Author Topic: Is it better for me to be an independent contractor or employee?  (Read 5073 times)

RedMaple

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My boss told me that I can choose between being an independent contractor or an employee. For personal reasons I will be working part time. For this reason I won't be getting health insurance through the company. I will be doing office work and I won't travel anywhere except to the office - I won't be able to write anything off my taxes. She hasn't told me the numbers, but I assume the salary will be comparable if I choose between independent contractor or employee.

From my understanding, IC are not eligible for unemployment benefits and I will need to specifically request to include a clause in my contract regarding severance. Is there anything else that I'm missing?

Is there a significant difference for me between IC and employee?

As an IC can I randomly take weeks off? I will be doing administrative work. Am I obligated to work certain hours? Is being an IC more flexible - if yes, how?

iamlindoro

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Re: Is it better for me to be an independent contractor or employee?
« Reply #1 on: October 22, 2015, 07:49:32 PM »
It totally depends on your setup, what you're able to negotiate, and your goals.  Let me tell you why for *my* situation, I am and will remain a contractor for as long as possible.

1) Companies figure 30-50% overhead on W2 employees for benefits, payroll, taxes, and other miscellaneous costs.  You can and should at *least* negotiate 20-30% over the equivalent hourly rate since you are providing them this means of saving.  I can, I have, I do.  I pay myself only medical benefits, minimize my taxes (more on that in a sec), and end up walking away well ahead of where I would be in the same job as a salaried employee.

2) I try to negotiate my contracts as a weekly rate, inclusive of company holidays, to allow me to still be paid fully on weeks like Thanksgiving, Christmas, etc.  Sometimes I can, sometimes I can't.  I still come out ahead.

3) I deduct EVERYTHING.  Mileage when going into the office, every pen I buy, annual fees for my business cards (which also conveniently earn me huge miles), etc.  If you are set up as an S-Corp, you can deduct the employment taxes as well.

4) The holy grail: Individual 401(k).  I have a very high savings rate and a pretty high salary, so I can save and pax NO TAXES WHATSOEVER on up to $53,000 per year, because as a S-corp or sole-proprietor, you are both the employee AND the employer of your 401(k), and you can provide "company matching."  If you are saving large amounts, the Individual 401(k) may make all the difference in the world to you.  I slash my tax bills and save a huge amount in a 401(k) that I control myself-- thus it is with Vanguard, in exactly the funds I want.  No HR manager or fund company scammer can tell me what funds are available!

I wrote a blog post about my Individual 401(k) experience that might help you understand the math so that I don't have to go into it here.

http://frugalvagabond.com/2015/08/27/individual-401k-ultimate-early-retirement/

Obviously there are down sides to contractor employment-- no unemployment coverage or other benefits, not getting paid in most cases if you take a vacation, having to keep track of and pay your estimated taxes, having to send invoices and monitor their payment, the fact that unpaid bills aren't secured debts if the company goes under, etc., but by and large, it has been a huge boost towards FI for me.  I put away about 3-4x more towards retirement, into better accounts and better investment options, than I ever did as a W2 employee.
« Last Edit: October 22, 2015, 07:51:48 PM by iamlindoro »

SailorGirl

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Re: Is it better for me to be an independent contractor or employee?
« Reply #2 on: October 22, 2015, 07:55:40 PM »
Check the laws regarding employees and 1099s.  If, for example, you are required to work certain hours you can't legally be 1099.

bacchi

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Re: Is it better for me to be an independent contractor or employee?
« Reply #3 on: October 22, 2015, 08:09:43 PM »
I'm also a contractor and strongly prefer it.

SailorGirl is right. Legally, you can't be expected to show up in an office every day during certain hours and be a 1099 (what the IRS calls "behavioral" rules). There's a lot of we-won't-tell-if-you-won't-tell going on, however.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Behavioral-Control

If you find yourself in that situation, use it to your advantage. Yes, you can randomly take weeks off. You tell; do not ask. Skip status meetings that are useless. If you have to run some errands, do so. Again, tell and do not ask. You are being paid for your work only. You are not being paid to sit your butt in a chair.

Only you know how assertive you can be. If all else fails, there's always form SS-8.

https://www.irs.gov/pub/irs-pdf/fss8.pdf

iamlindoro

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Re: Is it better for me to be an independent contractor or employee?
« Reply #4 on: October 22, 2015, 08:13:56 PM »
SailorGirl is right. Legally, you can't be expected to show up in an office every day during certain hours and be a 1099 (what the IRS calls "behavioral" rules). There's a lot of we-won't-tell-if-you-won't-tell going on, however.

