3 on: May 05, 2015, 10:04:59 AM »
Yes the liability deal is huge... At least for me as a FIRED Professional Engineer. I get numerous companies/individuals looking for me to do small designs and stamp them for permit approval.

Without liability insurance I won't touch that work with a 10 foot pole because anything that goes wrong with that work even 10 years from now and I would be on the hook to defend myself.

My meager net worth I have spent 30 years building could be wiped out in a heartbeat.

BlueHouse

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Re: Independent Contractor or W2 Employee?
« Reply #4 on: May 05, 2015, 10:14:46 AM »
Has the big company said they are willing to work with this type of arrangement?  Does your husband drum up business on his own, or would he be dependent on the big company to do this and then throw business his way? 
It's usually advantageous for companies to hire W-2 employees vs. contract employees because they make more profit on W-2s.  The more employees you have, the more you can lower overhead and reduce expenses such as fringe.  Your husband's billable hours are undoubtedly paying for some of the office workers' salaries, not to mention office space, equipment, etc. 

Also, for home office and health insurance costs, it depends on how you organize your new business.  As an S-Corp, I cannot take the home office deduction, but I can write off office supplies, equipment, and even a portion of my house's utilities.  As for health care, I have my company pay the bill, but then it is reported in box 14 of the W-2 as income, but not as SS income.



Fuzz

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Re: Independent Contractor or W2 Employee?
« Reply #5 on: May 05, 2015, 09:18:15 PM »
As a 1099 employee, you can probably qualify for a solo 401k, which is better than a SEP for making large retirement contributions if you're under ~250/year gross. It's worth looking into.

Also, definitely push for the 25-50 percent pay bump as an independent contractor. On the other hand, he would be much easier to lay off/cut hours. So factor in whether they're committed to him, before you ask to change the relationship.

ender

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Re: Independent Contractor or W2 Employee?
« Reply #6 on: May 06, 2015, 06:08:09 AM »
It's usually advantageous for companies to hire W-2 employees vs. contract employees because they make more profit on W-2s.

[[Citation Needed]]


Regarding W2 vs 1099, when a 1099 keep in mind you are now responsible for:

  • Healthcare (generally employers have some contribution here)
  • Both FICA taxes
  • Vacation/sick time
  • Holiday pay
  • Most training/career development, both funding and time
  • 401k match (if applicable)
  • Any bonus/profit sharing
  • Job stability (and any associated time off work between contracts, etc)
  • Disability/life insurances

Most salaried positions include all those benefits that you do not get as a 1099 contractor.

A good rule of thumb is to take your yearly salary and make it your hourly rate as a 1099 contractor. If it seems really high, well, there are a lot of things your employer is providing you (see above) that add up really fast.

James

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Re: Independent Contractor or W2 Employee?
« Reply #7 on: May 06, 2015, 06:20:43 AM »
There are less tangible issues as Fuzz mentioned, the commitment to employment is seldom as strong for contract employees, it is more like "business" and less personal if they choose to not use your husband for work in the future. That isn't something we can judge, but something to consider. How much value to put on that idea in dollars and cents is up to you, but in general I would suggest that you are certain the contract position comes out ahead (not just even) before considering asking for it.


I think the biggest benefits of contract are the tax benefits. In general I think you can negotiate an increase in pay to offset the lost benefits of being W2, but the key is that you take the time and effort to benefit the most from any tax benefits of being contract. I see two issues with that. First, it's a lot of work. Obviously it is your own work so you aren't paying for that to be done, but it takes your time and your time is valuable. As a W2 employee they pay other employees to take care of that tax stuff. Second, you need to have the sort of spending that your tax situation will benefit you. Things like vehicles and home office are bigger write offs the more you spend. But it's not worth spending more to get more tax break obviously. If you are mustachian, you might not be spending enough to benefit as much as others would from the tax write-off side of things.

Papa bear

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Re: Independent Contractor or W2 Employee?
« Reply #8 on: May 06, 2015, 06:28:24 AM »
Even if you and your husband think 1099 is the best option, the company may not have a choice.  There are number of criteria that have to be met for a worker to meet the 1099 conditions.

A quick google search turned up: http://www.accountingpartners.com/irschecklist.shtml

Basically, even if your husband and the company say, 1099 is a great idea! The IRS may think differently.


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jwright

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Re: Independent Contractor or W2 Employee?
« Reply #9 on: May 06, 2015, 08:38:05 AM »
You need to look at whether or not your husband meets the definition of employee or contractor.  You don't get to choose.  There may be some gray area or blurred lines between the two distinctions depending on how the responsibilities of the position are structured so you may be able to change, but the IRS will frown upon a change made just for a tax benefit. 

BlueHouse

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Re: Independent Contractor or W2 Employee?
« Reply #10 on: May 14, 2015, 08:51:28 AM »
It's usually advantageous for companies to hire W-2 employees vs. contract employees because they make more profit on W-2s.

[[Citation Needed]]
Sorry, I don't know where to cite a source for my general comment, so I'll restate it.  It's what I've seen in my experience as a contractor -- most government contractors that I work with do not want to hire a second tier subcontractor because it cuts into their profit margin.  Government agencies are a different matter --  they prefer to hire contractors because it is generally easier to ramp up or down the labor force without having to pay severance when the labor demand is low. 

Quote
Regarding W2 vs 1099, when a 1099 keep in mind you are now responsible for:

  • Healthcare (generally employers have some contribution here)
  • Both FICA taxes
  • Vacation/sick time
  • Holiday pay
  • Most training/career development, both funding and time
  • 401k match (if applicable)
  • Any bonus/profit sharing
  • Job stability (and any associated time off work between contracts, etc)
  • Disability/life insurances

Most salaried positions include all those benefits that you do not get as a 1099 contractor.
I agree with this. 
Quote
A good rule of thumb is to take your yearly salary and make it your hourly rate as a 1099 contractor. If it seems really high, well, there are a lot of things your employer is providing you (see above) that add up really fast.
I disagree with this.  If you follow this heuristic, you're not taking into account any of the Fringe/Overhead expenses that were just listed above.  In determining hourly rate, start with hourly rate and then increase it by the expenses and fringe that you want to receive.  A good rule of thumb is to usually double or triple your current salary's hourly rate. 

curler

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Re: Independent Contractor or W2 Employee?
« Reply #11 on: May 14, 2015, 09:04:03 AM »
Quote
A good rule of thumb is to take your yearly salary and make it your hourly rate as a 1099 contractor. If it seems really high, well, there are a lot of things your employer is providing you (see above) that add up really fast.
I disagree with this.  If you follow this heuristic, you're not taking into account any of the Fringe/Overhead expenses that were just listed above.  In determining hourly rate, start with hourly rate and then increase it by the expenses and fringe that you want to receive.  A good rule of thumb is to usually double or triple your current salary's hourly rate.
I think you are saying the same/similar thing, just differently.  Taking your yearly salary and making it your hourly rate meant if your salary is $50,000 your hourly rate should be $50/hour.  This works out almost identically to doubling your  salary's hourly rate ($50,000*2)/(40hours/week*52weeks/year)=$48/hour