Amen to both of the above posters.  I used to dread walking this line when I was working a lot of hours for a given client, but realized that if you are in-demand, you can use it to negotiate extra flexibility (as to when, where, how you will work) in your job, too.  One thing that helps all parties is if you can have at least a couple of contracts going at a time, or at least in a given year.  Gives you a lot more basis for claiming the "independence" part of an independent contractor.

RedMaple

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Re: Is it better for me to be an independent contractor or employee?
« Reply #5 on: October 22, 2015, 08:15:26 PM »
Check the laws regarding employees and 1099s.  If, for example, you are required to work certain hours you can't legally be 1099.

Why should I care about the legality? What negative impacts will it have on me?

RedMaple

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Re: Is it better for me to be an independent contractor or employee?
« Reply #6 on: October 22, 2015, 08:17:36 PM »
It totally depends on your setup, what you're able to negotiate, and your goals.  Let me tell you why for *my* situation, I am and will remain a contractor for as long as possible.

1) Companies figure 30-50% overhead on W2 employees for benefits, payroll, taxes, and other miscellaneous costs.  You can and should at *least* negotiate 20-30% over the equivalent hourly rate since you are providing them this means of saving.  I can, I have, I do.  I pay myself only medical benefits, minimize my taxes (more on that in a sec), and end up walking away well ahead of where I would be in the same job as a salaried employee.

2) I try to negotiate my contracts as a weekly rate, inclusive of company holidays, to allow me to still be paid fully on weeks like Thanksgiving, Christmas, etc.  Sometimes I can, sometimes I can't.  I still come out ahead.

3) I deduct EVERYTHING.  Mileage when going into the office, every pen I buy, annual fees for my business cards (which also conveniently earn me huge miles), etc.  If you are set up as an S-Corp, you can deduct the employment taxes as well.

4) The holy grail: Individual 401(k).  I have a very high savings rate and a pretty high salary, so I can save and pax NO TAXES WHATSOEVER on up to $53,000 per year, because as a S-corp or sole-proprietor, you are both the employee AND the employer of your 401(k), and you can provide "company matching."  If you are saving large amounts, the Individual 401(k) may make all the difference in the world to you.  I slash my tax bills and save a huge amount in a 401(k) that I control myself-- thus it is with Vanguard, in exactly the funds I want.  No HR manager or fund company scammer can tell me what funds are available!

I wrote a blog post about my Individual 401(k) experience that might help you understand the math so that I don't have to go into it here.

http://frugalvagabond.com/2015/08/27/individual-401k-ultimate-early-retirement/

Obviously there are down sides to contractor employment-- no unemployment coverage or other benefits, not getting paid in most cases if you take a vacation, having to keep track of and pay your estimated taxes, having to send invoices and monitor their payment, the fact that unpaid bills aren't secured debts if the company goes under, etc., but by and large, it has been a huge boost towards FI for me.  I put away about 3-4x more towards retirement, into better accounts and better investment options, than I ever did as a W2 employee.

Awesome. Thanks a lot for the pointers! I'll check out the website tomorrow am.

iamlindoro

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Re: Is it better for me to be an independent contractor or employee?
« Reply #7 on: October 22, 2015, 08:27:45 PM »
Check the laws regarding employees and 1099s.  If, for example, you are required to work certain hours you can't legally be 1099.

Why should I care about the legality? What negative impacts will it have on me?

The majority of the risk if a employee is mischaracterized as a contractor is on the employer, but if you find yourself depending on certain parts of being a 1099 employee, those options could disappear overnight.  The employer could have to pay a penalty, which might or might not make them reconsider your employment altogether. 

For me, I had one very big contract that constituted much of my income this year.  I had a lot of early year expenses, made most of my contributions to my individual 401k closer to the end of the year, and paid quarterly taxes appropriately.  If, all of a sudden, I wasn't going to earn the rest of the year's income as 1099, I would have to ratchet my 401k contribution way back, and I would owe a lot more in taxes too.  It would suck.  That's one very specific way of saying "it might have very complicated tax implications for you."

Goldielocks

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Re: Is it better for me to be an independent contractor or employee?
« Reply #8 on: October 22, 2015, 11:12:07 PM »
A few more considerations :

Example
Part time retail clerks paid min wage and no obvious benefits such as paid software or anything else  provided --> cost to employer is an additional 17% minimum in employer paid  tax /SS.  25% more is more typical. 

An office employee costs 37% to 50% more than base salary shown on her paystub.  Therefore, a contractor needs to demand 25% more minimum to cost the same  as a pt employee to the company.

Will you provide laptop?  Liability insurance?  Invoice them for your bill? Will that take time you don't bill for?

Will taxes be a bit more involved for you?

Also,

Contractors become vendors like any other in bankruptcy..not even preferred vendors....  Employees will get first dibs on money recovered, for their backpay, after payroll taxes are paid, of course!  I Found out about that one the hard way...

Vacation is worth a 4% top up on your hourly rate.

Contractors can be let go without notice.

So, ask for more money as a contractor.

A set up as a contractor would be my choice if I had a lot of personal financial security. why?

Advantages:, more deductions, more flexibility, can be great for FIRE.

  Multiple incomes, opportunity for partnership, incone splitting or corporation tax deferral if you start making a lot of money..  Eg capital gains tax in future instead of income tax now..

ETA: updated horrible grammar to just poor grammar. Sorry for the bad post all.
« Last Edit: October 23, 2015, 10:07:28 PM by goldielocks »

The_path_less_taken

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Re: Is it better for me to be an independent contractor or employee?
« Reply #9 on: October 23, 2015, 06:31:29 AM »
Money and taxes aside, the flexibility is nice.

I'm now working 9 hour days as an employee and it's killing me: I got WAY more done in 3 hours doing the gigs on my own.

So sanity has to count for something, right?

But I have med/dental/vision/401k so I'm trying to slog through it for now.

Tyler

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Re: Is it better for me to be an independent contractor or employee?
« Reply #10 on: October 23, 2015, 07:42:37 AM »
It depends on your goals and the arrangement with your employer.

I personally prefer being a part-time employee -- think of it as an extended contract with less paperwork.  The trick is negotiating a system that maintains the flexibility perks of contracting.  If you can name your work days and hours and take extended time off, it's a great setup.
« Last Edit: October 23, 2015, 08:09:08 AM by Tyler »

PurposelyVague

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Re: Is it better for me to be an independent contractor or employee?
« Reply #11 on: October 23, 2015, 09:19:31 PM »
But you aren't covered by laws like fmla as a contractor. Something to consider.

Sent from my SCH-I545 using Tapatalk


cerberusss

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Re: Is it better for me to be an independent contractor or employee?
« Reply #12 on: October 24, 2015, 01:05:20 PM »
I'd start contracting but go look for other clients immediately. Your old boss will keep falling into the employer role, which he isn't. He's a client. Vice versa, you'll have to get used to looking for new projects, new clients, raising your hourly rate to something decent, etc.

You'll have to make at least double of what you're making now, because there'll be lags in clients, losing healthcare benefits, etc.

La Bibliotecaria Feroz

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Re: Is it better for me to be an independent contractor or employee?
« Reply #13 on: October 24, 2015, 01:13:32 PM »
Did anyone mention self-employment tax? Essentially, when you're a contractor, you have to pay the employer's share of payroll taxes (I think it's an extra 15.3% or something). So make sure to take that into account as well.

mozar

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Re: Is it better for me to be an independent contractor or employee?
« Reply #14 on: October 24, 2015, 09:48:15 PM »
I absolutely agree that you will come out ahead financially. But! In my case specifically employers respect me less when I am a contractor. They won't consider me for their best, most skill building work. They think "there must be something not good about that person because they can't get a real job." So there's that. It depends on your field.

cchrissyy

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Re: Is it better for me to be an independent contractor or employee?
« Reply #15 on: October 24, 2015, 10:04:13 PM »
it's not just your milage to the office that you can deduct.  Get a Nolo press book on self employment and taxes

you can deduct from your income

- your office supplies
- your computer, software, accessories
- a share of your rent and utilities for whatever part of your home is your office
- miles when you go anywhere for work, like  lunch meetings at restaurants, drop stuff off at the post office, checking up on a competitor, applying for more (independant contracting) work, shopping for business supplies


You'll certainly want to keep track of every thing, and know your rights of what can be counted, because any income you have left after your deductions is taxed like employment income AND with self-employment tax  Plus, you are losing the right to collect unemployment if laid off, and your employer is benefiting quite a lot by saying you are an IC and saving taxes on your end, so YES you should be making more per hour/job this way or having true flexibility of your schedule.  If I were you, I'd worry that they'd call me an IC, but follow the old patterns of treating me as an employee.  That may be worth it if pay or flexibility were truly better. But if they aren't offering any improvement there, then don't agree to a one-sided change.

Bearded Man

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Re: Is it better for me to be an independent contractor or employee?
« Reply #16 on: October 24, 2015, 10:07:34 PM »
Employee, hands down. Far more rights than a contractor. Contractors are let go for sneezing. Meanwhile the employees are only counseled each time (3 so far for one guy I know) but still has his job. A contractor was recently let go for faaaar less.

Bonus if you're a gov or better yet, union employee.

BlueHouse

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Re: Is it better for me to be an independent contractor or employee?
« Reply #17 on: October 25, 2015, 11:07:01 AM »
+1 to almost everything iamlindoro said. 
I am in my late 40s and my net worth jumped from less than $200k to over $1.2m in the 7 years that I have been an IC.  If it hadn't been for that opportunity, I would be just like all the other people who could not retire due to insufficient savings & planning.  In addition to making a shit-ton more money, I also had to do some research for myself and actually learn about saving and investments, which is what ultimately led me here.  Imagine if I had known about mustachianism when I first went solo!
The most important part is to get your billing rate right.   Google for information and you'll find spreadsheets to help you identify all of your hidden costs that your new billing rate must cover.  Remember that you won't have the benefit of HR or Payroll employees to help you out, so you need to increase your rates to cover either paying someone to do that work for you, or the time it takes for you to learn and do it. 
The one area that I disagree:  I work with budgets all the time, and most contractors have overhead rates that are 100 to 130% ON TOP OF the direct rate.  That means that if you get paid $25/hour in salary, you bill $50 - 58/hour.  Maybe different industries have different scales, but I see rates for every contractor that work on hundreds of projects and it is what it is.  Do not think of this as profit, because it isn't.  Think of it as money to cover the bills that you will have because you no longer have an employer to do much of this work for you. 

iamlindoro

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Re: Is it better for me to be an independent contractor or employee?
« Reply #18 on: October 25, 2015, 11:29:41 AM »
+1 to almost everything iamlindoro said. 
I am in my late 40s and my net worth jumped from less than $200k to over $1.2m in the 7 years that I have been an IC.  If it hadn't been for that opportunity, I would be just like all the other people who could not retire due to insufficient savings & planning.  In addition to making a shit-ton more money, I also had to do some research for myself and actually learn about saving and investments, which is what ultimately led me here.  Imagine if I had known about mustachianism when I first went solo!
The most important part is to get your billing rate right.   Google for information and you'll find spreadsheets to help you identify all of your hidden costs that your new billing rate must cover.  Remember that you won't have the benefit of HR or Payroll employees to help you out, so you need to increase your rates to cover either paying someone to do that work for you, or the time it takes for you to learn and do it. 
The one area that I disagree:  I work with budgets all the time, and most contractors have overhead rates that are 100 to 130% ON TOP OF the direct rate.  That means that if you get paid $25/hour in salary, you bill $50 - 58/hour.  Maybe different industries have different scales, but I see rates for every contractor that work on hundreds of projects and it is what it is.  Do not think of this as profit, because it isn't.  Think of it as money to cover the bills that you will have because you no longer have an employer to do much of this work for you.

I actually don't disagree at all, this is great advice-- If it's a short contract I always start at ~200% of the direct rate.  I do give a discount for long-running contracts, though, which is where most of my income comes from at the moment.  I'm currently billing about 160% of what I would expect to make as a W2 employee, which I'm cool with because it's been regular work for about 9 months.
 
I have to admit that when things were really tight/desperate after having been laid off of my last W2 job, I accepted ~120% of my previous hourly until I found a better contract.  What can I say?  I preferred it to eating into my savings :)

ShaneD

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Re: Is it better for me to be an independent contractor or employee?
« Reply #19 on: October 25, 2015, 01:15:14 PM »
Lots of good heads-up above re: the IRS and contractor v. employee behavioral rules.


Employee, hands down. Far more rights than a contractor. Contractors are let go for sneezing. Meanwhile the employees are only counseled each time (3 so far for one guy I know) but still has his job. A contractor was recently let go for faaaar less.

And I've seen many employees let go for far, far less. The issue there is the employer, not the status of employee. Never assume salary = security. Salary brings predictability, yes -- but only until it doesn't.


I'd start contracting but go look for other clients immediately. Your old boss will keep falling into the employer role, which he isn't. He's a client. Vice versa, you'll have to get used to looking for new projects, new clients, raising your hourly rate to something decent, etc.

^This. You may need to find a new (though polite) way to talk to make the new relationship clear.

For us, contracting is way more lucrative: more money for less time. But it's not easy, and you need to be prepared for some volatility.
« Last Edit: October 25, 2015, 01:17:49 PM by ShaneD »